Critical Issues in Environmental Taxation series
Edited by Natalie P. Stoianoff, Larry Kreiser, Bill Butcher, Janet E. Milne and Hope Ashiabor
Chapter 9: The ad unit and ad valorem tax burden shifting and its impact on Pigovian taxation in the European Union Member States
The chapter is concerned with the process of tax shifting of the indirect taxation imposed on transport fuels and the interaction with the Pigovian principle that underlines corrective levies such as environmental taxation. In order to emphasize the potential threats to environmental taxation, this study relies on both theoretical and empirical analysis of the market reaction to the modifications of corrective taxation rates. While the theoretical part focuses on the debate regarding the process of tax shifting, the empirical research is based on analyzing the impact of ad valorem and ad unit taxes on transport fuel retail prices, aiming to determine the size of tax burden shifting, considering this process as the main trigger driving tax incidence. Consequently, the chapter tries to establish a connection between tax shifting and its impact on the fundamental rationale of corrective taxation. The starting point relies on the analysis of excise duties as an instrument of choice, which we assume to be the appropriate proxy for environmental taxation. The most important similarity is that environmental taxation bears the same characteristics as excise duties for commodities such as alcohol, cigarettes and transport fuels. The main purpose of levying these selective taxes is to discourage individuals from the consumption of harmful goods in order to decrease the associated negative externalities; however, nowadays these fiscal instruments represent a tool for raising revenues to the public budget. The rationale behind fossil fuel excise tax (mainly gasoline and diesel excise duty) is to preserve oil resources, decrease pollution and protect the environment. Therefore, we understand environmental taxation as an excise duty-wise corrective tax.
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