Gasoline Taxation in Selected OECD Countries, 1970–79
Author:
Mr. Alan A. Tait https://isni.org/isni/0000000404811396 International Monetary Fund

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David Morgan
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Publication Date:
01 Jan 1980
eISBN:
9781451946864
Language:
English
Keywords:
SP; mixed-citation publication-type; change instability; change dispersion; elasticity estimate; price change; price inflexibility; Fuel prices; Oil prices; Fuel tax
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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.

Abstract

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.

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.

I. Role of Gasoline Taxation

User Charges for Roads

A traditional role of gasoline taxation has been as a third-best instrument (to highway toll systems and parking taxes) for imposing road-user charges. 1 This role has found expression in the earmarking of gasoline tax revenues for highway construction and maintenance. In the United States, for example, federal gasoline tax proceeds are earmarked for the Highway Trust Fund, the income of which is used to defray the cost of a federal highway network. State gasoline taxes are also earmarked for highway maintenance. Other countries earmarking all or part of their taxes on gasoline include Belgium, Canada, Denmark, Japan, and Sweden (Table 1). The relative merits of the gasoline tax as a user charge for roads will not be discussed here. It is sufficient to note that, if this was the sole objective of gasoline taxation, the oil price increases since late 1973 would not call for any substantial increase in the real level of gasoline taxation, since no change in highway construction or maintenance results. 2

Table 1.

Selected OECD Countries: Types of Gasoline Taxation

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Sources: Various country documents.

General Revenue Instrument

Gasoline is also an appropriate commodity for general revenue purposes in that its price elasticity of demand appears, at least in the short run, to be low. 3 In several countries (e.g., Belgium, Denmark, France, the Federal Republic of Germany, Italy, Sweden, and the United Kingdom), the gasoline tax is a part of broad-based indirect tax systems (mainly of value-added tax (VAT) systems). In some cases, this revenue is supplemented by specific excises not earmarked for highway construction (e.g., Canada, Italy, and the United Kingdom). As will be discussed in Section II, estimates indicate that the share of gasoline taxation in total taxation in the OECD countries considered here varies, but in some cases is substantial.

Instrument of Energy Policy

The major objective of energy policy in OECD countries since 1974 has been to reduce their dependence on imported oil. This objective was formalized in October 1977, when IEA ministers 4 adopted the objective of reducing in absolute terms future oil imports through the conservation of energy, the expansion of indigenous energy sources, and oil substitution. 5 A “group objective” was established in the form of an oil import ceiling of 25 million barrels a day for the year 1985. The ceiling was considered necessary on grounds of both “economic welfare and national security.” 6

The IEA ministers’ “principles for energy policy” statement also endorsed the need for a wide range of nonmarket measures to complement market forces in achieving reduced dependence on imported oil. It should be emphasized that endorsement of nonmarket measures does not necessarily imply that there are significant aspects of market failure inherent in the energy sector; the endorsement merely suggests that market forces alone probably will not be sufficient to meet an objective that has been determined at least partly with reference to noneconomic (i.e., strategic) objectives. Given the oil supply situation, it can be argued that individual preferences and individual welfare are not synonymous, the national security benefits provided by reduced dependence on oil imports not being appropriately evaluated by individuals. 7

Indeed, it is probably the case that, without intervention, market forces would operate in the conventional manner, but such operation would be inconsistent with achievement of the IEA group objective to limit oil imports. Given the existence of reasonably competitive conditions in the oil importing countries, it would be expected that, following the price increases of 1973–74 by the Organization of Petroleum Exporting Countries (OPEC), oil prices would rise to market-clearing levels; the quantity demanded by consumers would fall, and domestic suppliers’ profits would rise, giving an incentive to expand output. These responses would serve to reverse some of the short-run price rise. Clearly, though, such a reversal would be inconsistent with the IEA group objective:

  • Lower oil prices, however, would eventually lead to increased imports. Unless offsetting actions were then taken, the reduction in economic losses would be followed by a reduction in security. For the OECD countries to have cheaper oil within acceptable security bounds, they may have to take specific measures to limit their vulnerability once world oil prices are reduced. Such measures could include maintaining larger oil stocks or standby capacity, subsidizing or protecting domestic production, or taxing domestic consumption. 8

So the OPEC price increases of early 1973 and late 1974 created a new role for gasoline taxation—an instrument to assist in the reduction of OECD countries’ dependence on imported oil. Such a role implied the need for an increase in the real value of gasoline taxation from October 1973 levels or, at a minimum, for the avoidance of any decline in real terms. Additionally, gasoline taxation could have been used to avoid any decline in real gasoline prices arising from softness in world oil markets or from particular currency appreciations vis-à-vis the U. S. dollar.

