Advantages Of Excise Taxes

1. The reasons for imposing excise taxes are listed and briefly discussed below. Thereafter the answer will deal with the cases in which one would advise the use of specific rates and in which cases ad valorem rates.

2. To raise revenue for general purposes - This objective, in its simplest form, means that excise taxation is a means to raise revenue for the government for different purposes. One of the rationales for excise taxation on certain products is that such taxation is easier to administer than other taxes in that excise legislation is generally not as complex as for instance income tax laws. This simplicity also has the benefit that the cost associated with the administering of excise taxes are nominal. Another rationale is that

If one then need to advice on which rate to apply the question would be – what is the purpose of the tax. Is it to raise revenue or to discourage consumption? With cigarettes and alcohol one of the objectives is certainly to discourage consumption. It is therefore only sensible to tax alcohol or cigarettes on the content and not he value. Cnossen believes that “since the damage caused by smoking, drinking or pollution is independent of price, the correction of externalities favours specific over ad valorem”. Broadly speaking the use of specific rates can simplify the administration . The revenue authority only needs to concern itself with the quantity and not the valuation of products. Therefore with regard to excise duty where the aim is discourage consumption, the advice would be to use the specific

There are also instances where the use of the ad valorem rate is preferable. In a country where the inflation rate is high, the use of the ad valorem rate will protect the base of the excise tax from inflation. It is also advisable to use the ad valorem rate when taxing luxury goods. Again, this will have the effect of progressivity in the tax system and it is fair towards the less prosperous taxpayers.

QUESTION 2

1. A basic principle of economics links the price of a product to the demand for the product. Accordingly the increase in the price of a product should generally lead to a lower demand for that product. The question is – is that also the case if the price of alcohol increases due to excise taxation?

2. Excise taxes and even high excise taxes cannot, as a single component, solve the problem of abusive drinking. This statement will be discussed