Public Disclosure Authorized

POLICY RESEARCH WORKING PAPER

1251

Public Disclosure Authorized

ExciseTaxes

Oncea county has

l~~~~~~~~~~~~~

developed subs.antial
domestic production-

John F. Due

beyondagricultural
commodities and those

Public Disclosure Authorized

subject to traditional excises

-

there are strong

arguments for moving to a

salestax rather than
continuing to add exdse

Public Disclosure Authorized

taxes.

The WorldBank
PolicyResearchDepartment
PublicEconomicsDivision
February1994

I)oiLc,r

IRESEARCH
I WORKING I'APIR

1251

S iiimiiaryfindings
Due ConitraststXcise taxcs with sales taxcs, consumpl'tioln
taxes, licenses, stamp duties, anidother indirect taxes. He
describes differenittypes of cxcises, their relative tax
burdeLis,and how progrcssive and economically efficient
they may be.
TIhe main argument for traditional excise taxes, he
says, is that they yield substantial revenue with relatively
little complaiit. A second justification is that the cost of
the cxcessive use of commodities is borne by the
purchasers, not by society at large. A third argument is to
penalize people for a commodity's use (especially
popilam wvithcommodities such as alcohol).
Arguments against traditional excises: They tend to bc
regressive, because of the low incomneelasticity of
dciiand, and they place an unequal burden on families at
given income Ilrvels.'fhcy deprive families of the funds
for milk and other essenitialitrms, without reducing
conisumiiptioni
of taxed goods. High rates tend to increase
smuigglingand illicit production, often of inferior, evenI
dangcroiis, substitutes. And thc case for them is not
strong, resting as it often does on moral grounds. But
excise raxts are sure to continue as they yield revenues
and are generally more acceptable than other sources of
revenue, such as income taxes.
Taxes on motor fuel and related motot vehicle Ic ies
arc amorig the three most productive excises. They are

justified as a charge for the use of roads, in, licu of tolls.

In western Europe, they are seeCIas progressive, as
reaching the peoplc most able to pay - and incidentall
as reducing road congestion. Criticism of such taxes
centers on how best to attain desired goals - for
example, sorting out the r-lative burdens on light and
heavy vehicles.
L.uxuryexcises tend to be applied to commodities an
services with a high income-elasticity of demand, the
assumption being that thcy will reach the people best
able to pay them - achieving equity without relyirg on
increased income taxes, which are difficult to enforce in
developing countries and hurt incentives. A luxury exci
tax, limited to certain items, is viewed as being
progressive, which a sales tax rarely is.
But if various rates apply, compliance and
administration beconmecomplex, and consumers may
discriminatc amcng closely related commodities.
Morcover, the goods taxed are often widely used by
lower incomc groups (sugar and kerosene are p.ime
examples). For these reasons, maniycountries are
introducinlgsales taxes, with few rates or a single rate
(with exemptions), with simplified processing, and with
less ambiguity about what is or is not taxed.

This paper -- a product of the Public EconomicsDivision,Policy Research Department - is part of a larger effort in the
dcpartmientto develop policy options to reform fiscal systems in developingcountries. Copies of this paper are available free
from tl,c World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Carlina Jones, room N1O-063,extension
37699 (38 pages). Fcbruary 1994.

The .PolicyResearch
WorkingPaperSr.ics dissemirates
thefindingsof work in progress
to enrsuragethe exchange
of ideasabout
development
issues.
Anobkective
of theseries
is to grt thefindings
outquickly, etlenif thepresentations
arelessthanfully polished. ehe
paperscarryihe namesofthe authorsandshouldbeub.-dandcitedaccoidingly.he findings,
interpretations,
andconclusions
arethe
authors'ouw andshouldnot beattributedto theWorldBank,itsExecutiveBoardof Directors,or any of itsmembercountries.

Produccd ,y the Policy Research DisseminationCcntcr

EXCISE TAXES

by

John F. Due

EXCISE TAXES
by

John F. Due*

Contents
THE CONCEPT OF AN EXCISE TAX ...................................

Excises vs. Sales Taxes .........................................

Excises vs. Consumption Taxes ....................................
Excises vs. Licenses, Stamp Duties, and Other Miscellaneous Indirect Taxes ...
THE ORIGIN OF EXCISE TAXES

...............

.....

.....................

1
2
2
2

THE TYPES AND CHARACTERISTICS OF EXCISES ........................

Domestic and Imported Goods .....................................

Level of Application of the Excise ...................................
Specific vs. Ad Valorem Rates .............................
Extent of Coverage and Use ......................................

4
4
4
5

RELATIVE EXCISE TAX BURDENS .....................................

THE POSSIBILITY OF PROGRESSIVITY IN AN EXCISE TAX

SYSTEM.

.......................................................
13

Problems in Determining Distributional Patterns ..........................

Circumstances in Developing Countries Facilitating Progressivity of Excises
The Criteria for Selection of Commodities for Excise Taxation .................
Obstacles to Attainment of These Objectives .
............................
Differences Among Families ......................................
THE CHOICE BETWEEN AD VALOREM VS SPECIFIC RATES

...

...........

.....

....

ECONOMIC EFFICIENCY CONSIDERATIONS ..............................

Avoidance of Tax on Production Inputs ...............................
The Special Cases of Motor Fuel and Related Taxes .......................
The Importance of Uniform Treatment of Domestic and Imported Goods ....

The author is grateful to Anwar Shah for comments on an earlier version of this paper.

- i -

13
15
15
17
18
18
2

.......

23
23
26

27

EVALUATIONOF THE USE OF EXCISES ..........................

The TraditionalLevies .....................................
Motor Fuel and Motor VehicleLevies ...........................
Luxury Excises .........................................
ADMINISI RATION OF EXCISETAXES ...............
The TraditionalTechniques.

..........................

ii

27
28
28
............

31
32

EXCISE TAXES
THE CONCEPTOF AN EXCISETAX
Unlike most forms of taxation, excise taxes are not, in their modern form, clearly
delimited from other taxes. The traditionalBritishconcept of an excise, still accepted in many
BritishCommonwealthcountries,was clearlydefined: an excise tax was a levy uponproduction
rather than sale, imposedonly upon domesticactiv:ityand only to commodities,not services, at
specific rates, with quantitativecontrol. The modern concept of an excise, however, is
substantiailybroader, especially in nonCommonwealthcountries. The basic characteristic is
application to specified commoditiesor groups of commodities. The tax may apply to either
productionor sale, to domesticoutputsor to importsas well, with either specificor ad valorem
rates, with either physical control (commonon alconolicbeverages and tobacco) or accounts
control. As with the traditionalBritishconcept, there is a definiteintent to discriminateagainst
the users of the specifiedgoods. Excisemay apply to servicesas wellas commodities,altho' -h
in many countriesselective servicetaxes are regarded as distinct from excises.
Excisesvs. Sales Taxes
Thus excises are distinguishedfrom sales taxes in being appliedto specifiedgoods, with
a limited nverall coverage, whereas typically, but not always, sales taxes apply to all goods
except those specifiedas exempt. A few sales taxes, such as that of Tanzania, specify taxed
goods and rates by tariff classificationnumber. In most countriesthere is a sharp distinc.ion, at
law and in practice, between excisesand sales taxes, but this distinctionis not universal, nor is
the terminology. Thus a very broa(' excise system, such as that of Japan and the Union
governmentof India, resemblesa sales tax, and a sales tax with numerousexemptionsand a wide
range of rates (for exampleGuyana) is similar to the usual excise system. In a few countries

-2 levies that are excises by usual definition are designatedby law as sales taxes, the states of
Nigeria being the prime example. Nevertheless,in most countries, there is in practice a sharp
delineaticnbetweenexcisesand the sales tax.
Excisesvs. ConsumptionTaxes
A few countries,particularlyin the immediatepast, haveused two sets of selectivelevies,
one group consistingof excises in the usual form, the other, called consirmptionor purchase
taxes, havinga much broadercoverageand applyingto importsas well as domesticproduction.
Jamaica, Trinidad and Barbados were major examples, though the first two have now moved
(Trinidad)or are moving (Jamaica)to value-addedtaxes. Egypt has had a similar pattern of
indirect taxes. Broad levies of this type will not be included in the coverage of this paper,
despite their similarityto excises.
Excisesvs. Licenses. Stamp Duties. and Other MiscellaneousIndirect Taxes
Most countries imposelicense taxes on motor vehicles and various forms of economic
activity. Theseare typicallyannual, constitutinga direct charge for a certainprivilege,and thus
are distinguishedfrom excises. The same is true of stampduties requiredon various documents
in many countries, airport departure taxes, and other similar levies.
Taxeson specifiedservices, whilein manycountriesdistinguishedfrom excises,will be
included in the concept of excises in this paper.
THE ORIGINOF EXCISETAXES
Excise taxes were among the relatively early forms of taxation, first developedon a
significantscale in Holland,then introducedin Great Britainand other countriesin the 16th and
17th centuries. In developing countries, however, the introductionof excises, though partly
influencedby the policies of the colonialpowers, occurredprimarilywhen domesticproduction

began of commoditiesthat had been niajrorsourcesof customsrevenue,particularlycigarettesand

beer, and subsequentlydistilledspirits. Essentiallytle exciseswere introducedto protect major
revenue sources as domesticproductionreplacedimportation.
THE TYPES AND CHARACTERISTICS OF EXCISES
Excise taxes of today fall into several rather distinct classes.
First, and usually the most productiveof revenue, are the traditionalexcises: alcoholic
beverages, often with different rates on distilled spirits of various types, beer, and wine; and
tobacco products, primarily cigarettes. These are arnongthe oldest of excises,and their use is
almostuniversalaround the world. Theseare deliberatelydiscriminatoryagainstthe users of the
products.
Secondly,and of major revenue importance,are the excisesupon motor fuel, and, in
some countries, other petroleumproducts as well. The motor fuel levies may be regarded as
charges for the use of roads, in lieu of tolls; this philosophy(thoughnot universallyaccepted)
is substantiallydifferent from that of the traditionallevies.
Thirdly, in many countries, excises are applied to commoditiesessentiallyregarded as
"luxuries"--onesthe purchase of which is consideredto reflect ability to pay. A secondary
motive in many developingcountries is to reduce luxury consumptionof imported goods for
foreign exchangereasons. Includedfrequentlyare the sale of motor vehicles, various consumer
durables, entertainment,transportation,sugar, candy,varioustypes of cloth.-ng,and manyothers.
Not infrequentlysome commoditiesare i-..iuded that can scarcelybe consideredluxuries in any
sense, such as cement, but offet considerablerevenue; they could be classified separately as
simply revenueexcises.
This classificationis importantin terms of the rationaleof the levies and administration;
the control measuresare substantiailydifferent amongthe three.

