ABSTRACT
Economic theory provides three clear rationales for selective excise taxa tion: (1) Excise taxes can be part of an efficient tax structure if they are placed on goods with inelastic demands, following the Ramsey rule for allocating taxes among markets. (2) An excise tax can be applied as a substitute for a user charge, as, for example, a gasoline tax earmarked for financing highway expenditures, or the federal excise tax on airline tickets earmarked for the Airport and Airway Trust Fund. (3) An excise tax can be placed on goods whose consumption is considered to be undesirable; in this case, the tax can be viewed as either a penalty for consuming the good, a tax on a negative externality associated with the good’s consumption, or both. These justifica tions for excise taxes can provide an omniscient and benevolent government with the guidance it needs to set taxes optimally.
