Justification of Excise Tax in General
Excise taxes are an example of what have been traditionally called indirect taxes: taxes that are imposed on a transaction rather than directly on a person or corporation. Excise taxes are narrow-based taxes, as compared with broad-based taxes on consumption such as a general sales tax, a value-added tax, or an expenditure tax. Excise taxes can be collected at various stages, including the point of production, the wholesale level, or the retail level. They are also known as selective sales taxes or differential commodity taxes.
Excise taxes are levied on either a unit or ad valorem basis. For unit (also known as specific) excises, the tax is denominated in terms of money per physical unit produced or sold. Examples include the federal government taxes of 18.4 cents per gallon of gasoline, $13.50 per gallon of distilled spirits, and $3.10 per domestic flight segment for passenger airline travel. Ad valorem excises are based on a percentage of the value of the product or service sold. The 7.5 percent federal tax on the cost of domestic airline passenger tickets and the 3 percent tax on the cost of telephone services are examples of ad valorem taxes.
Broader-based taxes, such as the income and general sales taxes, are difficult to administer when most of the economic activity takes place outside a structured market setting. Excise taxes are sometimes used as a means of implementing an ability-to-pay approach to taxation. So-called luxury taxes are an example of this approach.1 The United States currently levies an excise tax on expensive passenger vehicles. This tax is set at 10 percent of the value in excess of a floor amount of $30,000. The tax on high-value automobiles has also been explained as a means of making foreign imports (which comprise a large percentage of such vehicles) more expensive than domestic Automobiles. By taxing items consumed disproportionately by higher-income individuals, excise taxes can achieve an element of progressivity. There are questions, however, concerning horizontal equity because not all people at the same income level have similar expenditure patterns for luxury items. Excises are also levied on goods or services that are considered harmful or undesirable, in an Attempt to discourage consumption. Taxes based on this rationale are labeled sumptuary excises. Examples include taxes on alcoholic beverages, tobacco products, and wagering. Because many of the goods and services taxed by sumptuary excises have relatively inelastic demands, these taxes May have only a limited impact on curtailing consumption. This presents an added benefit, however, for the government in that it provides a relatively stable source of tax revenue. Sumptuary Taxes are often popular politically because many citizens do not engage in the taxed activities, whereas purchasers of the taxed items do so voluntarily. Such taxes may have negative consequences from the standpoint of vertical equity because sumptuary excises are often highly regressive. Excises may also be imposed as a technique for dealing with negative externalities. This is related in some ways to the sumptuary excises. Taxes on “gas guzzling” automobiles and gasoline can be explained as a kind of Pigouvian (corrective) tax to reduce the divergence of the private and social costs relating to pollution or congestion. Such taxes are usually an imperfect technique for internalizing externalities, because an efficient Pigouvian tax should be related to the marginal damage caused by an activity, which is not necessarily proportional to the level of consumption.
Finally, excise taxes may be employed as a means of implementing a benefits-received approach to taxation. Gasoline taxes are an example. Gasoline usage is closely related to highway travel, thereby providing a link between taxes paid and benefits received from roadways. This link is further strengthened by earmarking where the revenues collected from an excise tax are designated for use in providing government services related to the activity. Examples include the earmarking of motor fuel taxes for highways and taxes on airline tickets for air traffic control and facilities expansion.
Excise taxes have existed for centuries and are widely used by governments today. The twentieth century spread of income taxation and value-added taxation reduced the significance of excise taxation as a source of government revenue, but most governments still collect sizable taxes on petroleum products, tobacco products, and alcohol. For example, in 2004 the U.S. federal government collected $72 billion in excise taxes, representing four percent of its total tax revenues, of which petroleum taxes accounted for $33 billion, or 45 percent of total excises. The United States relies the least on excise taxes of the 30 wealthy nations that are members of the Organization for Economic Cooperation and Development (OECD), whose excise tax collections in 2000 averaged 12 percent of total government revenues. As recently as 1969-1971, excise taxes contributed 23 percent of total tax collections of high income countries, and 27 percent of tax collections of developing countries.
Historically, excise taxes have played an important role in the tax systems of most governments. They have declined in relative importance, however, in the last hundred years because of the increased reliance on broad-based taxes such as income, general sales, and value-added taxes. Today, less-developed countries rely somewhat more heavily on excises than more highly developed countries. In the United States, excise taxes are used by all levels of government, with states relying most heavily on this source. At the federal level in 1991, various excises (not including customs duties) amounted to $42 billion, or 6.5 percent of federal tax revenues.