-4 Apart from the type of commodityand servicesubject to tax, the contemporaryexcise

systems vary in other respects,as suggestedabove.
Domesticand Import d Goods
A numberof coun'ries still adhere to the old British conceptof an excise apply'ng only
to domestic production.
Theseleviesare b ?autimessupplementedby equivalentbuitseparatetaxeson importation,
adjusted as excises are changed, but not designatedas excises. Otherwise, changes in excises
require adjustmentsin customsduties to maintainthe samedegree of protection. This has been
done systematicallyin some countries such as India; in others it has not. The alternative,
common in other parts of the world, is to apply excises equally to imports and domestic
production. This is the practice in most Latin A.mericanand FrancopnoneAfrican cnuntries.
Level ofQApplication
of the ExSise
Traditionally, and still primarily, excises apply on domestic transactions, at the
manufacturinglevel. However, some are applied at the wholesale or retail level, the latter
inevitable with most services, and are used with commodities in several countries, as for
example, the United States in the past, on jewelry, and currently on diesel fuel (wholesale).
Specificvs. Ad ValoremRates
Typically, specific rates were used, primarily for adm nistrativesimplicity,but in part,
with traditional excises, under the principle that the amount of tax should be the same per
physical unit (e.g., of alcohol) regardlessof the price paid. Specific levies are still dominant,
particularlywith traditionalexcises,but many countries,for example,Guatemalaand Chile, use
ad valorem rates, and others use a combination,a specific minimum and an ad "alorem
supplement. This issue will be discussedin a subsequentsection.

-5-

Extent of Coverageand Use

Some writers classify excise systems into three classes: limnited,intermtdiate, and
extended, on the basis of coverage. The limitedsystems, such as those of the United Statt and
Trinidad, apply only to the traditionalcommnodities
plus motor fuel and a very few other items.
The other two apply to broader ranges, the third resemblinga sales tax if the coverageis broad
enough.
Table I indicatesthe revenue importanceof excises (includingspecial service taxes) by
country and by region, based on the InternationalMonetary Fund tabulation. Only market
economycountrieswere included. Some arbitrary classificationdecisionsmust be made by the
IMF staff in preparingtables, but the figures neverthelessgive a good overall impressionof the
relativerelianceon this form of taxation. Figuresby county are shown in AppendixTable Al.
For all countries for which data are available(108), the lowest income countriesshow
only slightly more reliance on excisesthan do the countriesin the $501-$2,000range, basically
becausethey haveless domesticindustryand rely more heavilyon customsduties. The countries
above show a definitely lower percentage. But statistical analysis shows no meaningful
correlation between per capita GNP and reliance on excises. For the African and Asian
countries, however, there is a definiteinverserelationshipbetweenper capita GNP and reliance
on excises, a pattern also found in Central and North America. All but one of the South
American countries show approximatelythe same relative dependenceon excises. Previous
studies of excisesas a percentageof indirecttax revenueshow a definitepositive

- 6Table 1

The RelationshipBetweenExcisesas Percentageol

Total Tax Revenueand GNP per Capita,
For All Countriesand by Region
EstimatedPer
Capita GNP
(US dollara)

Numberof
Countries

Below500
All countries
Africa
Asia

30
20
8

Excisesas Percentage
of Total Tax
Revenve

14.7%
11.3%
22.3%

Europe

North and Centra!America

South America

1
1

29.9%
7.4%

501-2000
All countries
frica
Asia
Europe
North and Central America
South America

37
I1
8
1
11
6

13.4%
9.9%
15.8%
7.7%
14.9%
14.6%

2001-6000
All countries
Africa
Asia
Europe
North and Central America
South America

16
2
2
4
3
5

10.5%
0.2%
6.6%
14.1%
8.3%
14.4%

Above 6000
All countries

--

25

9.4%

Africa

--

Asia
Europe
North and Central America

6
16
3

8.8%
10.3%
5.8%

South America

Source of Data:

--

InternationalMonetaryFund. Goverunment
FinanceStatisticsYearbook,
1990 (Washington: 1991). More detailedanalysis is presented in the
article by John F. Due and Carrie Meyer, "Major Determinantsof the
Tax Structures of Market Economy Countries, Tanzania Journal of
Economics,Vol. I (July 1989),pp. 47-63.

-7Appendix tablecorrelationbetween per capita GNP and the reliance on excises as a

percentageof indirecttaxes. For the world as a whol.e,ovic half of the countriesshow a reliance
on excises as a percentageof indi:ect taxes in a nairow rangebetween 27 and 29 percent. Al
showsthe data by couniry. The highcstgroup, showingmore than 30 percent of their revenue
from excises(omittingIndia becauseof its relianceon basicallya sales tax labelledexcise), are
Burundi,Guinea-Bissau,Pakistan,Maldives,and Nicaragua. Those showingno excise revenue
are Seychelles,Botswana,Comoros, Oman, Kuwaii,and Syria.
Data of revenue from various forms of exc. 's are not generallyavailable; the I.M.F.
volume provides figures on these categories for only a limited sample. On the basis of
information,available,however, some data ^an be given (from the early 1980s). Somecountries
obtai.amost of their exciserevenuefrom alcoholicbeverages: for example(percentagesof vxcise
tax revenue)Rwanda99, Burundi95, Guyana70, Congo 59, NetherlandsAntilles 57, Belize53,
Suriname43, Zarnbia41. Zambiain most years receivesabout 18 percent of its total tax revenue
from beer alone. Latin American countries show relatively high percentages; the Islamic
countries the least, since they prohibit or restrict the sales of alcoholic beverages. Several
countriesdependheavilyon tobaccotaxes: Indonesia90, Zaire 80, Somalia52, Morocco44 and
Sierra Leone 44. Severalof these are Islamic countrieswith little or no reliancc on taxes on
alcoholic beverages. In a number of countries motor fuel levies are the major sources; in 14
countries they yield over half of all excise revenue. These include (1980s data) Oman 100,
Kuwait 98, Columbia96, Peru 91, Mexico88, Israel 79, Costa Rica 76, Mali 74, Trinidad 72,
Argentine69, Niger 67, Singapore67, Chad 63, Bezswana59.

-8RELATIVE EXCISE TAX BURDENS

It is impossibleto coinpiledata on excisetaxesrelativeto pricesfor developingcountries,
other than for a very small sample. Thus as a second best solution,data are presentedin Table
2 for the OECD countries, as compiledby the U.S. CongressionalBudgetOffice, with data for
1988.
The almost universalassumptionis that excise taxes, by addingto the cost of producing
the particular items, will be reflectedin higherprices, under usual competitiveconditions,and
thus will be borne in relation to consumer spending on the items. This is of course an
oversimplification,because of the possibility of shift in factor prices as demand for the tax
products fail, particularlyin a relativelyopen economy,as demonstratedby G. A. Hughes with
respect to Thailand.1 Widespreadsmugglingand black markets (not reached by the tax), for
example, may prevent full shifting,as will some price controls. Import licensing, which leads
to monopolypricing, may result in less than full shifting.2 But neverthelessit is the only
reasonableworkableassumption.
Empirical studies of distributionof excise tax burden by income class have been made
in a numberof countries. Many of these were sunmmarized
by Charles McLureand Wayne

1
G. A. Hughes, "A New Method for Estimating
the Effects
of Fuel
Taxes: An Application to Thailand," World Bank Economic Review 1
(1986) 65-101. Note also A. Lans Bovenberg, Indirect Taxation in
DevelopinQ Countries: A General Eauilibrium Approach, International
Monetary Funa Staff Papers 34 (June 1987) 333-73.
2
A good discussion is presented in the paper by Anwar Shah and John
Whalley, An Alternative View of Tax Incidence Analysis for DeveloDina
Countries, NBER Working Paper 3375 (Cambridge, Mass.: National Bureau
of Economic Research), June 1990.

