economy benefits from the reduced extent of the negative externality and from lower reliance on other taxes that distort production. Apart from generating revenue and reducing the consumption of goods creating negative externalities, excise taxes can be tailored to impose tax burdens on those who cause the negative externality or those who benefit from government services. Examples are petrol tax, argued to be user fees for the government provided roads, and tobacco tax, imposed on smokers who through smoking create a negative externality of consumption. The design of such excise tax determines the consequences. Two main types of excise taxes are specific tax (tax imposed as fixed amount of money per unit) and ad valorem tax (tax imposed as the percentage of the price of a good). Specific and ad valorem taxes have identical consequences in competitive markets apart from differences in compliance and enforcement. As for imperfectly competitive markets, such as the cigarette market, ad valorem taxes are arguably better as they automatically produce higher per-unit taxes when firms reduce production to increase prices, whereas specific taxes need to be readjusted in this case, which is administratively and legislatively difficult process. Moreover, indirect taxes are usually associated with relatively lower administrative costs than direct taxes. In general, the administrative costs of tax system are determined by its complexity, and most costs associated with administering come from special provisions such as deductibility of certain categories of expenditures, which is typical for direct taxes such as personal and corporate income taxes. The indirect evidence may be drawn from the fact that developing countries have significantly lower direct-to-indirect tax ratio than developed countries given that choice of tax mix in developing countries is mainly based on administration and capacity issues. Developing countries used to heavily rely on trade taxes collected at centralized ports of entry into the country, which is associated with the relatively low cost of collection and enforcement. The relative importance of trade taxes in developing countries in recent years is on decrease due to trade liberalization, however, the drop of importance of indirect taxes in developing countries was partially offset by increases in the relative importance of domestic consumption taxes such as VAT. Empirical evidence suggests that income levels are associated with reduced reliance on expenditure taxes, countries with larger government size are more likely to rely more on direct taxes and that the countries prefer to use taxes