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elective taxes on goods and services, often referred to as excise taxes, are among the oldest
forms of taxation in the world.1 The salt excise, for
instance, was considered a gold mine for the European sovereign during the Middle Ages, because
sources of supply were few and could be easily
controlled. Interestingly, the prominence of excise
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2
According to Websters Third New International Dictionary, the word excise derives from the Middle Dutch excijs,
which is probably a modification of the old French assise:
session, settlement, assessment.
3
From a reference made by van der Poel (1963 and 1964),
who surveys the development of excise taxation in the Netherlands; the quotation is from p. 1012.
4
In 17th-century England, the term excise or new impost
was not only applied to eatables, drinks, tobacco, and other
goods, but also to houses, trades (hackney coaches, hawkers),
bachelors, and services performed in connection with burials,
births, and marriages.
supply and demand have induced various governments to reexamine the revenue-substituting potential of excise taxation.
Broadly speaking, the distinguishing features of
excise taxation are selectivity in coverage, discrimination in intent, and often some form of quantitative
measurement in determining the tax liability. That
contrasts with general consumption taxes, such as
VATs and retail sales taxes (RSTs), which are typically defined to include all goods and services for
sale in the tax base other than those specifically
exempted. VATs and RSTs, moreover, are levied only
to raise revenue, whereas excises are often also
justified on other grounds or viewed as serving a
special purpose. Beyond that, excise tax collection is
usually linked to physical controls, whereas the VAT
or RST liability is generally verified through checks
on books of account and other documentary evidence.
As indicated above, history supports a broad
interpretation of the concept of excise. In fact,
following usage in the professional literature (Cnossen, 1977), all selective taxes on goods, services, and
motor vehicles can be considered part of excise
systems. Arguably, profits of government-owned tobacco, alcohol, and gambling monopolies should also
be considered part of excise systems, in addition to
the taxes on those products and activities. A further
subcategory is taxes on the ownership or use of
goods, as distinct from taxes on the goods themselves, and taxes on permission to perform particular activities. Examples are the important recurrent
or user taxes on motor vehicles and taxes on licenses
to sell alcoholic beverages; those taxes are also
selective in nature.5 In sum, excise systems comprise all selective taxes and related levies and
charges on tobacco, alcohol, gambling, pollution,
driving, and other specific goods, services, and activities.
5
In the terminology of the OECD, excise systems therefore
comprise all selective taxes on the production, sale, transfer,
leasing, and delivery of goods and the rendering of services
(item 5120 in the OECD (2003) classification), as well as all
selective taxes on the use of goods, or on the permission to use
goods or perform activities (item 5200), other than general
taxes on goods and services (item 5110).
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6
A disturbing feature of Ramseys analysis is that it
assumes that all individuals are identical, in which case a
uniform lump sum tax would be indicated. However, Atkinson
and Stiglitz (1976) have extended the analysis to include
multiple persons and redistributional goals.
7
Coase (1960) has pointed out that government intervention to deal with externalities would not be required if
property rights to, say, air and water were established. But
the application of that important finding is limited if resource
owners cannot identify the source of damages to their property (and legally prevent the damages) or if the cost of
bargaining deters the parties involved from finding their way
to an efficient solution. (Even if those conditions were met,
the assignment of property rights would still, of course, affect
income distribution.)
8
Of course, measurement problems come back in full force
if there are threshold levels of consumption below which
adverse effects are absent or attenuated (for example, one or
two glasses of wine per day are good for you). In that
situation, Pigouvian taxes should exceed average external
cost.
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More generally, the Diamond-Mirrlees theorem holds
that the pursuit of production efficiency (all firms face the
same input and output prices) as a policy objective takes
precedence over the pursuit of exchange efficiency (all consumers face the same product prices).
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E. Other Objectives
In addition to these four main objectives, there
are other goals of excise taxation. Thus, excises
(including higher-than-standard VAT or RST rates)
on (luxury) goods and services, whose incomeelasticity of demand exceeds unity, can be used in an
attempt to improve the progressivity of tax systems.
Those taxes are difficult to justify, however, in industrial economies with sufficient administrative
capacity to levy comprehensive, graduated income
taxes. Accordingly, they are not dealt with in this
article. Similarly, no attention is paid to differentially higher duties on imports to protect domestic
industry, because it would be just as sensible to
drop rocks into our harbors because other nations
have rocky coasts (Robinson, 1947). Differentially
higher taxes on the export of natural resource products, such as oil and gas, are not dealt with either.
They are not permitted in the European Union.