-9 -

Table 2
Excise Taxes as Percentageof Retail Prices, 1988

Cigarettes

Country
Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Iceland
Ireland
Italy
Japan
Luxembourg
Netherlands
New Zealand
Norway
Portugal
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
Source:

32.3
53.0
64.4
N.A.
69.2
N.A.
49.2
59.8
36.8
N.A.
53.8
56.8
N.A.
60.9
54.8
N.A.
N.A.
58.0
32.8
N.A.
N.A.
N.A.
61.3
30.1

Distilled
Spirits

Beer

Wine

17
40
56
82
83
66
45
64
N.A.
N.A.
66
27
23
44
72
53
91
8
47
92
31
N.A.
51
45

35
36
27
53
50
41
18
20
N.A.
N.A.
64
20
47
14
34
30
54
14
15
34
14
N.A.
31
15

15
31
27
69
48
66
18
12
N.A.
N.A.
51
8
22
6
25
20
59
8
11
69
5
N.A.
29
12

Gasoline
49.4
62.5
64.7
40.5
75.3
52.0
76.9
64.0
66.4
N.A.
70.7
78.3
47.0
56.4
70.4
51.0
66.6
66.0
65.2
62.2
64.7
N.A.
67.8
31.5

CongressionalBudgetOffice, FederalTaxationof Tobacco.AlcoholicBeveragesand Motor

Fuels (Washington: CongressionalBudgetOffice, 1990.

- 10-

Thirsk,3 by Sijbren Cnossen,4 and by Mukul Asher and Anne Booth for the ASEAN
countries.5

One of the most complete recent studies is that for Jamaica by Michael

Wayslenko.6 All of these are based upon consumerexpenditurestudies, showingexpenditures

by commoditiesand services by income groups, and these are by no means entirely accurate,
especially for alcoholic beverages. It is not possible to review these studies in detail, but
summaryis possible.
A portionof the Jamaicastudy is shown in Table 3, providingdata for both excise taxes
and the portion of the consumptiontax applyingto the samecommodities,with different income
brackets. The tax on cigarettesand tobaccoproducts is clearly regressive, except in the lower
income brackets. The tax on beer is progressive at the lowest brackets, then more or less
proportionaland regressiveat higher levels. Tax on distilledspirits shows an irregular pattern,
with progressionat some levelsbut regressionat higherlevels. All alcoholicbeveragescombined
show an overall progressionexcept at the higher income levels, but in an irregular fashion;
expenditureson the lower taxed item are concentratedin the lower income levels. The tax on
motor fuel is proportional,slightlyprogressiveat the higher incomelevels.

Charles McLure and Wayne Thirsk, "The Inequjty of Taxing

Iniquity," Economic DeveloDment and Cultural Chance 26 (April 1978),
487-503.
4
Sijbren Cnossen, Excise Systems: A Global Study of the Selective
Taxation of Goods and Services (Baltimore: Johns Hopkins Press, 1977).
5
Mukul G. Asher and Anne Booth, Indirect Taxation in ASEAN
(Singapore: Singapore University Press, 1983).
6
Michael Wayslenko, Tax Burden in Jamaica Before and After Tax
Reform. Jamaica Tax Structure Examination Project, Metropolitan Studies
Program, Syracuse University and Jamaica Board of Revenue (Syracuse and
Kingston 1987).

11-

Table 3
Jamaica,Tax Burdenby IncomeGroups, ExciseTaxes and General ConsumptionTax
on GoodsAlso Subjectto Excises
Consi'notionTax on Goods Also Sub..ct to Excises

Excises

InomeDecile

IncomeDecile

Alcoholic
Beverages

Tobacco
Products

Motor
Fuels

Cigarettes

Boor

Spirits

UnderJ $3,674

1.16

0.42

0.06

UnderJ $1,232

0.42

1.06

0.62

3,675 - 6,048

1.46

0.41

0.25

1,233 - 1,943

0.69

1.20

0.61

6,049 - 8,734

1.32

0.51

0.41

1,944 - 2,825

0.57

1.40

0.59

8,735 - 12,704

1.54

0.58

0.10

2,826 - 3,759

0.89

1.46

0.59

12,705- 16,780

1.15

0.52

0.13

3,760 - 4,848

0.96

1.47

0.57

16,781-21,895

1.10

0.50

0.25

4,849 - 6,336

1.09

1.14

0.71

21,896-27,701

0.91

0.41

0.22

6,337 - 8,543

1.03

.. L4

0.83

27,702- 35,882

0.80

0.41

0.16

8,544 - 12,120

1.22

0.97

35,883- 54.928

0.78

0.37

0.22

12,121- 19,995

0.79

0.Ca

1.07

Over J $54,929

0.41

0.27

0.10

Over J $19,996

0.82

0.59

1.20

All Households

1.06

0.44

0.19

All Households

0.85

1.10

0.78

Source MichaelWayslenko,Tax Burden inJamaicaBeforeandAfter TaxReform,JamaicaTax StructureExanination Project,MetropolitanStudiesProgram,

SyracuseUniversityand JamaicaBoardof Revenue(Syracuseand Kingston1987).

- 12 -

The general picture shown in the other studies is similar, with some exceptions.
Cigarettes: Accordingto virtuallyall of the studies, taxes on cigarettesare regressive.
One of the most recent studies, in Korea, shows a high degree of regressivity7 , as do studies
in industrializedcountries. There appear to be a few exceptions,in Lebanonand the Argentine,
and possiblyin Indonesia. The reason in thesecountriesis that there are two types of cigarettes,
one muchcheaperand subjectto a lower tax thanthe other, boughtprimarilyin the lower income
groups.
Beer: Generallyshown to be regressive,but less so than cigarettes.
Distilled spirits: Less regressive,but some at higher levels.
Alcoholicbeverages: Overall,possiblyprogressive,as higher incomegroupsconcentrate
on distilled spirits, with a high tax, lower incomegroups concentrateon beer.
Motor fuel: The Hughes study in Thailandand others show the tax to be regressive,
though not universally so, in developing countries. In the United States, however, the tax
appears to be highly regressive.8
On other comunodities,studies are limited. Entertainmenttaxes appear to be progressive
(India, Philippines);taxes on public utilities to be regressive; salt, very regressive (Lebanon);
radios, TV and refrigerators, very progressiveto middle incomes, then regressive(Panama);
clothing,proportionalto middle incomes,then regressive(Panama);sugar, progressiveto mniddle
incomes, then regressive(Greece).

7Peter S. Heller, The Incidence of Taxation in Korea, IMF Staff

Paper, DM/81/14, Feb. 15, 1981.
8
U.S. Congressional Budget Office, Federal Taxation of Tobacco,
Alcoholic Beveracresand Motor Fuel (Washington: Congressional Budget
Office, 1990) p. 78. This conclusion is challenged by James W. Poterba,
"Is the Gasoline Tax T.egressive?,"NBER Working Paper 3578, (Cambridge,
Mass., National Bureau of Economic Research) January 1990, who argues
that in this instance expenditures are a better base for measuring
regressivity as so many persons in the lowest income group are there
only temporarily.

13

The reference thus far has been only to overall distributionof burden by income class.
But the relative burden on various familieswill differ substantiallyaccording to relative use of
the taxed commodities. Thus familieswith regular smokers will bear much more burden than
nonsmoking familiesat given income levels; consumptionof alcoholic beverages also differs
sharply amongfamilies, and in those developingcountries in which some familiesown cars, so
will the tax on motor fuel. There are also significantdifferences between urban and rural
familiesat given income levels, with a higherburden on the former, because of treaterrelative
purchases of the taxed goods at given incomelevels.
THE POSSIBILITYOF PROGRESSIVw"Y
IN AN EXCISETAX SYSTEM
Since a major complaint against excise taxes is the regressivity, governments have
frequently sought to adjust the levies to lessen regressivity and if possible to introduce
progressivity.9

Problems in Detennining DistributionalPatterns

As suggestedin earlier sections,there are seriousproblemsin determiningthe pattern of
distributionof excise tax burdens by incomegroup.
First, what is the incidenceof an excise, that is, to what extent is it reflected in higher
commodityprices and thus is borne in relation to consumer expenditures,or instead reduces
factor incomes and thus is borne in relation to factor incomes, either in total or by certain
groups? No scientificanswer is possible, though as suggested in an earlier section the most
commonassumptionmade is that an excisetax, as an additionto cost, will primarilybe reflected
in the prices of the products, though there are undoubtedlyexceptions when, for example,

one of the few extensive discussions of this question is to be

found in the volume by Sijbren Cnossen, Excise Systems (Baltimore:
Johns Hopkins Press, 1977) Chap. 4.

