ONE OF the reasons most countries tax consumption of petroleum products is that it provides a sure source of revenue. In fact, petroleum products provide far more tax revenue than any other product, including tobacco or alcohol, especially in developing countries. In some countries, the revenue gains from consumption taxes on petroleum products have been as high as 3.5 percent of GDP and up to 30 percent of the total revenue. In some industrial countries, such as Italy and Norway, petroleum revenue has amounted to 2 percent of GDP.
The importance of petroleum taxation for most countries raises a number of interrelated questions. Can this heavy reliance on petroleum products for revenue be justified given the significance of petroleum in the economy’s production processes? Is there an optimum level of petroleum consumption taxes that a country should adopt? Are petroleum taxes consistent across countries? To answer some of these questions, the authors examined petroleum tax policies and their rationales in over 100 countries.
The findings are striking: there is a wide variation in retail prices and tax rates on different petroleum products across regions and within regions, as well as over time—a trend not found in any other product whose consumption is taxed and one that cannot be explained by economic theory alone.
Is there an optimal consumption tax rate for petroleum products? Unfortunately, economic theory does not provide much help. But theory nevertheless tells us that petroleum taxes should be neither too high nor too low. High tax rates can create distortions in the production structure and hurt competitiveness by increasing the cost of an important intermediate input. Low tax rates that keep retail prices below world prices, or explicit subsidies, can distort the attractiveness of alternative production activities as resources get directed to areas where there is no comparative advantage.
How, then, do countries determine the level of taxation? The range of reasons that countries give for levying taxes on petroleum products provides some clues.
Why petroleum is taxed
Countries levy a tax on petroleum products for several reasons:
|Gasoline||Kerosene||Automotive diesel||Heavy fuel oil|
Raise revenue. One of the main justifications in a number of countries, this consideration is bolstered by the administrative ease and the associated low cost with which petroleum taxes can be collected. Heavy reliance on petroleum taxation for revenue purposes, however, can be economically inefficient, to the extent that it raises the cost of an input that is essential to the production process. In some developing countries, high petroleum taxes could inhibit development of more remote regions, which, although entailing some economic cost, may be desirable on political and social grounds.
Charge for benefits and costs. Petroleum taxation is a way of charging for costs or negative external effects (externalities) that flow from petroleum consumption. It serves as a charge for the use of public roads, comparable to the user charge governments levy on the provision of other services, such as mail delivery or electric power. Although difficult to measure, the tax can also be considered a charge for costs imposed by traffic congestion and environmental pollution. Reliance on fuel taxes as a means of charging for road congestion and pollution, however, may be inappropriate because the taxes affect congested/polluted and uncongested/unpolluted areas alike.
|Gasoline||Kerosene||Automotive diesel||Heavy fuel oil|
Redistribute income. A high tax is frequently levied on gasoline in developing countries partly because evidence indicates that gasoline is consumed mainly by the relatively high-income groups. In the same vein, it is argued that kerosene, a significant item in the consumption basket of the poorer segments of the population, should be taxed lightly or even subsidized. The latter argument is sometimes supported by environmental considerations because, in many countries, kerosene and fuel-wood are near substitutes.
Conserve foreign exchange. Net importers of petroleum products sometimes tax petroleum to restrain its consumption and to conserve foreign exchange. Major petroleum-importing countries may also impose taxes on petroleum products in an effort to constrain the ability of oil exporters to influence crude oil prices.
Close the wedge between world prices and the domestic cost of production Because the marginal cost of producing gasoline is significantly lower than world market prices of gasoline in many petroleum-producing countries, domestic prices are frequently set well below world market levels. These countries justify this implicit subsidy on the ground that domestic consumers should benefit from low production costs. However, given that subsidies introduce inefficiencies in the production structure, it is generally more appropriate to redistribute the “rent” extracted through petroleum taxation to promote socially desirable objectives, although institutions and mechanisms for redistributive expenditure policy may be lacking in some countries.
A look at regions
The petroleum tax policies of 120 countries are examined for 1990 and 1991, and about half as many for 1973 and 1974. Given the variety of reasons for taxing petroleum products, it is not surprising that tax policies across countries are not consistent. Although the data used to describe and assess the petroleum tax policy of different countries may not be entirely consistent, the tables reveal certain facts and trends.
In response to the sharp increase in crude oil prices in late 1973 and early 1974, almost all regions sharply reduced the average tax rate on all petroleum products; in contrast, the average tax rate on heavy fuel oil in Africa was increased modestly from a low initial level. This occurred mainly because most countries relied on specific duties that were left unadjusted in the wake of oil price increases. Indeed, between 1974 and 1991—when petroleum prices more than doubled—there was a large variation in changes in average tax rates on petroleum products in different regions. While average tax rates declined in Asia and the Middle East during this period, they increased in the member countries of the Organization for Economic Co-operation and Development (OECD) and in the Western Hemisphere. In 1991, regional average tax rates on all petroleum products were highest in the OECD countries and lowest in the Middle East.
A look at gasoline taxes in two country groupings, the OECD countries and Africa, revealed wide dispersions in rates, not only across regions but also within regions. The extraordinarily high tax rates on gasoline in some countries seem to be linked to the weight given to environmental and revenue considerations. For instance, gasoline tax rates exceeding 200 percent in Denmark, France, Italy, Norway, Portugal, and Sweden appear to reflect the weight attached to containing pollution, whereas in The Gambia and Senegal, revenue considerations seem to be dominant.
Role of policy
These findings also provide some perspective for guiding petroleum tax policy. As noted before, a relatively high tax rate on petroleum products can be distortionary, and a relatively low, or no, tax on selected petroleum products can be counterproductive because of possible adulteration with cheaper fuels and because of the perverse impact on resource allocation. Although it is reasonable to expect some diversity in petroleum tax rates among countries, depending upon the weight given to the various considerations noted above, a significant reduction in the present wide dispersion in petroleum prices and tax rates—across countries and products—appears warranted.
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This special statistical supplement on countries of the former Soviet Union contains data and explanatory notes on exchange rates, international liquidity, money and banking, interest rates, prices, production, international transactions, government accounts, and national accounts. This supplement to the IMF’s monthly International Financial Statistics provides data for 14 of the countries of the former Soviet Union; Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Moldova, Russian Federation, Turkmenistan, Ukraine, and Uzbekistan, xvi + 47 pp. 1993. No. 16
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