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. Specific taxes on goods and services, referred to as excise taxes, are among the oldest forms of taxation in the world.
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 taxation in the sixteenth and seventeenth centuries owed much to the Dutch, whose duties on beer, sugar, salt, spirits, and other goods were called excijsen. In fact, excise taxation was so widely applied that an English observer noted that a fish dish eaten in Holland pays 30 excises.
From la terre classique de la fiscalite´, as Holland was called at that time, excise taxation spread to other European countries. Many German states, for instance, followed the Dutch example, and the apparent success of the new imposts also led to their introduction in England4 and its colonies, including the USA.
In Europe, during the nineteenth century, many of the small excises (so-called because they yielded comparatively little revenue) were abolished or absorbed into general taxes on goods and services, often referred to as sales taxes, which were widely introduced in the first quarter of the twentieth century and transformed into general consumption or value added taxes (VATs) during the 1970s and 1980s. The “big excises“on tobacco products, alcoholic beverages, and petroleum products remained, but little attention was given to them in the professional literature.
The excise policy has changed greatly in recent years, primarily due to the rise and awareness of environmental problems. Greenhouse gases, for instance, lead to global warming; they are generated by the burning of fossil fuels, such as coal, petroleum, and natural gas. This has led to a burgeoning literature on the use of economic instruments’, such as excises, to restrain harmful emissions. As another example, the perceived health costs of smoking have induced the World Health Organization to initiate a campaign to reduce tobacco consumption, among others through an increase in the tobacco excises.
More generally, the difficulties in extracting revenue from the capital income tax base due to greater capital mobility and the distortionary effects of high taxes on labour supply and demand have induced various governments to re-examine the revenue-substituting potential of excise taxation.
VAT is 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 liability is generally verified through checks on books of account and another documentary evidence.
The differentially higher taxation of excisable products for revenue purposes also has an economic rationale. The absence of close substitutes for addictive or indispensable products, such as tobacco, alcohol, and energy, implies that the demand for them is inelastic. This means that the potential for distortion of economic decisions by the imposition of excise taxes is relatively small. More generally, economic theory prescribes that as long as goods are unrelated in consumption, tax rates should be higher on the good with the lowest elasticity.
Charging consumers or producers for external costs is known as the Pigouvian prescription (Pigou, 1918), which holds that efficient consumption or production can be achieved through the tax system by imposing an excise on the activity equal to the marginal cost of the damage caused to other people.
Global warming through fossil-fuel burning perhaps represents the classic case for internalizing external costs through appropriately designed excise taxes imposed on carbon emissions or, less directly, energy. The impact of burning fossil fuels on global climate change is a pure public bad and the damage caused to the global climate is a function simply of the total amount of carbon dioxide and other greenhouse gases emitted, which in turn can be directly related to the quantities of different fossil fuels used and their characteristics. This observation has induced various countries to redesign their energy taxes in line with environmental objectives by differentiating the related excises by type of fossil fuel.
An important question regarding the taxation of pollution (as well as of smoking, drinking, and gambling) is whether duty rates should exceed Pigouvian levels when governments need revenue, and non-distortionary lump-sum taxes are unavailable. Surprisingly, perhaps, Bovenberg and de Mooij (1994) argue that revenue considerations generally lead to taxes on â€˜dirtyâ€™ goods that are below Pigouvian levels. The reason is that in their model, government revenue is best collected with a uniform tax on all consumption; and, as the overall level of taxation increases, the marginal excess burden of a Pigouvian tax rises relative to its external benefits. Hence, differential taxation of polluting goods should fall as the overall level of taxation rises.
To ensure fiscal neutrality, excisable products, regardless of whether they are domestically produced or imported, should be included in the consumption tax base. Levying the general consumption tax on the excise-duty-inclusive value of manufactured or imported items would then effect coordination.
Accordingly, and properly so, the resource allocation function of the excises would be given priority over the revenue raising role of the consumption tax. But this assumes that corrective excises reflect external costs and as such should be subject to the standard rate of VAT. If the amount of the excises exceeds external costs, however, there will be additional VAT on the excess of these excises over the corrective component, and that part of the total VAT should be considered to be part of the residual tax system rather than the VAT as such.
Yet another policy issue concerns the desirable degree of harmonization in the regional Balkan market. Harmonization would improve the efficiency of exchange and reduce incentives for tax-base snatching, i.e. setting low excise duty rates to attract consumers from other states. Furthermore, if fuel and motor vehicles are used in the production process, harmonization of the related excises reduces intercountry distortions from excise-induced differences in cost structures.