Excise tax

An excise tax or excise duty is a special type of tax imposed on products in domestic market, as opposed to customs tax charged on foreign products. The word "excise" and the idea of tax was derived from Dutch.

Whenever a government is about to raise the excise tax, it must concern considerably about which products to tax, particularly based on their elasticity of demand. An increasing price resulted from the use of excise tax will affect the quantity demanded of that product. If the demand is elastic, such as the demand of necessity goods, higher excise tax will bring less revenue because a given percentage increase in price results in a larger percentage decrease in quantity demanded. Otherwise, excise taxes levied on goods with relatively inelastic demand will bring more revenue. It is not suprising, then, that typical example of excise taxes are taxes on alcohol, tobacco and petrol.

Let's examine more specifically on just these above-mentioned products.

In positive consequences, excise taxes on tobacco and alcohol are beneficial for two main reasons. By the use of excise taxes, the government will raise new revenue, as we have discussed above. In addition, the quantity demanded of these products will fall and this consequence protects people from harming their health by abusing substances such as alcohol and tobacco. In this point, we can call excise tax sumptuary tax/Pigovian tax, a kind of tax aimed to correct the market outcome/activities. Adam Smith, a classical economist, indicates:

The motive for the implementation of excise should be nothing more than to curb the pursuit of goods and services harmful to our health and morals.

Nevertheless, excise taxes as a law enforcement to reduce the amount of harmful goods also bring negative effects. As in case of heroin, the higher price of those products the more flourishing black markets and the more expenditures the addicts have to spend. As a result, social crime committed by addicts, such as shoplifting, burgaly, prostitution, muggings and so on, will increase.

Therefore, although it is about raising the price by the use of excise tax, the government should attempt to reduce the consumption rather than to restrict the supply of those products.