- 14 -

smugglingor black marketspreventsfull forwardshifting,firms absorbtax becauseof monopoly

profits due to import licensingor other causes,or pricesof factorsspecializedto the industryfall,
or there are broader overall shifts in commodityand factor prices, as demonstratedin general
equilibriummodelsof shifting. Nevertheless,the generallyacceptedassumptionis that an excise
primarilyresults in higher prices to consumersof the commodity.
Secondly, should distribution of burden be measured in relation to consumption, or
income, and if the latter is chosen, annualincomeor lifetimeincome? Sinceincomeis generally,
but not universally, regarded as the best measure of tax paying ability, it is most commonly
accepted as the basis for expressing the pattern of tax burden distribution. Likewise annual
incomeis usually regardedas the appropriatemeasureof income, sinceincomeon a current basis
is the primary source of paymentof taxes. But there is no completeagreementon this issue, and
in some special circumstances,expendituremay be the better basis.
Thirdly, there are related questions about exactly what items should be included in
income and problems of measurementof some forms. Should gifts and welfare paymentsbe
included--thoughthese are not significantin most developingcountries. More serious is the
importance of income in kind in the developing countries, products of semi subsistence
agriculture,for example. Theseare difficultto discoverand measure, and are frequentlyomitted
in tabulations. Sincethis form of incomeconcentratesin the lowest incomegroups, figures of
tax burden as a percentageof incomeoverstatetax for these groups.
Fourthly, data on consumer expenditureby income group are based upon consumer
expendituresurveys,which are by no meLiisentirelyaccurate. The familysamplesselectedmay
not be fully representative. Persons often do not rememberor keep accurate records of their
expendituresby commoditygroups. There are definite biases on the part of many persons in
reporting expenditureson various commodities,particularlyalcoholicbeverages; some studies

- 15 -

have shown that if purchasesreported in the sampleare expandedto cover the entire population,
the total accountsfor only a small percentageof the amountsknownto be sold by distributors.
A final problemnowwidelyrecognizedis that expenditurepatternsdiffer sharplybetween
urbar. and rural areas; some studies now have separate data for the two groups.
Circumstancesin DevelopingCountriesFacilitatingProgressivityof Excises
For severalreasons it appearsto be more feasibleto reduceregressiviLyof excise systems
or increaseprogressivityin developingcountriesthan in industrializedones. In manydeveloping
countries, particularly the least developed ones, the economies are essentiallydualistic, with
sharply differentconsurrptionpatternsin the two sectors. In the lower incomesemi-subsistence
sector, muchconsumptionis in kind, goodsproducedand consumerby the familyor village,with
little or no commercialactivity. Even if these commoditieswere subject to excises, the taxes
could not possiblybe collected. To the extent that goodsare purchasedcommercially,only the
cheapest varieties are acquired. Thus luxury goods in the usual sense are virtually unknown.
Alcoholic beveragesare village produced,or the cheapesttype purchased;cigarettesare rolled
from tobacco, motor fuel is unknown. Consumer durables, confined to simple articles of
furniture and housewares,are made by the familyor local groups; excisescould not possiblybe
applied.
It is thus possible to devise an excise system that will virtually exclude the rural low
income groups from the burden of the tax. As a country develops, however, this becomes
increasinglydifficultas the two sectors tend to merge in consumptionpatterns.
The Criteria for Selectionof Commoditiesfor Excise Taxation
In terms of progressivity,the basic rule is that taxes should be applied to commodities
with high income elasticityof demand; that is, as incomerises, consumptionrises by a greater

- 16 -

percentage. A 5 percent increase in the family income, for example, will lead to a 10 or 15
percent increase in consumptionof the commodities, If this rule couldbe used, personalviews
of those developingthe legislationaboutwhat constitutes"luxury" spendingwould be avoided.
A second rule is that the tax should be appliedto commoditieswith low price elasticity,
that is, relatively inelastic demands. Otherwise, persons will shift from taxed to untaxed
substitutesand little revenuewill be ob.ained,with potentialexcessburden. This in turn requires
the taxationof a relatively broad category of goods, since the broader the category, the less is
the chance of shiftingto substitutes.
A third requirement is that expenditures on the commoditiesconstitute substantial
segmentsof consumptionin the higher income groups, and little in the patterns of the lower
income groups. Unless the taxed goods are consumed in substantial amounts, the revenue
potentialwill not be great enough to warrant taxation. Many excise systems single out minor
items for taxation that constitutesuch a small elementin total spending that taxation under an
excise is useless. Cigarettelighters are an example.
A fourth requirement is the possibility of disaggregatingthe broad categories of
commoditiesin such a way that differentialrates can be applied accordingto the concentration
of consumerpurchasesby incomegroups. Segregationmaybe possibleby priceschargedas with
motor vehiclesor by precise natureof product(octanelevelof gasoline,for example). Examples
of these are numerous, even with traditional excises. A good exampleis the much lower rate
applied to hand rolled kretak (clove) cigarettesin Indonesia,used primarilyin the lower income
groups,comparedto iates on manufacturedcigarettes. The use of a much lower rate on chibuku
(unstable)beer in Zambia,the typepurchasedmainlyin beer hallsby the lower and lower middle
urban incomegroups, relative to that on standardbeer, is another. The very high rates on wine
in CommonwealthCaribbeancountries, comparedto that on beer, is mainly designedto reach

17 -

the higher incomegroups, includingtourists, sincebeer is the standarddrink in the lower income
groups. Applicationof much higher rates to alcoholicbeveragesof types not produced in
country and used almost solely by the higher incomegroups is common, even though uniform
rates apply to domesticand importedproducts. This type of differentiation,with the traditional
excises applyingat the manufacturinglevel, is administrativelyfeasible.
Finally, there is strongjustificationfor the use of ad valorem rates, as the amount of tax
per physical unit will be greater on the more expensivevarietiesthan on the cheaper ones.
Obstaclesto Attainmentof These Obiectives
Unfortunately,it is difficultto implementpoliciesthat willattain these objectives. First,
knowledgeof income and price elasticities of demand is limited, particularly in developing
countries. The price elasticity will of course vary with changesin prices of other goods; the
usual concept of price elasticityassumesthat prices of other goods and factors are unchanged.
Secondly,a relativelyhigh demandelasticityrequiresbroad coverageof the excises,but
his in turn may cause loss of high incomeelasticity,which may be much greater for particular
commoditiesthan for a group of related commodities.
Thirdly, the disaggregation of taxed commodity groups necessary for increasing
progressivitymay be very difficultto do from an operationalstandpoint. Exampleshave been
given in previous sectionswhere this is possible: machinemade vs. hand rolled cigarettes, for
example,applicationof differentrates to differenttypes of alcoholicbeverageswhosepurchases
are concentratedin the differentincomegroups;various gradesof gasoline,etc., price or physical
characteristicsof motor vehicles, etc.
But disaggregationis not feasible with many types of commoditiesin a fashion that is
operable. Clothing, hardware, lumber, etc. are examples. A large number of different
subspeciesmakes both complianceand control increasinglydifficult. One of the most serious

18 -

objections is that the requirementscould result in a numberof different excises with different
rates and operationalrules. As a consequence,operationwouldbe seriouslycomplicated.
Fourthly, the requirementswould lead to rejection of application of excises to certain
commoditieswhich are universallyregardedas desirablefor taxationand 'o havejustificationon
economicefficiencygrounds (alcohol, tobacco). The use of ad valorem rates may be contrary
to the desire to relate the tax to quantitiesconsumedrather than to vall
A major implicationof these conclusionsis that an attempt to use a large number of
separate excises, disaggregatedby a particular form of the commodityor service, would be
operationallyvery difficult.
DifferencesArmongFamilies
Even if an excisesystemcan be made progressive,there is still an importantdisadvantage
from an equity standpoint,particularlywith the tiaditionalexcises. The tax burden relative to
incomewill vary greatly amongfamiliesdependingon whetheror not the particularcommodities
are used in the family. Relativelyheavy taxation of families in which one or more members
smoke cigarettes may be justified on economic efficiency grounds, but can be seriously
questionedon equity grounds.
THE CHOICEBETWEENAD VALOREMVS SPECIFICRATES
A major issue with regard to excises is the choice between ad valorem and specific
rates. 10 The issue is particularly importantwith the traditional excises and motor fuel. For
most other excises the use of ad valorem rates is almost essential because of the problems of

10

J. A. Kay and M. J. Keen, The Structure

of Tobacco Taxes in the
European Community (London: Institute for Fiscal Studies, 1S82);
Cnossen, Excise Systems, op. cit., pp. 104-05.

19

definingthe taxableunits and establishingsuitablerelative rates--asfor exampleif all hardware

items were made taxable.
Traditionally,exciseshad specific rates, and the major excises in terms of revenue still
do in many countries, though not in all. There are severaladvantagesclaimedfor the specific
form of rate.
First, compliance and administration are typically simpler, as there is no need to
determinethe value of the productfor applicationof the tax. Controlinvolvesthe relativelyeasy
task of determiningphysical output--numbersof cigarettes, etc. There is no need for audit to
check upon reported values, and there are no issues relating to the appropriatevalue. These
excises are typically collected at the manufacturinglevel; applicationof the tax to the actual
sellingprice would encouragemanufacturersto shift functionsforward of the point of imposition
of the tax to distributors. To avoid this, commonlythe retailprice is used. This is not difficult
with cigarettes,for example,with more or less standardretailprices, but it is moredifficultwith
a wide range of a!coholicbeverages. In any event, it adds a complicatingelementto operation
of the tax.
Secondly,the traditionalexcisesare in part based upon a penalty philosophy--thatuse of
the commoditiescreates negative externalitiesor, particularly in the past, is in some sense
"immoral" or "sinful." Thus the specific levy ensures that the tax burden borne by consumers
will be related to the physical quantityconsumed,not to the value. Using U.S. wine prices as
an example,presumablythe tax "penalty"shouldbe the samefor consuminga litre of $1.98 wine
as for consumingone of $25 super quality wine. If anythingit might be arguedthat the cheaper
wine may be more harmful, per litre, than the high qualitywine.-andcertainlythere is incentive
to use more. This reasoninghas validityonly if one accepts the negativeexternalitiespenalty
and/or "sin" justification for these taxes.