Finally, we concluded that at least the four justifications or motivations are enforced any legislatures to make excise tax law. The first justification is revenue generation: excise taxes can produce significant government revenues, and may do so at lower political or economic cost than alternatives such as income taxation. The second justification is application of the benefit principle of taxation: excise taxes can be tailored to impose tax burdens on those who benefit from government services financed by excise taxes. Gasoline taxes are often justified as user fees for government-provided roads, and the tax on sonar devices is justified by government expenditures to maintain lakes and fisheries. The third justification is control of externalities, which is the goal of a number of excise taxes on polluting substances, such as taxes on ozone-depleting chemicals. And the fourth justification is that excise taxes may discourage consumption of potentially harmful substances (such as alcohol and tobacco) that individuals might over-consume in the absence of taxation. As these examples suggest, one of the typical reasons for excise taxes is to discourage consumption of the good (i.e., so-called ʺsin taxes.").
Justification of Excise Tax under Ethiopian Law
Excise taxes are indirect taxes imposed upon the production or sale of particular commodities or related groups of commodities. Excise taxes are nothing but sales taxes imposed on a limited category of goods. Excise taxes were one of the first modern taxes to be spotted by the Ethiopian Government as potential sources of revenue. Some excise taxes had already been introduced before the Italian occupation targeting goods that were considered luxuries or primary exports at the time. Before the Italian occupation, selective excise taxation was introduced in 1931 targeting products like alcoholic drinks, cigarettes, incense, carpets and wear.
In the post-Italian period, excise taxes became one of the first taxes to be introduced they at least preceded general sales taxes by more than a decade. This is hardly surprising. Excise taxes, as selective taxes or production taxes, are much easier to administer than sales taxes with application on broad range of goods. The nascent Ethiopian tax administration at the time pursued a prudent policy of first introducing taxes on selective goods and then later extending the net to cover larger number of goods.
The first target of excise taxation was tobacco in 1942. In that year, the Government asserted a state monopoly over the manufacture, purchase, preparation, sale, import and export of tobacco. The 1942 law also established a Tobacco Monopoly Board, which was empowered to license tobacco production and, more importantly, to collect taxes, a proportion of which was to go to the Ministry of Finance as general revenue.
The second targets of excise taxation were alcohol and alcoholic products - in 1943.5 the excise duty of 1943 levied ad-rem duties upon the production of alcohol, and befitting the nature of the tax, the amount of duty depended upon the alcoholic content and concentration of an alcoholic Product. The excise tax regime on alcoholic products went beyond taxation of alcohol and alcoholic Products. A series of regulations were successively issued in the 1940s, some with a view to regulating the production of alcohol in the country, and others with a view to regulating the licensing and warehousing of alcoholic production. At first, alcohol excise duties were limited to Foreign produced alcoholic products but these duties were later extended in the mid-1950s to locally produced wine and bar beverages. But these alcohol excise duties prudently relieved the production of tej and tella (traditional alcoholic beverages) from the payment of excise duties. It would have been administratively impractical to levy excise duties on these products as they are produced in innumerable households with no attachment to modem commercial establishments. Although not mentioned in name, the omission of 'chat (a mildly addictive chewable plant) from
The list of products subject to excise duties must have been motivated by the traditional nature of 'chat' production in Ethiopia. As part of the excise tax regime, the taxation of alcohol and tobacco Production is usually accompanied by warehousing obligations. It is administratively easy (or at least manageable) to enforce warehousing obligations upon alcohol and tobacco producers - since the producers employ modern technology of organized production. It is extremely difficult to enforce warehousing regulations on the production of traditional products like tej, tella and chat. from the middle of the 1950s and increasingly after that, Ethiopian Governments began to see excise taxes not merely as instruments of specific public policy but also as sources of easy revenues. Hence, we had an excise tax regime targeting salt in 1955. The aim of this tax which incidentally continues to this day is revenue generation, although some people might argue that the aim is to discourage consumption of salt (a harmful product), although some variety of salt can be Harmful to health (and therefore an occasion for excise taxation), the taxation of salt in Ethiopian context remains to be predominantly motivated by the desire to generate additional revenues from an easy target i.e., the collection of salt tax in places where salt is mined (mainly in the Afar Region- Afdera).
