This paper attempts to assess the role of gasoline taxation in selected countries of the Organization for Economic Cooperation and Development (OECD) since the oil price increases of late 1973 and early 1974, with a view to providing some guidance for future tax policy. It is argued that the experience of these countries in 1970–78 indicates that gasoline taxation has generally declined in real terms. Reluctance to use such taxation seems to stem from skepticism about its potential to reduce demand for gasoline, as well as other concerns that higher gasoline taxation would conflict with such stabilization objectives as the control of inflation, equity, growth, and external equilibrium. The tentative conclusion is that the importance of such concerns is often exaggerated; at the macroeconomic level; the costs appear to be more modest than suggested in most public debate.
The paper is in four sections. Section I discusses the objectives of gasoline taxation. One major stated objective for gasoline taxation during the period under review was to help to revive energy policy objectives; in particular, the objective stated explicitly by a large majority of OECD countries was to reduce dependence on imported oil. An assessment of the adequacy of implementation of all energy policy instruments, including gasoline taxation, from the viewpoint of this objective is beyond the scope of this paper, and reliance is placed on the judgments of the International Energy Agency (IEA) in this regard. The roles of gasoline taxation as a user charge for roads and a general government revenue instrument are also considered briefly.
Section II documents developments in gasoline taxation in seven OECD countries during 1970–79 and assesses the extent to which these developments have been consistent with stated objectives, particularly the energy objectives discussed in Section I. Section III attempts to explain and assess the major factors underlying the findings of the previous section of a generally declining role for gasoline taxation. Section IV provides a summary and outlines some implications for future gasoline taxation policy.
Mr. Tait, Assistant Director in charge of the Fiscal Analysis Division of the Fiscal Affairs Department, is a graduate of the Universities of Edinburgh and Dublin. He was formerly a fellow of Trinity College, Dublin, and Professor and Chairman of the Economics Department at the University of Strathclyde. He is the author of The Taxation of Personal Wealth, The Value-Added Tax, and numerous articles in professional journals.
Mr. Morgan, Assistant Secretary in the Australian Treasury, was a Senior Economist in the Fiscal Analysis Division of the Fiscal Affairs Department when this paper was written. He is a graduate of La Trobe University, Australia, and received his masters degree and doctorate from the London School of Economics. He is the author of a number of papers on inflation, taxation, and stabilization policy.
The authors wish to acknowledge the assistance of Bradford G. Reid (University of Toronto), a participant in the Fund’s summer intern program in 1979, who helped with data collection.
See, for example, Henry C. Simons, Personal Income Taxation: The Definition of Income as a Problem of Fiscal Policy (University of Chicago Press, 1938), p. 205; Richard A. Musgrave and Peggy B. Musgrave, Public Finance in Theory and Practice (New York, 1973), pp. 196–97; A. A. Walters, The Economics of Road User Charges (Johns Hopkins Press, 1968), pp. 209–13.
If anything, higher prices for gasoline would suggest less traffic, lower highway costs, and, hence, lower taxes to finance highway construction or maintenance.
Twenty of the OECD’s 24 member countries are members of the IEA: Australia, Austria, Belgium, Canada, Denmark, the Federal Republic of Germany, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.
See International Energy Agency, Energy Policies and Programmes of IEA Countries: 1978 Review, Organization for Economic Cooperation and Development (Paris, 1979), p. 295.
Ibid., p. 12.
For an extensive discussion of public goods, see Jesse Burkhead and Jerry Miner, Public Expenditure (Chicago, 1973), pp. 125–33.
Edward R. Fried and Charles L. Schultze, eds., Higher Oil Prices and the World Economy: The Adjustment Problem, The Brookings Institution (Washington, 1975), p. 68. For instance, in 1978 the IEA recommended increases in gasoline taxation for seven countries: Belgium, Canada, Denmark, Japan, Sweden, the United Kingdom, and the United States.
No straightforward universal relationship exists between the price of crude oil and the price of gasoline. The relationship varies according to the refining process, the joint product nature of the numerous final products from crude, the degree of market monopoly, and the different qualities of crude oil.
The data in Figure 1 for the period since July 1979 understate the actual price rise, since the data relate only to Saudi Arabian selling prices (which have been below those charged by most other oil exporters during this period).
The taxes considered include those levied by both central and local governments, usually at the retail level, and also include taxes levied on gasoline that are part of broad-based indirect tax systems.
P. K. Verlerger and D. P. Sheehan, “A Study of the Demand for Gasoline,” in Econometric Studies of U. S. Energy Policy, ed. by Dale W. Jorgensen (Amsterdam, 1976).
George J. Kouris, “Price Sensitivity of Petrol Consumption and Some Policy Implications: The Case of the EEC,” Energy Policy, Vol. 6 (September 1978), pp. 209–16.