- 20 -

Thirdly, as demonstratedby J. A. Kay and M. .1.Keen, specific levies avoid the effect
of ad valorem levies in loweringthe quality of the productand the range of varieties. With an
ad valorem levy a firm can reduce its tax liability by loweringthe quality (for example, use of
inferior materials, less aging, etc.) whereas with a specific levy it cannotdo so. By the same
reasoningad valoremrates :endto reducethe range of varietiesavailableto the consumers,since
provision of a numberof varietieswill raise costs relativeto meetingthe demand with a single
variety and thus an ad valorem tax will give incentiveto cut back on the numberof varieties.
It should be noted that this is an advantageof the specific rate only if the quality and
varietywere opti? al in the absenceof the tax; if theyare not, appropriateuse of ad valoremrates
might bring the industry closer to the optimum, but design of such a program is extremely
difficult.

A final advantageof the specificrate is that its use tendsto concealthe very high tax rate
relative to purchaseprice that is evident with an ad valorem rate.
The ad valo;em approach,in turn, has some significantadvantages. First, it avoids the
penalty placed by specific rates on the lower priced varietiesof the product, and makes the tax
more progressiveor less regressive,as notedin a previous section. A uniformrate of tax on all
wine places a much higher tax burden on the purchaseof the litre of cheapwine comparedto the
purchaseof an expensivewine. Ad valorem leviesplace a higherburden on drinking in luxury
establishments,for example. To many observers, this is a much more significantmatter than
possible effects of an ad valorem levy in leadingproducersto reducequality, given ti1 ; demand
for and the higher prices possible on high quality varieties. It may be possible to lessen this
regressivefeature of specific rates by varyingthe rate according to the price of the product, as
some countriesdo with cigarettesand motor fuel, but this materiallycomplicatesoperationof the

21 -

tax, and is contrary to the "penalty" goal of traditionalexcises, or the road use philosophy of
motor fuel taxes.
Secondly,the ad valoremapproacheliminatesthe needfor definingthe taxableunit, since
the tax can be applied to the selling price of groups of units; a firm produces and sells a
particular batch of goods for a certain amount; tax appliesto this selling price. There are no
problems of determiningappropriateprice necessaryif rate differentiationis used with specific
rates. Closely related, there is no incentive,as with some specific levies, to "water down" the
product--forexample,beer or distilledspirits--ifthe tax is appliedto the concentrate, which is
diluted after the tax is applied. This problemof specificationof units is particularlytroublesome
with some types of luxury goods,where the final productcan be sold in parts, which may or may
not be subject lo excise.
Thirdly, an.1 most seriously in many countries, specific rates do not keep pace with
inflation, as do ad valorem rates. When prices are rising, the specificrates must be constantly
revised. Experiencein the UnitedStatesand elsewhereshowsthat this is often not done. There
are two primary reasons: inertia, especiallyin a nonparliamentarygovernmentalstructure, and
politicaloppositionto any tax rate increases,even though necessaryto keep the real tax burden
constantrelative to sellingprices. This tax increasepsychosishas become very strong in recent
years in many countries.
One of the greatest fears in manydevelopingcountriesconsideringshift from specific to
ad valoremrates is that the traditionalleviesare highlyproductiveof revcnue,and there is danger
that tamperingwith the rate will interferewith effectiveenforcemcntand cause serious loss of
zevenue.

- 22 -

Since the lag of rates behindinflationis the most serious disadvantageof specific rates,
one approachto the problemis to retain the specificratesbut to indexthem automaticallyto keep
them in line with price level changes.
ECONOMIC EFFICIENCY CONSIDERATIONS
Exciseshave oftenbeen criticizedfor seriousadverseeconomiceffects--interferencewith
attainmentof economicoptimality. The effect long stressedis the excess burdenargument;when
some commoditiesare taxedand not others, personsshift from taxed to untaxedarticles,and thus
a net excessburden results. The personssuffer a loss in satisfactionbut the governmentgets no
revenue. Indirect taxes were often comparedunfavorablywith income taxes on this score. But
the generality of the argument has been seriously questioned in recent years, although there
remains an element of validity. The basic argumenttoday followingfrom the theory of optimal
taxation is that when taxes are levied on particular commoditiesor services, they should be
imposedon itemswith low price elasticityof demand,so that there will be a minimumof shifting
of consumerpurchases. But this rule, if broadlyapplied, would result in heavytaxationof basic
necessitieswhich have low price and incomeelasticity. Sincethese are consumedwidelyin the
lower income levels, heavy taxationis not acceptablein terms of equity.
Of the typicalexcise taxes, those on cigarettesand beer, and to a lesser extent those on
distilledspirits, meet the low price elasticity requirementrelatively well, from all indications,
because of their addictive nature. But of course this feature lessens the attainment of the
objective of these levies of offsettingthe negative externalitiesby reducing use. The tax on
motor fuel is of a somewhatdifferentcharacter; it may be regardedas basicallya charge for the
use of roads to covertheir costs, and likeany other charge or price any reductionin usage below
the volume with no charge may be consideredto aid in attainmentof the economicoptimum.
Failure to charge for the use of roads would result in excessive utilization relative to the

- 23 -

optimum. Exciseson pollutingeffluentswouldbe justified, in termsof economicefficiency,for

the same reason as motor fuel levies--withthe motive of lesseningpollution. The economic
efficiencyargumentis strongestagainstexcise systemsthat includea numberof articles regarded
as luxuries. Price elasticitymay be relativelyhigh, especiallyif close substitutesare not taxed.

Avoidanceof Tax on ProductionInRuts

The reasoningapplied to excises on consumptiongoods does not apply to production
inputs, except when the tax representsa payment for inputs (motor fuel chargesfor commercial
vehicles),or the governmentdeliberatelyseeksto alter factor inputratios. Theprincipalexample
goods than on those producedby hand--as
of the latter is a higher tax on machine-manufactured
the cigarette tax structurein Indonesia,and textile taxationin some countries.
Apart from these specialcases, a tax on productioninputs will almost certainlycause a
shiftingin factor proportionsaway from optimalproductionefficiency. An obvious exampleis
the taxation of freight transportprovidedby public carriers, which will lead business firms to
haul goods in their own vehiclesto avoid tax, and may affect locationdecisions.
The SpecialCases of Motor Fuel and RelatedTaxes
As noted, taxes on motor vohiclescan play a major role in financingroad construction
and maintenanceon a rationalbasis, and in a developingcountry, improvethe equity of the tax
structure, since relatively few persons own cars. These levies can also yield the government
substantialrevenue.
Apart from annual license charges, which are not included in the coverage of excises,
there are two principal levies for highwayuse, the tax on the initial sale of the vehicles (and
possibly upon subsequentresale), and the motor fuel tax, plus possible supplementaryexcises

24 -

such as on vehicle tires. It is relativelyeasy to administeran excise tax on the sale of motor
vehicles, on an ad valorem basis, with control through the licensingsystem. If there is a strong
desire to hold down the size of vehicles,the ad valorem rate can be graduatedsharply according
to weightor engine capacity,relativelyobjectivemeasures. The second, and frequentlythe most
important,is the excise on motor fuel, collectedfrom the refinery or wholesaledistributor. In
theory, the level of the tax shouldbe determinedby the short run marginalcost of maintenance
of the highways--butgiventhe constanthigh continuinglevels of spendingon highwayscharging
a substantiallyhigher amountto cover a large portion of overall highwaycosts has merit. The
tax would be collected, of course, oil sales for use by both private and commercialvehicles.
Specific rates can be justified on the argumentthat quantityconsumed,not amount paid, is the
appropriatemeasure of road use. But indexingof rates to offset inflationis imperative.
Since, in most developingcountries,there is substantialincomeelasticityof demand for
motor fuel, the tax structurecan be made more acceptablefrom an equity standpointby raising
the levy on noncommercialuse abovethat necessaryto cover highwaycost, the additionalto be
placed in the general fund rather than the highwayfund.
One major issue, political and economic,is the appropriaterelative burden on gasoline
and diesel fuel. In terms of highwayfinancing,the tax on diesel fuel shouldbe higher, because
for vehiclesof a givenweight,less dieselfuel is requiredper mile than gasoline. But if a portion
of the levy is regarded as a regular tax and not as a charge for road use, applicationof a higher
rate or the same rate on diesel fuel as on gasoline is scarcelyjustified. In fact, most countries
applya rate on dieselfuel so muchlower than that on gasolinethat the differenceis greater than
that necessary to eliminate the nonhighwaytax element on gasoline. This often results in a
burden entirely inadequatein terms of highwaycosts on the larger transportvehicles, which are
primarily diesel. A major problem is to confine the heavy tax on diesel fuel to that used for

- 25 -

highway purposes; there is no logic to applying a higher rate, or any rate to diesel fuel for
nonhighwayuse (exceptperhaps to lessen importsof petroleum). But differentiatingpurchases
for highwayand nonhighwayuse is very difficultin a developingcountry,so serious that David
Newbery and others recommendagainst seekingto tax diesel fuel, using instead high taxes on
the sale of diesel vehicles.11 Probablythe only other workablesolutionis to tax all diesel fuel
sales arw' allow application for refunds for nonhighwayuse. The same problem arises with
gasoline except that only limited amounts are used for nonhighway purposes, mostly in
agriculture.
One aspectof the issuerelatesto the relativeburden on heaviervehicles, especiallytrucks
(freight vehicles). Motor fuel consumption and thus motor fuel tax does not increase in
proportionto the greater damagedone to the roadsby the larger vehicles. Yet any form of levy
based upon weight and distance travelled is difficult to enforce; the only feasible solution is
substantiallyhigher annual license charges, though these are unrelatedto mileagetravelled.
While the motor fuel levy is a reasonablemeasure of road use and effect on road costs,
it does not reflect congestioncosts--theeffect upon the costs of other vehicles through delay,
discomfort, and accident hazard as additional cars use the roads and the latter become
overcrowded,as they do in urban areas in many developingcountries. The only solutionto this
problem, in the absenceof tolls, is the requiringof special vehiclelicensesfor persons living in
congested areas, although these are unrelated to actual usage. Tolls are the alternative; the
problem is the cost of collection and the nuisanceand delay issue. Of all developingcountry
cities, only Singaporehas developeda systematicprogram for restrictionof congestion.