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taxation. They start their contribution with an overview of tobacco taxes in Europe (the EU member
states, plus the accession countries in Central and
Eastern Europe, as well as the Mediterranean) and
the U.S. states. In the European Union, tobacco
taxes (specific and ad valorem excises, plus VAT), at
more than 300 percent of the pretax retail price, are
the highest on any single product in the world (by
comparison, the VAT is, on average, 19 percent in
the European Union). The level of tobacco taxation
differs widely. In the United Kingdom, for instance,
the total tax on a pack of 20 cigarettes is nearly 6
and four times the level found in Spain. A wide range
of tobacco tax levels is also found among the U.S.
states, although the overall average level (as a share
of the tax-inclusive retail price) is only half the EU
level. Interestingly, the ad valorem excise is mainly
an EU phenomenon. It tends to protect the cheap
tobaccos grown in southern member states.
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In 2000 per capita lottery sales in the United States, for
instance, were US $127, based on the entire U.S. population,
or US $144, based on the population of the lottery states.
Clotfelters figures show that there is considerable variation
in gambling tax revenue across OECD countries. Italy, Australia, and Finland are the only countries, however, where
gambling taxes contribute as much as 1 percent to 2 percent
of total tax revenue.
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had no idea how quantitatively important interaction externalities are, but he observed that the
majority of urban economists believe that the benefits from interaction are the principal force leading
to the spatial agglomeration of economic activity. If
that belief is correct, then the standard analysis of
congestion pricing may be seriously misguided.
If road pricing is so efficient, Reiner Eichenberger
asked, why is there so little effective political support to implement it? Eichenberger believed that the
answer must be found in voters fear that the government may use road pricing to increase overall
taxation. Also, road pricing gives the government an
incentive to reduce road capacity to set monopolistic
prices (resulting in more instead of less congestion).
Similarly, local governments have an incentive to
export road taxes by unduly increasing taxes on
roads that are used heavily by commuters. According to Eichenberger, those issues can only be resolved in the context of direct democracy in which
citizens are able to control taxes. Democratic road
districts could be drawn up based on the concept of
functional, overlapping, and competing jurisdictions
(Frey and Eichenberger, 1999) in analogy to the
school districts in several U.S. states. Those districts
would have their own institutions with a specific
power to tax. A pricing scheme adopted in Saas Fee
in the Canton of Valais provides proof that that idea
was the road forward.
G. Economics, Politics, and Psychology
Excise taxation, as Bruno Frey (2005) argues in
the last chapter, is only one instrument in the fiscal
toolbox to combat externality and immorality. Excise
taxes, along with tradable permits and commandand-control measures, provide external incentives
for desirable conduct; that is, they induce extrinsic
motivation. Also, as the author emphasizes, the
importance of socially desirable behavior for its own
sake (that is, intrinsic motivation) should be recognized. In fact, intrinsic motivation should be seen as
a regulatory resource or tool that must be explicitly
considered as an alternative to the usual conventional instruments. Specifically, a key consideration
in the analysis and evaluation of external regulatory
instruments and strategies is whether they undermine intrinsic behavior (crowding-out effect) or reinforce it (crowding-in effect). Crowding-out is a
hidden cost that should be accounted for.
Frey argues that tax-price instruments bolster
intrinsic motivation in that they provide regulated
agents freedom of choice and thus enhance moral
agency. Those instruments may also help consumers
to overcome their weakness of will; they may restrain consumers from taking short-run decisions
that they themselves consider to be suboptimal over
the long run. At the same time, the author notes that
tax-price instruments may impair intrinsic motivation by signaling that, once the price has been paid
Tax Notes International
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IV. Invitation
As this summary of the contributions to Theory
and Practice of Excise Taxation and the discussions
indicate, excise taxes on smoking, drinking, gambling, polluting, and driving nearly always involve
lively, insightful, and provocative exchanges of views
at academic, government, and industry levels. The
authors attempt to show what we have learned,
focusing on issues such as external costs, regulation,
incidence, revenue, trade deflection, harmonization,
and various administrative aspects of excise taxation. Clearly, excise taxes have come a long way from
the simple efficient revenue-raising measures they
once were to the complex policy tools that they have
become today.
Inevitably, this summary of the essays is selective
and to some extent subjective, but hopefully it has
motivated the reader to study the contributions on
the various excise taxes more closely. No doubt he or
she will benefit from their analysis and learn from
the perspectives they offer.
References
A.B. Atkinson and J.E. Stiglitz (1976), The Design of
Tax Structure: Direct Versus Indirect Taxation,
Journal of Public Economics, 6: 55-75.
J-P. Barde and N.A. Braathen (2005), Environmentally Related Levies, Chapter 5 in S. Cnossen (ed.),
Theory and Practice of Excise Taxation: Smoking,
Drinking, Gambling, Polluting, and Driving, Oxford: Oxford University Press.
A.L. Bovenberg and R. de Mooij (1994), Environmental Levies and Distortionary Taxation, American
Economic Review, 84: 1085-1089.
May 16, 2005
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