Excise Tax

Unlike general sales taxes or value-added tax, which apply to most goods, excise taxes target particular products. They are often charged at the production or import stage and included in the final price.

Excise taxes serve two main purposes. They raise revenue, and they discourage consumption of products that cause harm to health or the environment, such as cigarettes, sugary drinks or carbon-intensive fuels. In this second role, they help address negative externalities.

For example, if a government charges an excise tax of 0.60 per litre of petrol, that amount is built into the pump price. If petrol costs 1.20 per litre before tax, the price paid by drivers may rise to around 1.80, depending on how the burden is shared.

Because demand for products like fuel and tobacco is often inelastic in the short term, excise taxes can raise reliable revenue. Critics point out that they can take a larger share of income from poorer households, which spend a higher proportion of their income on such goods.