"1 David M. Newbery, Road User Charges and the Taxation of Road
TransDort, IMF Working Paper WP/87/5, 1987.

- 26 -

While beyond the scope of this paper, it is well to point out that a major method of
reducing automobilecongestionis the provision of efficientinexpensivepublic transportation-typically by bus, though in larger metropolitanareas, by light rail or rapid transit systems. To
hold fares down, such vehicles should be relativelyfree of highway-relatedexcise.
The Importanceof Uniform Treatmentof Domesticand ImportedGoods
Histo-ically,as noted, ir many countries, excisesapply only to domesticallyproduced
goods. While compensatingimportduty increasesor supplementswereprovided,manycountries
have not maintained a uniform relationshipbetween tax on the imported and domestic goods.
Not infrequently,a higher rate was appliedto imported goods, thus addingto protection. The
results havebeen alterationsin the degreeof protectionprovided,and deliberateuse of the excise
systemto increaseprotection. Theundesirableconsequencesare obvious. Haphazarddifferences
betweenthe taxes on domesticand importedgoods make no sense. Deliberateuse of the excise
system to increase protection has the effect of confusingand concealingthe actual amount of
protectionprovided. If a countryis to protect domesticindustry,this should clearlybe done by
one levy--the customsduties--nottwo, customsand excise differentials. For both political and
economicconsiderations,excisesshould apply equallyto imported and domesticgoods.
This rule is simple with specific rate levies. It is more complicatedwith ad valorem
levies, because of problems of ensuring that the taxable price is the same for imported and
domestic goods, the problem that also arises with sales taxes at the manufacturinglevel. The
prices of domesticgoodsmay reflectsignificantcost items not appearingin theprices of imported
goods--costsof domesticdistribution,advertising,warranty,etc. Ensuringcompleteequality is
difficult, but the problem must be faced.

- 27 -

EVALUATIONOF THE USE OF EXCISES

The justificationfor excisesmust be approachedin terms of each of the major types, as
the rationale and objectionsdiffer substantially.
The TraditionalLevies
Perhaps the most significant case for the traditional excises is their ability to yield
substantial revenue with relatively little popular complaint.12 This reflects in part the low
price elasticity of demand, in part the rather general consensusthat they are more acceptable
forms of taxes than others, especiallyincometaxes. Beyondrevenue,the strongestjustification
rests upon negativeexternalities;use of the commoditiesto excess results in costs to society not
borne by the purchasersof the commodities. This is particularlytrue of alcoholicbeverages,but
of cigarettesas well, giventhe effectson lung cancer, not only of the smokersbut of nonsmokers
inhaling the smoke. The third, and perhaps oldest, argumentis the desire to place a deliberate
"penalty"upon use of these commodities--thattheir use contributeslittle to the welfareof society,
and their purchasetakes funds away from goods essentialfor health and well being. This view
in part reflects the Victoriannotion that use of the commoditiesis in a sense sinful, and in part
the antagonismof Islamic countriesto the use of alcohol.
These levies, however, are not withoutcriticism. As noted, they tend to be regressive,
becauseof the low incomeelasticityof demandand they tend to place a very unequal burden on
families at given income levels. A widespreadargument in some developingcountries is that
their primary effect is to deprivethe familieswhichuse thesecommoditiesof fundsfor milk, and
other items essential for health,while, it is argued, the taxes have little effect in reducing

"2A recent discussion

is provided by Joseph
Cordes,
Eric
and Frank Sammartino,
"Raising Revenues by Taxing Activities
Costs," National Tax Journal, 43 (Sept. 1990), pp. 343-57.

Nicholson
with Social

- 28 -

consumptionof the taxed goods becauseof the low price elasticity. Some recent studies suggest
that the price elasticity is not negligible.1 3 The high rates tend to increase smuggling and
illicit production, often of inferiorand sometimesdangeroussubstitutes. But perhaps the most
serious objection is that the case for these levies is not strong, resting as it does on moral
judgments. But one certain rule is that use of these excises will continue--giventheir revenue
yield and general acceptance.
Motor Fuel and Motor Vehicle Levies
As noted, the tax on motorfuel, and relatedmotorvehiclelevies,usuallyone of the three
most productiveexcises, has strongjustificationas a charge for the use of roads, in lieu of tolls.
Properly adjusted, the tax aids in attainingoptimalexpenditureon roads and optimalroad use.
The other major argument, one dominant in western Europe, is that these levies are
progressive, constitutingan importantsupplementto the income tax in reachingpersons on the
basis of ability to pay, with incidentalgains of lesseningroad congestion.
The only significantcriticismcenters around the problems of adjustingthe complex of
levies relatingto motor vehicles to attainthe desiredgoals in optimalfashion--particularlywith
regard to congestion,relativeburdens on light and heavyvehicles, relative treatmentof gasoline
and diesel fuel, and tax treatmentof diesel fuel for nonhighwayuse.
Luxury Excises
The third categoryof excisesconsistsof thosedesignedto reach personsin a progressive
fashion, as an alternative to heavier reliance on income taxation. The aim is to select
commoditiesand services with high income elasticityof demand. Thus equity is attained with

"3 For

example, the article by Christine Godfrey and Alan Maynard,

Economic Asnects of Tobacco Use and Taxation Policy, University of York,
Economic Reprint Series 401, 1988.

- 29 -

less reliance on income taxes, which are not only more difficult to enforce in a developing
country, but may have greater adverse effects upon incentives. Since in earlier years of
developmentmost of these commoditiesand the inputs to make them are imported, the excises,
by lesseninguse, will not only stimulatesaving, but reduce the drain on foreign exchange as
well. Comparedto a sales tax, an excise systemavoidsburden on widelyused commnodities
with
a low income elasticityof demand, and is thus likely to be progressive, which a sales tax rarely
is.

But the "luxury" excisesystemsas they exist leave a great deal to be desired, and reflect
inherent difficultiesnoted in a previous section. Except for a few obvious items such as motor
vehicles, informationon incomeelasticitiesis not adequateto selecton this basis. Thus typically
the taxed items are selected on the basis of what the persons making up the list regard as
"luxuries"--withoutany serious analysis. These are typicallyconsumerdurables. If the system
as at all broad, the result is a relatively long list of essentiallyseparate taxes, and in some
countriesa separate return must be filed for each excise. The result is serious complicationof
complianceand administration. A variety of rates if often used, with narrow differentialsthat
defy logic. There may be, for example, rates of 8, 9, 10, 11, and 12 percent--withno possible
rationalexplanationof the differences. Numerousinterpretivequestionsare inevitable,as weli
as discriminationamongconsumers(and producers)of closelyrelated commodities.
The final criticismis that the selectionof various goodsfor tax, whereasothers are not
taxed, is discriminatoryagainstthose personswho have relativelyhigh preference for the taxed
items and can createexcessburden. This argumentis not significantfor traditionalor motor fuel
excises; it is for the typical rangeof luxury excises. Furthermore,in the selectionof items, not
infrequently,onesare includedthat are eithernot consumptiongoods(e.g., cement),orare widel)
used in the lower income groups, sugar and kerosenebeing the prime examples. In some

- 30 -

countries, keroseneis the principalfuel of the poor. Furthermore,the luxury excise systemsare
scarcely "systems"at all and do not automaticallyadapt to changingconditions. New products
developed, though similar to ones now taxed, will not be brought within the tax network unless
there is deliberate action by the government. Firms may change the nature of taxed items
slightly, bringingthem out from under the tax.
It is these considerations that have led the majority of developing, as well as
industrializedcountries,to introducesales taxes, whichreach all commoditieswith few rates or
a single rate (there are exceptions)and thus includenew productsas they are introduced. Only
a single return is required for all the commodities. There are far fewer interpretativequestions
abut whether a particular item is taxed or not, though there are some, centering around
exemptions.
In summary,once a countryhas developedsubstantialdomesticproductionbeyondbasic
agriculturalcommoditiesand ones subject to traditionalexcises, there is great merit in moving
to a sales tax rather than continuingto add excises. By this meansall commoditiesplus selected
servicesare included, both domesticand imported, and new ones are automaticallyincluded in
the tax net. There are far fewer interpretativequestions,particularlyif the list of exemptionsis
minimized. Firms need only report total sales of all taxableitems and accountfor tax on them;
there is no need for separate returns for various commoditiesor itemizingsales by category of
goods. The issue of the appropriaterate structure is beyondthe scope of this paper, but at least
a wide range of different rates can be avoided. There is no need for registering or licensing
firms separatelyfor a range of separateexcises.
Typicallywhen a countryintroducesa sales tax, it retainsthe traditionalexcises,the tax
on motor fuel, and a special levy on sales of motor vehicles. There is merit if eliminatingthe
remainderof the excises and not establishingnew ones, unless there is very strongjustification