J. L. Sweeney, “The Demand for Gasoline in the United States: A Vintage Capital Model,” in International Energy Agency, Workshops on Energy Supply and Demand, Organization for Economic Cooperation and Development (Paris, 1978).
James M. Griffin, Energy Conservation in the OECD, 1980–2000 (Cambridge, Mass., 1979), pp. 188–89.
Organization for Economic Cooperation and Development, Adjustment for Trade: Studies on Industrial Adjustment Problems and Policies, Development Center Studies (Paris, 1975). See also, Flexibility, Economic Change and Growth: Treasury Submission to the Study Group on Structural Adjustment (Australian Government Publishing Service, 1978).
Bruce F. Davie and Bruce F. Duncombe, “The Income Distribution Aspects of Energy Policies,” in Studies in Energy Tax Policy, ed. by Gerard M. Brannon (Cambridge, Mass., 1975), p. 346; Sorrel Wildhorn, and others, How To Save Gasoline: Public Policy Alternatives for the Automobile (Cambridge, Mass., 1976), p. 319; U. S. Congressional Budget Office, The Decontrol of Domestic Oil Prices: An Overview (Washington, May 1979), pp. 59–62, the data for which were derived from U. S. Department of Labor, Bureau of Statistics, Consumer Expenditure Survey Series: Diary Survey, July 1973-June 1974 (Washington). It should be mentioned that these studies concern first-round impacts only. As discussed more fully below, for a full analysis some idea of the sectoral impact and successive round changes in final prices would be needed to draw any hard conclusions.
Yoshi Tsurumi, “The Case of Japan: Price Bargaining and Controls on Oil Products,” Journal of Comparative Economics, Vol. 2 (June 1978), p. 138.
It must be noted that this discussion of the distributional impacts of gasoline taxation has ignored entirely the question of the incidence associated with the expenditure of the revenue generated by the tax.
More detailed estimates of the impact of excise tax changes on household expenditure using input-output analysis suggest that U. S. authorities have overstated the regressiveness of oil price increases in their public pronouncements. See Thanos Catsambas, “Evaluation of the Impact of Excise Taxation on the Economy by Input-Output Analysis: Assessing the Distributional Implication of Changes in U. S. Petroleum Taxation” (unpublished, International Monetary Fund, March 5, 1980).
Leon Rothenberg, “Energy Taxation for Highway Financing,” National Tax Journal, Vol. 31 (September 1978), pp. 285–89.
The weight given to gasoline consumption for private transportation in the U. S. consumer price index for all urban consumers was 4.2 per cent as of December 1978: U. S. Department of Labor, Bureau of Labor Statistics, CPI Detailed Report (Washington, July 1979), p. 8. Per capita gasoline consumption is higher in the United States than in most of Europe, but the price is considerably lower, so that a 4–5 per cent figure might be roughly applicable to the other countries considered here. The figure ignores intermediate usage.
Daniel R. Vining, Jr., and Thomas C. Elwertowski, “The Relationship Between Relative Prices and the General Price Level,” American Economic Review, Vol. 66 (September 1976), pp. 699–708; the quotations are from pages 700 and 701.
Robert M. Solow, “The Intelligent Citizen’s Guide to Inflation,” The Public Interest, No. 38 (Winter 1975), p. 63.
“The last few years have seen at least three major shifts in relative prices, each the result of ‘real’ forces of supply and demand…. If you superimpose these massive shifts on the sort of world I have just been describing the consequences could be a prolonged merry-go-round of price increases. The price of grain or oil rises, because it has become relatively scarce. But then costs rise elsewhere in the economy and, in the absence of any inhibition, other prices float up to register the cost increases. But then the initial increase in the price of grain or oil will not have eventuated in the full relative-price increase demanded by the underlying market realities, so those things will go up some more, and so on. The process need not go on forever; it will come to an end when grain and oil have risen enough faster than prices in general so that the required shift in relative prices has been generated. In the process, the whole price level will have floated upward, perhaps quite a lot.”—Ibid., pp. 60–61 (emphasis added).
Paul McCracken, and others, Towards Full Eployment and Price Stability: A Report to the OECD by a Group of Independent Experts, Organization for Economic Cooperation and Development (Paris, 1977), p. 67.
This assumes that capital flows from OPEC surplus countries are autonomous rather than accommodating. For arguments in support of this view, and a discussion of the balance of payments implications of the oil price rises, see Warner Max Corden, Inflation, Exchange Rates, and the World Economy: Lectures on International Monetary Economics, Ch. 8 (University of Chicago Press, 1977).
See M. A. Adelman, “Constraints on the World Oil Monopoly Price,” Resources and Energy, Vol. 1 (September 1978), pp. 3–19. The argument was presented in terms of a tax on oil imports rather than on gasoline consumption, but, for the purposes of the discussion here, this distinction is not important.
Ibid., p. 6.