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The authors are grateful to Paula Demasi, Ved Gandhi, David Nellor, Parthasarati Shome, Vito Tanzi and colleagues in the Research Department for very helpful comments on the earlier drafts of the paper; and to Tarja Papavassiliou for computation assistance. The authors take full responsibility for any remaining errors.
For instance, in 1991 the retail price of premium gasoline, excluding commodity taxes, ranged from 3 to 65 U.S. cents per liter, while taxes on premium gasoline ranged from 0 to 87 U.S. cents per liter.
The word “petroleum” is used throughout the paper to refer to final petroleum products and not to crude oil. The paper focuses just on the main petroleum products—gasoline, diesel, fuel oil, and kerosene.
If the domestic refinery is inefficient and only produces at prices significantly above import prices, it would appear appropriate to close it down eventually unless the processing costs can be lowered.
As import duties on petroleum and petroleum products are covered by the GATT, they cannot be raised (or other charges imposed) without compensating affected trading partners. If domestically produced petroleum or petroleum products are favored through taxation of imports, the resulting shifts in consumption from imported to domestic sources will impinge on trading partners, and require compensation (or lead to retaliation).
Moreover, many of the developing countries (even those that have explicit taxes on electricity) set electricity prices at levels which do not provide an adequate return on investment in this sector.
Throughout the paper, especially in the data section, the discussion is in terms of percentage tax rates (or the percentage equivalent of specific taxes) unless it is clearly indicated that specific tax rates are being discussed.
The taxation of the use of diesel fuel in rail and marine transportation, and aviation fuel in air transportation raise additional issues which are beyond the scope of this paper.
The average tax rate on gasoline was about 70 percent higher in 1991 than the average tax rate on diesel in the data sample for this paper. Almost all countries levy much higher tax rates on gasoline than on diesel; however, there are some exceptions such as Australia, Barbados, Costa Rica, Guatemala, Switzerland, and the United States that each have higher tax rates on diesel than on gasoline.
Furthermore, in many developing countries it is difficult to bring higher-income groups fully into the taxation net, leaving consumption taxation as the major taxation avenue.
The long-standing view for industrial countries is that commodity taxes on gasoline are regressive, imposing a relatively heavier burden on low-income households vis-a-vis high-income ones. This conclusion is based on the studies using annual surveys of consumer income which show that expenditure on gasoline constitutes a larger proportion of household income at lower income levels than for middle- and high-income households. However, a recent study for the U.S. (Poterba, (1990)), argues that relative to household expenditure, low-expenditure households devote a smaller share of their budget to purchases of gasoline than higher-expenditure households.
Many other petroleum products (heavy fuel oil, bitumen, and aviation fuel) are also intermediates into production, and for this reason, warrant lower tax rates than those applied to gasoline. Taxes on aviation fuel are further constrained by taxes levied by other countries. If tax rates on aviation fuel are set relatively high, commercial airlines may decide to carry more fuel from another country or not to service the high-tax country at all. The latter could hurt the country’s exports, particularly of perishables.
Transport of goods weighing one ton, a distance of one mile.
Although gasoline and diesel are the main fuels used for transportation, some countries, for environmental and other reasons, have tried to encourage the use of methanol, ethanol, gasohol, liquefied petroleum gas (LPG), and compressed natural gas (CNG). In some instances, explicit subsidies have been provided for their use. If these fuels have no non-highway uses, they should be taxed in the same manner as gasoline or diesel to recover the user costs of roads. This would be true for methanol, ethanol, and gasohol. The difficulties arise, however, with LPG, which has uses outside the transport sector. It is used for cooking and water-heating purposes as well as for motor fuel (e.g., in Thailand). To some extent, kerosene and LPG are substitutes, and their relative tax rates will influence relative consumption. The ideal solution will be to levy taxes on the basis of use, but this is difficult. In a way, therefore, LPG is like diesel and may have to be treated in a similar way, with relatively low tax rates on its use combined with high license fees on LPG-powered private cars.
Ad valorem tax rates on petroleum products for the purpose of raising revenue are considered superior to specific rates for two main reasons. In a number of countries, the failure to adjust specific rates to maintain their ad valorem equivalence has resulted in revenue losses from this source. In addition, the process for adjusting specific rates has been unpredictable and has been frequently politicized.
To meet the objectives of increasing energy security, it would appear appropriate to tax all petroleum products at the same ad valorem tax rate, rather than singling out the transport use of gasoline and diesel, or to simply tax the crude oil input if there were domestic refineries.
Caution needs to be exercised in applying these estimates to other countries, as the conditions prevailing there may be different. The percentage rate suggested for Jamaica is for a given tax base. As shown in the next section, the tax-exclusive petroleum prices differ widely among countries.
It is interesting to note that these rates are fairly close to the average tax rates for the sample of countries shown in the next section in Table 4.
The tax rates in The Gambia may also have been influenced by relatively open borders with Senegal. In Angola, which is an oil exporting country, the tax rate is high in percentage terms, but low in specific terms because the tax-exclusive price is very low.
Charts are given only for the most important petroleum products in each region.
Since 70 to 80 percent of total automobile diesel fuel oil in the EC countries is used in industry and commerce and the VAT on such use is refunded, dollar prices and percentage tax rates exclude VAT. To the extent automobile diesel is used by motorists, tax and tax inclusive price is understated for these countries.
Hence charts for this region are only given for prices excluding taxes, and not for tax rates.