31 -

in particularinstances. There is little evidencethat a tax structurecan be mademore progressive

by includingexciseson a numberof so-calledluxurygoods,just as there is no evidencethat the
use of multiple rates under a sales tax improvesprogressivity. If a higher tax rate is desiredon
a few commodities,suchas motorvehicles,it is likelypreferable,from an operationalstandpoint.
to reach them by a separateexcise rather than by use of higherspecial rates in the sales tax.
In some countries, however, there is so little domestic manufacturingas to make a
general sales tax scarcely worth the trouble. In others there are political obstacles to the
introductionof a sales tax. Yet there is enoughdomesticproductionthat some form of domestic
indirect tax, beyond the traditional and motor fuel excises is warranted. As a second best
temporary solution, some form of onsumptionor purchase tax, as used in the Caribbean
countries, may be warranted. But experiencein the Caribbean, Egypt, and elsewheresuggests
that such a levy must be designedwith care, and even so is likely to be suitableonly for a few
years. Second best optimalityrequiresthat the group of reasonablyhomogenouscomrnodities,
as for example,consumerdurables, be subjectto a uniformrate, tax paid on the basis of a single
return, rather than imposinga substantialnumberof separate levieson different commodities,at
different rates. Motor vehicles constitutesuch an importantand clearly definable commodity
class that different rates, based on valueor other measures,may be warranted,distinct from the
general levy.
ADMINISTRATIONOF EXCISE TAXES
When exciseswere introduced,assignmentof them for administrationwas universallyto
Customs,since they were similarin nature in many respectsto customsduties, eventhough they
were collectedon domestictransactions,and the departmentwas frequentlyrenamedCustomsand
Excise. As levieswere ultimatelyimposeduponhotels, communication,transpcrtation,and other
services, administrationof these new ones was sometimes assigned to Customs and Excise,

- 32 -

sometimesto InlandRevenue,which administersthe income tax, thus splitting responsibilityfor

the various forms of domestic indirecttaxes.
The administrativestructuresand proceduresfor excises originatedwith the traditional
levies on alcoholicbeveragesand cigarettes; for these commoditiesthe systems remain largely
unchangedin developingcountries. As additionalcommoditieswere subjectedto excises,initially
the sameprocedureswere attempted. This provedto be unworkable,and thus simplertechniques
have come to be used.
The TraditionalTechniques
Becauseof the very high rates of the traditionalexcises, they were particularly subject
to evasion,and thus very strict physicalcontrol was established,with "physicalpresence" of the
enforcementagency.14 There are several steps in the process:
1. Licensing. A firm seekingto producealcoholicbeveragesor tobacco must register
and apply for a license. Detailedinformationis requiredabout the physicallayout of the plant,
bonded warehouses,operationalprocedures,etc. Some countriesrequire annual renewal of the
license.
2. PhysicalControl of Production. Frequentlyan exciseofficer is stationedin the plant
at all times, or during working hours; in other instancesthe officer will make regular--often
daily--visitsto the plant. The officerwill checkthe processof production,the entry of materials,
etc., into the plant, and the output, testing the strength as well as the quantity. He will pay
particular attentionto all transfers of the product from the factory to the bonded warehouseor
similar facility, and particularlyto the transferout of the bondedwarehouse, the point at which

14
In the United Stats, rigid controls were introduced in 1866 after
an increase in the tax on distilled spirits caused the revenue to fall
in half.

33 -

the excise becomespayable. No transfers can be made withoutobservationby the officer. In

some instances meteringdevices are now used to check output. The checking of strength is
mainly designedto prevent adulteration.
3. RecordControl. The direct physicalcontrolis supplementedby records control. The
firms are required to record materialsacquisitions,output, stock on hand, as well as details of
the productionprocess.
Shipments from the bonded warehouse must be accompaniedby a consignmentnote
giving details of the purchaser,etc., for each shipment,or for each day.
4. Payment and Returns. In some instancespayment must be made whenever the
commoditybecomessubjectto tax, that is, upon shipmentfrom the bonded warehouse,and thus
no arrears are possible (if the proceduresare strictly followed). In other situations,payment of
any unpaid amounts is made on a monthly basis. Returns giving detailed informationon
acquisitionsof materials,output,transfers from bondedwarehouses,etc. are required. These are
checked against the records kept on a day-to-daybasis, but there is typicallyno true audit.
The picture is complicatedby the fact that some shipmentsfrom the bonded warehouses
are exempt from tax: for export, for industrialnontaxableuse, etc. Adequatedocumentation
must be provided for these--butinevitablythey provide some avenuesof potentialleakage. In
industrializedcountriesthere is some tendencyto move away from primary relianceon physical
controls, with emphasison accountstypes of controls,15 but most developingcountries are not
yet ready for this change; the potentialloss of revenueis too great.
Motor Fuel Taxation. Usuallythere is only one oil refinery in a developingcountry, or
at most a few. Strict physical control is neitherpossible nor necessary. Returns are required,
with informationon acquisition of petroleum and sale of various petroleum products, and
indicationof sales and tax due, which must be paid with the filing of the return.

5
" For a discussion of the issues, note the study, Alcohol and
Tobacco Excise Taxes: Laws and Audits Need Modernizina, Report by
Comptroller General of the United States, Washington, DC, 1977.

- 34 -

There is a potentiallyseriousproblemif dieselfuel sold for nonhighwayuse is exempted;

as noted, a refund system may be necessarydespite its complications.
ExtendedExcise Systems. As countriesbeganto extendtheir excisesto other products,
initiallythey soughtto use the sameproceduresas for the traditionalexcises. But rigid physical
control proved to be impossible. With a number of different products, informationon plant
layout, etc., was difficultto develop, and was not significantin any event. Notihingequivalent
to a bonded warehousewas possible. Tax must apply to sales, not to physical transfer. With
a variety of products, tax almost of necessitymust be based upon amount of sales, not upon
physical unit. When some services were made taxable, clearly physical controls could not be
used.
Accordingly,transition to accounts control was imperative. But there are frequently
carryoversfrom the old systems. Many firms will be taxableon severaltypes of products. They
must register for each type of taxableproduct, with separateregistrationfiles. Paymentis on the
basis of returns filed monthly or at some other interval, but frequentlyfirms must show both
quantitiesand sales figures by typeof commodityand name of purchaser. Fig. 1 showsa typical
return, from Trinidad, under the old purchase tax system. The laws affecting various
commoditiesmay be different, with varyingrequirements.Thus firms are subjectto unnecessary
work, providing informationof which little use is made, as few governmentshave systematic
audit programs for their excises. Even the follow-up systems for ascertainingand pursuing
nonfilersare usuallyinadequate.
The tendency of countries to shift from these broad excise systems to sales taxes
eliminates these problems in larger measure. If a few luxury excisesare retained, such as on
motor vehicles, these can be administeredseparatelyfrom the sales tax or in conjunctionwith it;
the complicationsare largelyeliminatedonce most luxury excisesare emergedinto the sales tax.

PURCHASE

CUSTOMS AND EXCISE DIVISION

TRINIDAD AND TOBAGO

TAX

ASSESSMENT

C. A L.-r.T.-3&

(Ad No. 13.of9IM)

e Name...............................................................
oUfctzurer
Addrem,.................................................................................
eAuemmt
No.
PoealptNo.
Reep o

UatchnSo.
Rotation No.B^teh
~

No.smn0
~ No. ~
~ Invoice

GosVle

Duorno
Dzsunon

ADb

QvA= or Goons

Dostrpton

Q rJntAy

goods irop.sent the total

charpeable
Wo doherebydeclarethat the wlthLn.mentioned

Unit fo

S'L

()

Rate

TZ

Unilt

Amou&

TOTALB .

deliered by me
quantity of all auchgoodswhich weresold. appropriatedor apploedAnd

duringthe periodor..................
Wo further declarethat the abovequotedvalue. epreoentthe wbolesalevalets
requiredby Art 1313.