II. Experience of Seven Major Industrial Countries

Real Crude Oil Prices and Retail Gasoline Prices

Changes in retail gasoline prices during the 1970s reflect primarily crude oil price changes and changes in gasoline taxation occurring during the period. 9 As Figure 1 illustrates, the largest increases in both nominal and real crude prices occurred in January 1974. Since that time, the nominal price has increased in each year except 1974–75. However, the real price of crude oil after January 1974, and before July 1979, remained more or less constant. In fact, the real price existing in June 1979 was about 10 per cent less than the highest achieved in January 1974. Thus, while crude oil price increases exerted considerable pressure on gasoline prices to rise in real terms immediately after the initial round of OPEC price increases in 1973–74, that pressure disappeared during the 1975–78 period and re-emerged only with the crude oil price rises of July 1979. 10 By August 1979, the real price of Arabian light crude was just over five times the January 1970 price.

Figure 1.
Figure 1.

Nominal and Real Prices of Arabian Light Crude, 1970–79

(In U. S. dollars a barrel, f.o.b.)

Citation: IMF Staff Papers 1980, 002; 10.5089/9781451946864.024.A005

Sources: U. S. Department of Energy, International Petroleum Annual (various issues); International Monetary Fund, International Financial Statistics (various issues); data prepared by Fund staff.

The pattern of retail gasoline prices between countries was not significantly altered by the changing world price of crude oil during the 1970s. As Figure 2 shows, those countries with relatively high real gasoline prices before January 1974 continued to have relatively high prices after that date. The relative position of Japan changed (from charging a low price to having one of the highest prices), as did that of the United Kingdom (which adopted the lowest price in Europe). Figure 2 also shows that the major changes in real per gallon pump prices occurred immediately after the large OPEC-induced increases in the world price of crude oil, with gasoline prices generally either remaining fairly constant or declining in real terms during the latter part of the 1970s until a further OPEC-induced price increase in 1979. Figure 3 shows nominal and real retail gasoline prices in units of domestic currency. On this basis, the increase in the relative price of gasoline in the Federal Republic of Germany and Japan is far more modest than indicated in Figure 2. Likewise, the decline in the relative price of gasoline for the United Kingdom is less marked on a domestic currency basis.

Figure 2.
Figure 2.

Real Retail Gasoline Prices, by Country, 1970–791

(In U. S. dollars a gallon)

Citation: IMF Staff Papers 1980, 002; 10.5089/9781451946864.024.A005

Source: Fund staff estimates.1 Nominal values deflated by the domestic consumer price index (July 1975 = 100).
Figure 3.
Figure 3.
Figure 3.
Figure 3.

Nominal and Real Retail Gasoline Prices and Gasoline Taxes, 1970–791

(In units of domestic currency a U. S. gallon)

Citation: IMF Staff Papers 1980, 002; 10.5089/9781451946864.024.A005

Sources: U. S. Department of Energy, International Petroleum Annual (various issues); International Monetary Fund, International Financial Statistics (various issues).1 Nominal values deflated by the domestic consumer price index (July 1975 = 100).

Although there is no universal and direct relationship between crude oil prices and retail gasoline prices, the increases in the relative price of gasoline in the period 1970–78 are less than might have been expected on the basis of the crude oil price increases (Table 2). Clearly, the increase in the real price of gasoline between 1970 and 1978 was less than 8 per cent in five out of the seven countries (while the real price of crude more than doubled over the same period). The sharp increases in 1979 pushed up the percentage increase to about 20 per cent except for Italy and the United States (while the price of crude was over five times the 1970 price). The annual rate of increase in real gasoline prices averaged over the seven countries for the period is only about 1.1 per cent up to 1978 and 2.0 per cent by 1979.

Table 2.

Seven Major Industrial Countries: Percentage Increase in Real Retail Gasoline Prices, 1970–79

(In per cent)

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Source: Figure 3.

