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Tuesday, Oct 29th

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Excise Tax

Excise Tax

Excise tax also know as excise duty, is a type of special tax that is charged on the so-called ‘luxury items’; the items which cannot be afforded by poor families. These ‘luxury items’ include cigarettes, alcohol and gasoline. This is also referred as sin tax and may consist of a flat amount for a certain quantity of the item purchased. However, in US excise tax refers to any tax other than capitation or property tax or it is also termed as excise in statutory law sense.

The beginning of the excise tax goes back in 1794. This was done under Alexander Hamilton's tax package and since then the tax has been opposed and fought. But the main intention to charge excise tax is to raise revenue and to discourage a particular behavior. This is justified on both the grounds by the fact that these taxes are levied on alcohol, fuel, tobacco.

Over the past decade, the excise tax levied on cigarette has gone up by around 200%. This is mainly due to the economic slowdown that the government has increased and introduced many taxes which include hike in cigarette taxes. The federal tax hike is on the rise and excise tax per packet has gone above $1 in order to support State Children's Health Insurance Plan introduced by President Obama. In addition to this the excise tax is also increased on cigarettes in various states like San Francisco. This is done to pay the cost for cleaning purposes of cigarette butts. In many states like Arkansas and Kentucky, the authorities are planning to double the average taxes on cigarettes. This strategy is fast picking up trend and other state governments are looking to follow the same trend.

As mentioned earlier, the government uses the excise tax money to internalize external costs. Similarly, the government is planning to increase the tax on alcohol. This is mainly done to pay the costs incurred to cure the diseases called due to alcohol. However the view of certain economists is that the optimal revenue raising taxes should be incurred on sales of the items which have an inelastic demand, whereas the items having elastic demand should follow behavior altering taxes.