.............................................................................

of Manufaeturer.;..............
Signature
{

Dale.................
I/We declarothe abote particularsto betrue andcorrect.
Datedthis

da of

10
....

or AuJAtriodAga1
Si;pcre oJ Maou/oclurer

O.p..TrL(rO.-

forCompaiUerof Cwgomsan Raaim

*Velu s efliag]ls t Jm Fuu"

36

Table Al
DATAOF EXCISEREVENUE
BY COUNTRY

Couttr
Gabon
Seycbelles
South Africa
Hauritius
TMiUA
Botsm
Cmroon
Cote d'Ivoire
Swmz1and
Egypt, Arab Rep.
Morocco
Zimbabus
Senegal
Lberia
Ghana
Nigeria
Coros
Lesotho
Kenya
Benin
Sierra LeoOe
Togo
Uganda
Burundi
Zambia
Gambia, The
Kali
Burkina Faso
Tanzania
Malawi
Guinea-Bissau
Zaire
Ethiapia
Japan
Kuwaat
Australia
Singapore
NewZealand
Israel
Oman
Korea, Rep.
Malaysia
9yrian Arab Rep.
Fiji
Jordan
Thailand
Papua NewGuinea

Cont.inent
Africa
lfrica
Africa
Africa
Africa
Africa
Africa
Africa
Africa
Africa
Africa
Africa
Africa
Africa
Africa
Africa
Africa
lfrica
Africa
Africa
Africa
Africa
Africa
Africa
lfrica
Africa
Africa
Africa
kfrica
Africa
Africa
frica
Africa
Asia
Asia
Asia
Asia
Asia
Asia
Asia
Asia
Asia
Asia
Asia
Asia
Asia
Asia

Year of
GNP/PC
Data
4700
3210
1890
1490
1180
1050
970
740.
700
680
610
580
520
450
390
370
370
370
330
310
300
290
260
250
250
220
210
190
180
160
160
150
130
15760
14610
11100
7940
7750
6800
5810
2690
1810
1640
1570
1560
850
700

1985
1989
1987
1990
1989
1988
1989
1984
1990
1988
1987
1990
1984
1988
1988
1987
1987
1986
1988
1979
1989
1987
1986
1981
1988
1990
1988
1987
1985
1988
1988
1988
1987
1988
1989
1988
1988
1990
1989
1989
1990
1990
1987
1988
1988
1989
1988

IV
5.2
Total Tax Excise Tax
Revenues
Revenues
449.6
770.8
39975
7819
Z257.8
1307.66
570.99
574474
609.27
11470
33114
4637
189.63
203.8
131199
6447.6
5302.3
230946
29176
29754
3578.9
81696
2843.74
10461
4699 7
433.84
73.4
68923
17197
653.7
16240
155720
2098.2
49024
84
73707
7519
30341
29420.6
312.4
23262
20088
19028
300.74
321.99
289284
572.61

0
0
2920
630
291
0
49.65
36682
0
1984
7507
416.6
8.88
23
27138
886.6
0
5518
2573
1903
696
1220
97.26
3206
667.8
0
12.1
6682
0
20.94
5615
5597
409.3
7114
0
10285
544
2381
840.7
0
2778
2044
0
38.87
61.17
70655
66.85

5.4
Taxes on
Services
1.6
0
4
339
12
0
3.11
23238
0.3
51
242
13.1
1.18
1.8
782
0
0
865
531
86
9.2
481
22.68
0
5.7
2.2
407
34
0

nap
96
0
49
430
85
0
281
0
0
9.9
0
0.11

5.2 +
5.4
1.6
0
2924
969
303
0
52.76
59920
0.55
2035
7749
429.7
10.06
24.8
27920
886.6
0
6383
3104
1989
705.2
1701
119.94
3206
673,5
2.2
12.1
7089
34
20.94
5615
5597
409.3
7210
0
10334
974
2466
840.7
0
3059
2044
0
48.77
61.17
70655
66.96

%of
Total Tax
Revenue
0.36%
0.00%
7.31%
12.39%
13.42%
0.00%
9.24%
10.43%
0.09%
17.74%
23.40%
9.27%
5.31%
12.17%
21.28n
13.75%
0.00%
2.76%
10.64%
6.68%
19.70%
2.08%
4.22%
30.65%
14.33%
0.51%
16.49%
10.29%
0.20%
3.20%
34.58%
3.59%
19.51%
14.71%
0.00%
14.02%
12.95%
8.13%
2.86%
0.00%
13.15%
10.18%
0.00%
16.22%
19.00%
24.42%
11.69%

Country
____
YmemArab Reb.
Phillppines
Indoesia
Solann Isda3ds
Sri LanIM
Paiksltan
India
Maldlvew
Niepal
Bangladab
Swlt2erland
Luxer
bourg
Norway
Iceland
Sweden

Continent

Lsia
Asia
Asia
kAia
Asia
lsia
Asia
Asia
AsIa
Asia
Europ
Europe
Europe
Europ
Europe
Denark
Europe
Finland
Eur-.e
Germny, Fed. Rep.
Europ
France
Europe
Austria
Europe
Netherlands
Eurmp
selgia
Euope
united Kingdcm
Europe
Italy
Europe
Ireland
Europe
Spain
Europ
Cyprus
Europe
Malta
Europe
Greece
Europe
Portugpl
Europe
Turkey
Europe
United States
N & C Arica
Canada
N & C hmrica
Bahama
N & C Amrica
Barbados
N & C Amxdca
Trinidad &Tobago
N & Cdamlca
Paa
N & C Am3rIca
M1xico
N C Amica
St. Kitts &Mevis
N & C Amdca
Costa Rica
N & C AmIca
St. Lucia
N
C imrica
Belize
N & C Irdca
St. Vinnt & tbe Grnadi & C Amrica
Guateala
N & C America
Ja4ca
N & C Ameica
El Salvador
&
N C lAmica
Nicaragua
N & C 3-rica
Docinlca Rep.
N & C AmrIca
Haiti
N & C aelIca
Veneela
S Amrica
Argentina
S Amrica
Surinam
S America

37

Year of
GNP/PC Data

IV
5.2
Total Tax Excis Tax
Revenues

-----_

590
590
450
420
400
350
300
300
160
160
21330
18550
17190
16600
15550
14930
14470
14400
12790
11980
11860
11480
10420
10350
6120
6010
5200
4190
4020
2830
1210

18S30
15160
10280
5350
4210
2240
1830
1700
1610
1400
1240
1000
950
940
860
830
730
360
3230
2390
2270

1990
1988
1988
1988
1990
1986
1989
1989
1990
1988
1988
1988
1989
1987
1989
1989
1988
1989

1989
1989
1989
1988
1989
1989
1988
1987
1989
1988
1985
1988
1989
1989
1989
1986
1988
1989
1988
1990
1989
1989
1990
1984
1989
1989
1984
1989
1988
1988
1987
1986
1988
1986

Revenueu

5.4
Taxea on
Servioes

- ------

11740.4
90349
21436
72.76
55920
69323
508.76
271.8
7235.6
43274
54264
111622
218603
4629S.6
458.45
266164
125777
618.92
2318.3
529.28
209.82
2388.9
163917
436871
8481
10283.7
510.54
150.4
1483.38
1945.7
25572.1

963.16
115857
373.2
959.8
4072.6

817
88965
92.46

89.21
264
82S93
110.2
1853.75
2614.2
2509.9
66121
4019.3
994.9
88853
94110
375.19

2302.5
19597
1390
O.S3
7780
25052
228.8
0
1045.2
11667
1627
11237
3S338
2762.2
50.83
32139
19596
56.82
153.4
37.26
11.52
115.1
21381
30407
1447
709.5
77.4
5.81
228.81
308.1
675.4
26.36
6775
0
5.3
397.7
79.1
8610
2.11
7.57
1
7024
1.2
194.73

5.2 +
5.4

%of
Total Tax
Revenue

-----

4.1
3571
0
0
0
0.39
84
249.6
0
211
792
1572
199.1

1.99
1564
44
4.19
47.4
10.05
0
18.7
2915
5103
112
73.2
8.92
0.24
5.1
78.5
1299.9
6.48
931
27.7
38.4
8.3
1410
2.51
0.39
10.7
329
12
17.61

S32.8

80.5

429.4
25642
757.8
274.8
9138
1S201
24.54

22
0
116.4
22.9
76
137
4.53

2306.6
23168
1390
0.53
7780
2S052
229.19
84
1294.S
11667
183
12029
36910
2961.3
52.82
33703
19640
61.01
200.8
47.31
11.52
133.8
24296
35510
1S59
782.7

86.32
6.05
233.91
386.6
197S.3
32.84
7706
27.7
43.7
397.7
87.4
10020
4.62
7.96
11.7
7353
13.2
212.34
613.3
451.4
2S642
874.2
297.7
9214
16572
29.07

19.65%
2S.64%
6.48%
0.73%
13.91%
36.14%
4S.OS%
30.91%
17.89%
26.96%
3.39%
10.78%
16.88%
6.40%
11.52%
12.66%
15.61%
9.86%
8.66%
8.94%
5.49%
5.60%
14.82%
8.13%

18.38%
7.61%
16.91%
4.027.
15.77%
19.87%
7.72%
3.41%
6.65%
7.42%
4.55%
9.77%
10.70%
11.26%
5.00%
8.92%
4.43%
8.90%
11.98%
11.45%
23.46%
17.98%
38.78%
21.75%
29.92%
10.37%
17.61%
7.75%

38

Continent

Yeawof
GNP/1C Data

._____-

--------

--

Urusgay
Brazil
Peru
Chile
Colobia
Ecuadr
Paraguay
Bolivia
Guyana

S I-rica
S Aerica
S A-rica
S Amrica
S America
S Amrica
S Amuica
S lmerica
S krica

Country

--

d190
2020
1470
1310
1240
1040
990
580
390

Source: International Nonetary Fund, Financial Statistics

IV
5.2
Total Tax Excise Tax
Revenoes Revenues
-

1988
1988
1989
1988
1987
1988
1988
1989
1985

625674
12704.3
7165
1164.77
1005.6
398407
281734
1019.2
807.6

Yearbook 1990.

5.4
Taxes an
Services

% of
Total Tax
Revenue

___

------

87721
2232.4
1935
122.54
59.6
16470
52131
190.1
52.4

5.2 +
5.4

655
597.3
111
2
962
2066
7.3

88376
2829.7
2046
122.54
61.6
17432
54197
190.1
59.7

14.12%
22.277
28.56%
10.52%
6.13%
4.38%
19.24%
18.65%
7.39%

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