Changes in Gasoline Tax Rates

A major factor in the apparently modest increase in gasoline prices compared with the increases in crude oil prices was the decline in effective gasoline tax rates (Table 3). 11 These rates declined sharply in all the seven countries considered here between 1970 and 1979, with almost all of this decline occurring immediately after the increases in world crude oil prices in early 1974. As the net-of-tax price of gasoline increased due to higher imported crude prices, nominal per gallon taxes were not increased sufficiently to maintain the existing structure of effective tax rates. This downward trend continued until 1977, when four countries (France, the Federal Republic of Germany, Italy, and the United Kingdom) raised the level of gasoline taxation enough to create small increases in the effective tax rate. However, by 1979 two of these countries (the Federal Republic of Germany and the United Kingdom) had again allowed the effective rate of tax to fall below the 1976 rate.

Table 3.

Seven Major Industrial Countries: Effective Rates of Gasoline Taxation, 1970–791

(In percentage terms)

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Source: Calculated from U. S. Department of Energy, International Petroleum Annual (Washington, various issues).

The effective rate of taxation is calculated as the value of the gasoline tax per gallon divided by the net-of-tax price per gallon.

The same general declining trend was present in the real value of gasoline taxation per gallon, although the decline was less dramatic (see Figure 3). The only country in which the value of real taxes per gallon in 1979 was greater than that corresponding to 1970 was Italy. The trend generally reflected the fact that the specific component of gasoline taxation was not adjusted upward sufficiently to match the rising general price level over the period, although in one or two cases it is possible that the trend was affected somewhat by changes in the general rate of broad-based indirect taxes (notably, VAT).

Changes in Gasoline Tax Revenue

No clear trend emerges in real gasoline tax revenues for the seven countries in the period 1970–78. In general, however, increasing gasoline consumption levels were sufficient to outweigh declining real tax rates, resulting in rising aggregate real gasoline tax revenues (Table 4). In the United States and the United Kingdom, the real revenue from gasoline taxation in 1970–78 actually fell. In all the countries reviewed except Italy, gasoline taxation relative to other sources of government tax revenue became less important over the 1970–77 period (Table 5). This was part of a generally declining role for taxes on goods and services over the period. In all the countries except Canada, the taxation of goods and services declined in importance relative to other sources of tax revenue over the 1970–77 period. (In Canada, the percentage of total tax revenue derived from the taxation of goods and services remained fairly constant.)

Table 4.

Seven Major Industrial Countries: Estimated Real Revenue From Gasoline Taxation, 1970–781

(In millions of U. S. dollars)

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Sources: Estimated from U. S. Department of Energy, International Petroleum Annual (Washington, various issues); Organization for Economic Cooperation and Development, Quarterly Oil Statistics, and Revenue Statistics of OECD Member Countries: A Standardized Classification (Paris, various issues).

Revenues were calculated as tax per gallon times total gallons consumed. There is probably some bias toward overestimation, since no allowances were made for consumption exempt from tax. The nominal values were deflated by the consumer price index of each country (July 31, 1975 = 100).

Table 5.

Seven Major Industrial Countries: Ratio of Estimated Gasoline Tax Revenue to Total General Government Tax Revenue, 1970–771

(In per cent)

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Sources: Estimated from U. S. Department of Energy, International Petroleum Annual (Washington, various issues); and Organization for Economic Cooperation and Development, Quarterly Oil Statistics, and Revenue Statistics of OECD Member Countries: A Standardized Classification (Paris, various issues).

Total government tax revenue is composed of the tax revenue of all levels of government, regardless of whether all levels do or do not tax gasoline consumption.

Thus, the data indicate that the general decline in the relative importance of gasoline tax revenue with respect to total tax revenue was consistent with a decline in the relative importance of the taxation of goods and services in general. In Italy, this overall trend did not apply to gasoline, owing to the increased emphasis placed on the taxation of gasoline as a component of the taxation of all goods and services. Increases in the magnitude of taxation per gallon of gasoline were sufficient to maintain and even increase the importance of such taxation in Italy relative to other forms of taxation. It should be noted that the primary source of this result for Italy must be tax increases, since per capita gasoline consumption fell from the levels achieved in 1973. In Canada and the United States, the decline in the relative importance of gasoline taxation was greater than the general decline in the importance of goods and services taxation.

Conclusions

This brief examination of gasoline taxation in seven OECD countries has revealed both important similarities and dissimilarities in experience over the 1970–79 period. While all countries increased the nominal magnitude of gasoline taxation per gallon, there was no movement toward a homogeneous taxing approach. Those countries that taxed gasoline heavily before the 1973 oil crisis continued to do so after the crisis. Those countries that did not tax gasoline heavily, compared with other countries, did not alter their relative position after the initial OPEC price increases. Thus, much of the post-1973 experience could be predicted reasonably accurately by the form and magnitude of gasoline taxation existing before 1973.

