Excise

An excise is a specific type of indirect tax. Governments usually levy this duty when a product is manufactured for domestic use. This timing makes it different from a sales tax or a value-added tax (VAT). Those other taxes are applied at the point of sale. An excise is also distinct from customs duties. Customs duties are fees charged when goods cross a national border. Unlike a VAT, which is an ad valorem tax based on price, an excise is typically a per-unit tax. This means the cost is tied to a specific volume or quantity of the item.

How does the money move through the economy? The producer or seller is the one who pays the levy to the government. However, the producer usually tries to recover this cost. They do this by raising the retail price for the eventual buyer. Because of this, the consumer ultimately pays the tax. Excises are often applied to a very narrow range of products. These taxes are also typically much heavier than standard sales taxes. They often account for a large fraction of the final retail price.

There are several distinct reasons why a legislator might create an excise. One major reason is to correct a negative externality. An externality is a cost that a producer or consumer imposes on society. This cost is not reflected in the market price of the product. For example, a person might buy cheap gasoline that causes pollution. The pollution is a cost to everyone, but the driver does not pay for it directly. A Pigouvian tax attempts to fix this. The government sets the tax equal to the external marginal cost of the harm. This helps reach a more efficient market outcome.

Governments also use excises for other social purposes. Some are called "sin taxes" because they target products like alcohol or tobacco. These aim to discourage consumption of things that cause health risks. Other taxes act as "green taxes" to protect the environment. These might target fossil fuels like oil or gas to reduce pollution. Some excises are even used as "benefit-charging" tools. For instance, taxes on vehicle fuel can help pay for the construction and maintenance of roads. This ensures that those using the infrastructure help cover its costs.

History shows that excise has been a tool for many centuries. The term likely comes from Middle Dutch words meaning a tax on beer or wine. It was introduced to England from the Netherlands in the mid-17th century. Specifically, a duty on drinks was levied in 1650 under the Puritan regime. Later, the Tenures Abolition Act of 1660 re-introduced excise in a different way. It was used in place of rent for certain royal lands. This helped the government collect money from wealthy tenants. In 18th-century England, even gambling was subject to a stamp duty. This required a stamp on the ace of spades in every pack of cards.

Today, these taxes remain a massive part of global economies. In 2020, consumption taxes accounted for 30% of total tax revenues in OECD countries. This is equivalent to about 9.9% of the Gross Domestic Product (GDP) in those nations.

Common targets include tobacco, alcohol, and gasoline. These are items used by large numbers of people. Because they can be addictive or polluting, they are ideal for excise. Some states in the U.S. also use excise on illegal substances. In those cases, the goal is not just revenue, but also punishment. This can expose criminals to charges of tax evasion.

Excises can also target luxury goods or specific modern problems. High-value products are taxed to make the system more progressive. This means the tax burden is higher for those with more wealth. Recently, governments have looked at taxing polluting transport like air travel. They may also tax electronic products that create non-recyclable waste. Even food is being targeted in some places. Some countries consider taxes on sugary drinks to fight obesity. The World Health Organization suggests a 20% tax could help reduce cardiovascular disease. By using these specific tools, governments try to shape how people live and consume.