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Theory and Practice of Excise TaxationSmoking, Drinking, Gambling, Polluting, and Driving$
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Sijbren Cnossen

Print publication date: 2005

Print ISBN-13: 9780199278596

Published to Oxford Scholarship Online: October 2005

DOI: 10.1093/0199278598.001.0001

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Excise Taxes: Economics, Politics, and Psychology *

Excise Taxes: Economics, Politics, and Psychology *

(p.230) Chapter 8 Excise Taxes: Economics, Politics, and Psychology*
Theory and Practice of Excise Taxation

Bruno S. Frey

Oxford University Press

Excise taxation is only one instrument in the fiscal toolbox to combat externality and immorality. Excise taxes, along with tradable permits and command-and-control measures, provide external incentives for desirable conduct, i.e. they induce extrinsic motivation. In addition, the importance of socially desirable behaviour for its own sake, i.e. intrinsic motivation, should be recognized. Specifically, a key consideration in the analysis and evaluation of external regulatory instruments is whether they undermine intrinsic behaviour (crowding-out effect) or reinforce it (crowding-in effect). Crowding-out is a ‘hidden cost’ that should be accounted for. Tax-price instruments bolster intrinsic motivation in so far as they provide regulated agents freedom of choice and thus enhance moral agency. At the same time, tax-price instruments may impair intrinsic motivation by signalling that once the price has been paid for an activity, such as pollution, there is no reason, moral or otherwise, not to engage in it. By contrast, tradable permits may have a damaging effect on intrinsic behaviour; their sale may be likened to the selling of indulgences. In short, psychological and political considerations should be taken into account in formulating excise tax policy.

Keywords:   crowding-out effect, intrinsic motivation, psychology of excise taxation

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