There is also substantial evidence that none of the countries, with the possible exception of Italy, exploited the potential of gasoline taxation either as a revenue-generating instrument or as a policy for promoting gasoline conservation. With respect to revenue generation, Italy was the only country of the seven examined in which the revenue from gasoline taxation increased in relative importance compared with all other sources of tax revenue. In other countries, gasoline tax revenue decreased in relative importance. This is an interesting result when it is noted that Italy experienced almost no growth in the gasoline tax base (gasoline consumption) from the mid-1970s, while in all other countries such growth was present. It is also fairly obvious that the taxation of gasoline consumption was not aggressively used as an energy conservation measure. Again, in all the countries except Italy, taxes on gasoline in real terms declined during the 1970–79 period. This was particularly true of the United States, where such taxes on a per gallon basis remained virtually fixed in nominal terms over the time span being studied.

III. Factors in Decline of Gasoline Taxation

It seems clear from the evidence above that gasoline taxation was not widely adopted as an instrument of energy policy. This may be explained by skepticism regarding the effectiveness of, or necessity for, higher gasoline taxation in securing energy policy objectives. Alternatively, higher gasoline taxation might have been viewed as inconsistent with other government objectives, including control of inflation and an equitable distribution of income. Finally, it may have been thought that higher gasoline taxation could induce further oil price increases by the major oil exporting nations.

Skepticism Regarding Effectiveness in Securing Energy Policy Objectives

It has been argued that the demand for gasoline is almost wholly price inelastic, implying that large increases in gasoline taxation would not yield significant energy savings. Several studies, particularly within the United States, have attempted to determine the relationship between gasoline consumption and the price of gasoline.

A problem with earlier attempts to estimate the demand for gasoline was that the data for 1950–73 for the United States dealt with such small price changes for gasoline that it was doubtful if relationships based on these data would hold good for the severe price changes of 1973–80. Verlerger and Sheehan 12 derived a short-run price elasticity estimate of -0.09 and a long-run estimate of -0.45. Since, with quarterly data, the short run is defined as one three-month period, the Verlerger-Sheehan results predicted that a 10 per cent increase in the price of gasoline at the beginning of 1974 would yield an approximate 2 per cent decrease in per capita consumption over the year.

This simple per capita consumption analysis has been replicated using European data (annual data, 1956–73) by George Kouris, 13 who estimated the short-run price elasticities of the countries within his sample to be −0.32 for France, −0.18 for the Federal Republic of Germany, −0.20 for Italy, and −0.06 for the United Kingdom.

Another problem with such studies is that they do not differentiate between the impact of gasoline price changes on the stock of automobiles and the impact of such changes on the utilization of the stock. Sweeney 14 obtained estimates (annual U. S. data, 1955–74) of the price elasticity of the demand for gasoline broken into two components, the vehicle mile elasticity and the fleet efficiency elasticity (Table 6). The implication is that, in the long run, the impact of any price increase falls primarily on improved vehicle efficiency, with little effect on miles driven. Another recent study using OECD data suggested a long-run price elasticity as high as—1.34 to—1.43, with short-run elasticities of—0.64. 15

Table 6.

Elasticities from Vintage Capital Specification

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The general conclusion from the empirical estimates appears to be that, while the price elasticity of demand for gasoline is low in the short run (a magnitude of about—0.2 to—0.6 for one-year responses), the long-run value is considerably larger (between—0.75 and—1.43). Thus, the initial response to a 10 per cent increase in gasoline prices (due either to higher crude oil prices or higher taxes) would be a decline in per capita gasoline consumption of about 2–6 per cent within the first year and an ultimate decline of about 7–14 per cent when all adjustments have been made. It appears that these estimates would apply to both the United States and Europe, but, given the automobile stock in the United States, the potential for major savings using smaller, more fuel-efficient automobiles might be even greater than in Europe.

Several policy implications can be drawn from these elasticity estimates. First, the low short-run price elasticities indicate that theoretically the heavy taxation of gasoline for revenue generation may be consistent with the concept of an optimal tax structure. The taxation of goods whose demand is highly inelastic may be advantageous because given levels of revenue can be generated without large distortions in the allocation of resources. It should be noted, however, that, while gasoline demand for some countries appears inelastic in the short run, quantity does appear to respond more vigorously to price changes in the long run, thus somewhat mitigating the view of the gasoline tax being an optimal tax. While increases in the taxation of gasoline consumption constitute an efficient, high-yielding source of revenue in the short run, this tax yield can be expected to diminish as the economy adjusts to the new price structure.

