China is planning to increase tax on alcohol. The workers will not like this at all

The China Daily, that great wielder of the sword of Truth, has issued a dire warning to the unregenerate. From today the government is increasing the taxation on high-powered alcohol.

I’ve been waiting for them to do something like this for years. Chinese firewater (alcohol content 50 per cent plus) is astonishingly cheap. Yes, all right, the cheap stuff is very horrible indeed, but there can be few cheaper countries for the unfussy to get banjaxed. Beer, likewise, is jolly reasonable when free of bar mark-ups. How come they’ve never tapped this potential source of revenue?

The answer is obvious, given a little thought. The Soviets never dared to mess too much with the price or supply of vodka. China is not much different; like Russians, the Chinese will put up with a lot, provided they have access to misery’s best-known antidote. And the drinks of the Chinese working class are beer and rough grain spirit. They have to be kept accessible. I remember visiting a village in the far north-east circa 1990: I remarked that the village shop’s stock appeared to be 75 per cent booze. “Yes”, they told me. “Up here, we only have four months a year for agriculture, and we work very hard for that time. From September to May it’s too cold to work: we just lock ourselves in and play cards and drink.”

The alcohol taxation system has hitherto been rather peculiar: a low-level flat tax on all spirituous liquors, plus an additional ad valorem tax, i.e. one levied on the price of the drink rather than on its content. This enables the government to raise revenue from the top end of the market while leaving the bottom end more or less alone: impeccable socialism. As it happens, demand elasticity is more or less infinite at the top end, where the most prestigious stuff costs sixty quid a bottle: rich Chinese are happier when things are expensive, as it facilitates showing off.

However, the proposed tax changes relate to the flat tax, not to the ad valorem element, which is clearly working fine. An analyst quoted by the China Daily suggests that the liquor companies’ profits will be squeezed by 15-20 per cent. He hasn’t quite got capitalism, has he? You don’t let a tax increase squeeze your profits, you pass it on to the customer. So, it looks like a price hike, small in absolute terms but quite significant percentage-wise, on the cheap hooch which keeps the workers happy. I wonder how this will play in the rust belt.