Excise Tax

Published Mar 5, 2023

Definition of Excise Tax

An excise tax is a tax that is levied on a specific good or service, rather than on income or property taxes. Governments often use excise taxes to raise revenue and discourage the consumption of certain goods and services by making them more expensive to consumers.

Example

A common example of an excise tax is the taxes imposed on cigarettes and alcohol. Governments levy these taxes to discourage people from consuming them and to raise additional revenue. For instance, let’s assume that the government imposes a USD 1.00 tax on cigarettes. This tax is levied on every pack of cigarettes sold in the country, and the manufacturer or importer is responsible for paying it. As a result, the price of a pack of cigarettes will increase by USD 1.00. This taxation will cause some consumers to quit smoking while others will switch to cheaper, unbranded cigarettes or other tobacco products.

The same principle applies to the taxation of alcohol. If the government levies an excise tax on alcoholic beverages, the price of these beverages will increase accordingly. This, in turn, can discourage alcohol consumption, particularly by those with limited financial means.

Why Excise Tax Matters

Governments often use excise taxes to raise revenue and discourage the consumption of certain goods and services. They can be implemented to combat social problems such as smoking and drinking, especially among young people. However, critics argue that these taxes tend to affect low-income consumers disproportionately. Therefore, when implementing such taxes, the government must consider the equity and fairness of the tax in light of its intended goals.