The second implication from the elasticity estimates is concerned with conservation, or the use of higher gasoline prices and taxes as a means of discouraging the consumption of gasoline. This policy goal is essentially the converse of the optimal tax structure policy goal. To effect an efficient conservation tax policy, gasoline consumption must respond to changes in gasoline prices, and these responses should be of an acceptable magnitude and within an acceptable time. It is obvious from the estimated price elasticities of demand for gasoline that gasoline taxation is not a particularly effective short-run conservation policy. The demand for gasoline tends to be highly inelastic within the first year or so of any price change, with the full impact of any such change requiring many years to be worked out fully. However, in the longer run it appears that sizable increases in gasoline taxes can effect substantial reductions in gasoline consumption (provided that these elasticity estimates have some validity with respect to nonmarginal changes in price).

Perhaps the most interesting implication of these estimates can be obtained from Sweeney’s vintage capital model and its elasticities. The model suggests that the largest reduction in gasoline consumption for any given increase in price would be due to an increase in the efficiency of the stock of vehicles rather than to any substantial reduction in the volume of miles driven. This conclusion tends to counteract the arguments against increased gasoline prices and taxes that revolve around many distributional issues (i.e., such arguments as increased gasoline prices having severe negative impacts on the tourist industry, suburban residents, etc.). If the primary long-run response to higher gasoline prices is increased vehicle efficiency, then it is unreasonable to expect that price/tax-led conservation policies will have any long-run detrimental effects on those sectors of the economy that appear to be hardest hit in the short run. Again, it must be noted that this discussion is contingent on the assumption that the estimated price elasticities are reliable over nonmarginal changes in price. It is also worth noting that Sweeney’s results are probably more applicable to the North American market, which is characterized by low gasoline prices compared with Europe or Japan, which have a lengthy history of high gasoline prices (i.e., the fleet efficiency component may have already been exploited in Europe and Japan).

Effects on Resource Allocation and Economic Growth

This section discusses the resource reallocations required by the oil-induced changes in the cost structure and relative prices, and evaluates the implications, if any, for gasoline taxation. Specifically, this section will address the proposition that required resource reallocations would be facilitated by a gradual phasing in of the changed relative price. Acceptance of such a propostion may provide a case for allowing temporary reductions in the real value of gasoline taxation.

The 1973–74 oil price increases represented a massive change in the cost of a major input relative to output prices. The change in the cost of energy relative to other factors of production rendered part of the existing capital stock obsolete. Moreover, in the absence of offsetting reductions in real wages, the profitability of enterprises (other than those producing energy) was reduced. Changed cost structures and relative prices would have required resource reallocations even if the adjustment of final sales prices was unimpeded. In the event, such adjustments were less than complete in the period after 1973, reflecting price controls and restrictive demand management policies.

Probably most economists would argue that, to facilitate the real adjustments needed in patterns of production and consumption, final sales prices should be allowed to adjust without delay. Against this, it might be argued that the implementation of new technologies takes time, and that adaptations to changed relative prices as far as possible should be made without undue disruption. Specifically in the case of gasoline prices, motor vehicle technology cannot be rapidly retooled toward a substantially more fuel-efficient fleet (though European and Japanese alternative technology exists for use in North America), nor can certain parts of public transportation systems (e.g., underground rail systems) be rapidly introduced or expanded. Required rundowns in certain industries (e.g., parts of the tourist service industry heavily dependent on private motoring) may occur more smoothly if achieved over a longer period. On these grounds, it can be argued that what is required for appropriate resource allocation signals is for the direction of the future relative price of gasoline to be clear, but that real increases beyond a certain magnitude will, in the short run, have no discernible impact on resource reallocation; the major impact will be undue disruption.

The growing use of adjustment assistance schemes in OECD countries (often in response to lower levels of protection) aimed at smoothing the transfer of resources gives ample precedent for a similar scheme (effected by way of gasoline tax changes) for gasoline. However, the actual experience with such schemes also suggests caution in endorsing them. Recent OECD studies of adjustment assistance schemes (for import competition) concluded that they often tend to delay rather than to facilitate adjustment. 16 While this conclusion was in part attributable to avoidable defects in the design of particular schemes, there are more general shortcomings that carry over to the issue of smoothing the path of gasoline prices. Specifically, smoothing can readily degenerate into relative price changes of modest or even imperceptible magnitudes, which tend to frustrate required adjustment. The evidence in Section II for most of the countries considered appears consistent with that charge. Substantial smoothing might have been justified in the period immediately following the initial round of OPEC price increases, when there were reasonably widespread expectations that the new higher relative price of oil could not be sustained. Subsequent experience belied those expectations.

