Excise Taxes: Economics, Politics, and Psychology *

The imposition of taxes on specific consumption goods and services (i.e. excise taxes) not only is a time-honoured activity but also makes common sense: government financing can be combined with other important social goals, in particular the reduction of externalities (costs imposed on other people) by making the taxed goods more expensive. Thus two goals can be attained at the same time, which makes taxation an attractive option. Excise taxes1 enable us to reduce activities considered socially undesirable, such as environmental pollution, tobacco, alcohol, and drug consumption, gambling, and road congestion.2 The theoretical prediction that the induced relative price effect actually works is supported by considerable empirical evidence.3 The extensive economic theory of taxation applied to excises produces important insights that are far from being trivial. But this theory concentrates only on a limited number of aspects traditionally considered to be ‘economic’; other equally important aspects tend to be ignored. I wish to argue that excise taxation under identifiable conditions leads to undesired and even counterproductive outcomes. This does not mean that excise taxes should not be used, or even that they should be used less. But it does mean that their relative advantages and disadvantages should be evaluated carefully in the light of other methods of taxation and of economic and social policies in general. This chapter endeavours to focus on the aspects of excise taxation that have been neglected. Section 8.1 deals briefly with some of the largely ignored and unresolved problems arising in the standard theory of excise taxation. Section 8.2 considers excise taxation from the political point of view, based on constitutional economics. Section 8.3 centres on psychological aspects and is based on economic psychology. As these aspects are less well known in economics and in the taxation literature, they are discussed at greater length. Section 8.4 concludes.