In 1956, the excise tax regime was unabashedly deployed to target unconventional but easy targets of excise taxation. The 1956 excise tax law extended the reach of excise taxes to widely consumable goods like sugar, yam of cotton and textile fabrics. And a year later, the net of excise taxes was widened to target locally produced. Goods like eucalyptus trees, stones, chalk, sand, Jewelry and coal clearly indicating the aim of the government to use excise taxes as means of generating additional revenues. Another excise tax, introduced in 1960, further broadened the regime of excises, with taxes then levied on building materials like planks and rafters produced at sawmills, tiles and bricks. This period represented a moment of unprecedented expansion for excise tax regimes in Ethiopia. Excise tax in Ethiopia is introduced for many reasons. The preamble of the excise tax proclamation (proc No 307/2003) dictates the fundamental justification in the following manner. Firstly, it helps to improve government revenue by imposing excise tax payable on selected goods. When tax is imposed on certain items that were not subject to tax, the effect is usually increment of government’s revenue to facilitate different projects a head. We understood from the preamble of the excise tax proclamation that revenue generation is the first justification to proclaimed excise tax.
Secondly, Excise tax shall be imposed on luxury goods and basic goods which are demand inelastic. The imposition of tax on luxury goods usually has little or no impact on the expenditures of the poor. One basic rational of introducing Excise tax in a certain state is to redistribute income and narrow the gap between rich and poor. Thus, it is logical and acceptable to collect tax from luxury goods that have strong link with capable in certain economy. Our Excise Tax Law is used as a means of implementing an ability-to-pay approach to taxation. So-called luxury taxes are an example of this approach. Thirdly, imposition of taxation on goods that is hazardous to health and which causes to social Problems will reduce their consumption. Some goods hazardous to health the rate is too high and reaches 100%. This undoubtedly will have deterrence purpose so that consumers of such good shift or try to do so to other goods relatively acceptable and imposed with Lower rates of taxes.
Thus, the excise tax has positive impact on the reduction of consumption of goods hazardous to health and cause social problems. The Third justification is that excise taxes may discourage consumption of potentially harmful substances such as alcohol and tobacco good (i.e., so-called ʺsin taxes.").
The use of excise taxes is explained or justified by a variety of rationales. Often more than one rationale will explain a particular tax. There are obviously alternative instruments, including other
Types of taxes, for achieving the same goals that excise taxes achieve.
Excises are sometimes employed simply to raise revenue because they are easy to administer. In the past (and continuing today in some less-developed countries), excise taxes were applied only to products produced in sectors of the economy with well-developed markets.
Excise taxes may also be employed to achieve particular redistributive results. Excise taxes are sometimes used as a means of implementing an ability-to-pay approach to taxation. So-called luxury taxes are an example of this approach. Hotel occupancy taxes are another variant of this motive, where the intent is to shift the burden to non-residents of a jurisdiction. Windfall profits taxes such as the excise on domestic oil in the 1970s also have a redistributive intent.
Excises are also levied on goods or services that are considered harmful or undesirable in an attempt to discourage consumption or punish the consumer. This justification is acceptable all over the world including Ethiopia. While the goal of Pigouvian taxes is to correct for resource misallocation, liability taxes may also be levied on negative externalities to generate funds to mitigate the damages these activities create. The Superfund tax on pollution damage and leaking underground storage taxes are examples of liability taxes.
Excises may be used for border adjustment purposes if foreign firms are avoiding certain costs imposed on domestic firms. For example, if domestic producers are taxed to generate funds to deal with the negative consequences of the good they are producing, a border adjustment tax on the same good produced by foreign producers would "level the playing field." Excise taxes are also occasionally employed for regulatory purposes. An extreme example of this is an excise tax that some states have imposed on gambling devices that are, in fact, illegal.
Excise tax shall be paid on goods mentioned under the schedule of 'Excise Tax Proclamation No. 307/2002'(a) when imported and (b) when produced locally at the rate prescribed in the schedule. Computation of excise tax is applied (a) in the case of goods produced locally, production cost and (b) in the case of imported goods, cost, insurance and freight (C.I.F.). Payment of excise tax for locally produced goods is by the producer and for imported goods by the importer. Time of payment of excise tax for imported goods is at the time of clearing the goods from the customs area, and for locally produced goods it is not later than 30 days from the date of production.
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