Excise


An excise, or excise tax, is any duty on a category of goods that is normally levied by a government at the moment of manufacture for domestic consumption. This makes excise different from a sales tax or value-added tax or from customs duties.
An excise is considered an indirect tax, meaning that the producer or seller who pays the levy to the government is expected to try to recover their loss by raising the price paid by the eventual buyer of the goods. Excise is thus a tax that relates to a quantity, not a value, as opposed to the value-added tax which concerns the value of a good or service. Excises are typically imposed in addition to an indirect tax such as a sales tax or value-added tax. Typically, an excise is distinguished from a sales tax or VAT in three ways:
  1. an excise is typically a per unit tax, costing a specific amount for a volume or unit of the item purchased, whereas a sales tax or value-added tax is an ad valorem tax and proportional to the price of the goods,
  2. an excise typically applies to a narrow range of products, and
  3. an excise is typically heavier, accounting for a higher fraction of the retail price of the targeted products.
Typical examples of excise duties are taxes on alcohol and alcoholic beverages ; manufactured tobacco ; energy products ; vehicles; or luxury products. The legislator's aim is to discourage the consumption of products it considers to have a negative externality.
More recently, excise duty has been introduced on certain forms of transport considered to be polluting or on the consumption of products that generate polluting waste that is little or not at all recycled or harmful to the environment.
These are the oldest sources of revenue for governments around the world. In 2020, consumption taxes accounted for 30% of total tax revenues in OECD countries on average, equivalent to 9.9% of GDP in these countries.

History and rationale

Excise has existed in English since the late 15th century and was borrowed from Middle Dutch echijns and excijs, meaning 'excise on wine or beer', which was apparently altered from earlier assise, assijs, which meant simply a tax on consumption and is related to Medieval Latin accisia, assisia, assisa 'tax, excise duty'. The exact derivation is unclear and is presumed to come from several roots.
Excise was introduced to England from the Netherlands in the mid-17th century under the Puritan regime, as a tax, an excise duty, levied on drinks in 1650. In the British Isles, upon the Restoration of the Monarchy, many of the Puritan social restrictions were overturned, but excise was re-introduced, under the Tenures Abolition Act 1660, in lieu of rent, for tenancies of royally-owned land which had not already become socage. Although the affected tenancies were limited in number, the excise was levied more generally; at the time, there was thought to be a rough correspondence between the wealthy manufacturers of affected goods, and the wealthy tenants of royal land.
Excise duties or taxes continued to serve political as well as financial ends. Public safety and health, public morals, environmental protection, and national defense are all rationales for the imposition of an excise. In defense of excises on strong drink, Adam Smith wrote: "It has for some time past been the policy of Great Britain to discourage the consumption of spirituous liquors, on account of their supposed tendency to ruin the health and to corrupt the morals of the common people." Samuel Johnson was less flattering in his 1755 dictionary:
As a deterrent, excise is typically directed towards three broad categories of harm:
  • health risks from abusing toxic substances ; typically this includes tobacco and alcohol
  • environmental damage ; this usually includes fossil fuels
  • socially damaging / morally objectionable activity ; usually this includes gambling, and can include prostitution in places where it is legal
Revenue raised through excise may be earmarked for redress of specific social costs commonly associated with the product or service on which it is levied. Tobacco tax revenues, for example, might be spent on government anti-smoking campaigns, or healthcare for cancer, heart disease, vascular disease, lung disease, and so on.
In some countries, excise is also levied on some goods for purely punitive reasons. Many US states impose excise on illegal substances; these places do not consider it to be a revenue source, but instead regard it as a means of imposing a greater level of punishment, by opening up convicted criminals to the charge of tax evasion.

Theoretical foundations on specific taxation

The economic analysis of excise taxes has its beginnings with Atkinson and Stiglitz in 1976 stating that if income taxes were optimal there would be no need for specific taxes. But, "if income taxation is not optimal, excise have a role to play, because they are relatively efficient sources of revenue, improve resource allocation by internalizing the external costs associated with the consumption or production of excisable products, discourage the consumption of products considered harmful, serve as a proxy for charging road users for the cost of government-provided services, or promote progressivity in taxation.". This is how Sijbren Cnossen sets out five main rationales for the use of excise duties:
  1. Revenue-raising efficiency aspects. This is based on the classic argument of the "Ramsey rule". This means that in certain cases it is optimal to differentiate tax rates on consumption according to the price elasticity of each taxed good or service.
  2. Externality-correcting issues. These are surcharges for the cost that consumers or producers of certain goods impose on society as a whole but which is not reflected in the price. In other words, there is a negative externality and, therefore, there must be a special tax that tries to correct it. Economically it means that "the marginal cost of an individual consumer or producer's action is less than the marginal cost of his action to society and, as a result, the individual engages in more of the activity than is socially optimal". It has its basis in Pigou's theory, a Pigouvian tax is a method that tries to internalize negative externalities to achieve the Nash equilibrium and optimal Pareto efficiency. The tax is normally set by the government to correct an undesirable or inefficient market outcome and does so by being set equal to the external marginal cost of the negative externalities.
  3. Information failures and internality-correcting arguments. This refers to the fact that the lack of information or education about the consumption of certain harmful products has to be corrected by state intervention through the implementation of specific taxes. This is, for example, the case for alcohol, tobacco or sugary products. Because of the damage they cause to health and the illnesses they generate in people, it is decided to tax them specifically.
  4. Benefit-charging features. This refers to specific taxes derived from the use of public infrastructures to cover the costs of their construction and maintenance. The clearest example is that of roads, where we find the consumption of road infrastructure, the environmental costs of its use, congestion costs referring to the cost of the added time imposed on drivers and the costs of accidents. This will be financed by specific taxes such as vehicle licensing, road tax, fuel taxes, etc.
  5. Progressivity-enhancing aspects. Excise duties on high-value products, i.e. luxury goods, are included. In this way, the consumption of certain products that are only within the reach of high incomes is taxed, thus reinforcing a progressive tax system based on their consumption

    Targets of taxation

Tobacco, alcohol and gasoline

These are the three main targets of excise taxation in most countries around the world. They are everyday items of mass usage which bring significant revenue for governments. The first two are considered to be legal drugs, which are a cause of many illnesses, which are used by large swathes of the population, both being widely recognized as addictive. Gasoline, as well as diesel and certain other fuels, meanwhile, have excise tax imposed on them mainly because they pollute the environment and to raise funds to support the transportation infrastructure. Revenue-raising depends on a low responsiveness of consumption to tax-induced price changes and externality-prevention depends on the price responsiveness of specific users.

Cannabis

Following the legalization of non-medical cannabis in the United States, states with implemented legal markets have imposed new excise taxes on sales of cannabis products. These taxes have been used to build support for legalization initiatives by raising revenue for general spending purposes.

Narcotics

Some U.S. states tax transactions involving illegal drugs.

Gambling

Gambling licences are subject to excise in many countries today. In 18th-century England, and for a brief time in British North America, gambling itself was for a time also subject to taxation, in the form of stamp duty, whereby a revenue stamp had to be placed on the ace of spades in every pack of cards to demonstrate that the duty had been paid. Since stamp duty was originally only meant to be applied to documents, the fact that dice were also subject to stamp duty suggests that its implementation to cards and dice can be viewed as a type of excise duty on gambling.
Profits of bookmakers are subject to General Betting Duty in the United Kingdom.

Prostitution

Prostitution has been proposed to bear excise tax in a campaign proposal by an opposition party in Canada, and in a bill proposed in the Nevada Legislature – proposed wordings:
  • "5.5 Implementation of an excise tax on prostitution, the brothel is taxed and passed it on."
  • "An excise tax is hereby imposed on each patron who uses the prostitution services of a prostitute in the amount of $5 for each calendar day or portion thereof that the patron uses the prostitution services of that prostitute."