While a theoretical argument can be made for using gasoline taxation to smooth the rate of increase of gasoline prices, actual experience with analogous schemes, plus the gasoline pricing experience of several OECD countries since the start of the decade, indicate a real risk of unduly delaying required structural adjustments.

Effects on Distribution of Income

Governments usually want to ensure that, at least, the impact of higher taxes will not make the tax system more regressive. To the extent that higher gasoline prices were found to be regressive, governments may have been (and remain) reluctant to compound the higher gasoline prices flowing from the OPEC price increases with additional taxation, even though conservation and increased revenue would result.

Studies for the United States indicate that additional increases in gasoline prices and taxes will inflict a greater relative expenditure-based burden on lower-income groups than on higher-income groups. However, it may not be possible to generalize these results for other OECD countries, since Canada and the United States may be the only economies in which automobile ownership is virtually universal. 17 The experience of, for example, Japan with gasoline pricing has been summarized as follows:

  • Retail prices of gasoline in Japan have risen faster than any other oil product since the controls on it were lifted in March 1974. Unlike some other markets (e.g., kerosene), in gasoline the Japanese government has allowed markets to clear. In part, the motive has been to use higher prices to curb gasoline consumption and thereby oil imports. But an additional motive appears to have been to shift a sizable amount of the burden of higher oil costs to middle- and upper-income groups, who (in Japan) own and operate the majority of private cars. 18

Thus, gasoline taxation in Japan may, in fact, be progressive because of the income distribution of vehicle ownership. A similar conclusion would apply in many other countries.

In general, it may be possible to argue that the progressivity/regressivity issue is not important enough to override other policy objectives, such as the attainment of an efficient allocation of resources or a reduction in foreign oil imports. 19 It cannot be established clearly that the taxation of gasoline expenditures is regressive if the tax burden on capital income is included in the analysis, since it could be argued that increased gasoline taxation may be borne by producers and hence by the holders of refining company stocks. If the income side is ignored and regressivity is accepted, vertical equity still may not be an important issue. The extent of interincome class variation in the proportion of income spent on gasoline is very small, so that the degree of regressivity cannot be large. Also, even in the United States, where per capita gasoline consumption is much higher than in other OECD countries, these expenditures still account for less than 6.5 per cent of the money income of any income class. Thus, even a heavy tax on gasoline will have little impact on the overall distribution of income. Finally, even if substantial regressiveness was identified, part of the revenue from higher gasoline taxes could be used to finance transfers to ameliorate the more serious inequities. 20

Issues concerning horizontal equity may present more difficult problems. For example, an increase in gasoline taxation may cause a shift in residential property values, so that suburban homeowners (as opposed to renters) incur a capital loss and inner-city homeowners reap a capital gain. Other possible gains and losses may occur between industrial sectors, with declines in share values and income streams in such industries as tourism and automobile manufacturing. Because these gains and losses most likely would transcend income classes in such a way that intraclass variation would be just as likely as interclass variation, the maintenance of horizontal equity may be more difficult than the maintenance of vertical equity during such a transitional period. It should be noted that the more certainty there is about the direction of changes in both oil prices and gasoline taxes the less serious the horizontal inequities will be, since prices will reflect the likelihood of such changes.

Tax revenues between different levels of government can also be affected by gasoline tax changes. In the United States, both the federal and state governments collect gasoline taxes that are earmarked for highway construction and maintenance. The imposition of higher federal taxes (or increases in the price of gasoline) for conservation purposes would, to the extent that such measures were successful in reducing gasoline consumption, erode the states’ tax base. 21 Thus, an examination of changes in the taxation and/or pricing of gasoline must also consider the impact those charges would have on the distribution of revenue-generating capabilities among various levels of government.

In the discussion of appropriate gasoline pricing and tax policies it is important to distinguish distribution and allocation issues. The fact that a certain policy, such as higher taxes on gasoline consumption, carries with it possible adverse distributional impacts does not constitute a sufficient reason for discarding it. Adjustments in the general tax/transfer system may be a more appropriate means of maintaining equity than a complete abandonment of gasoline tax policies.

Increases in gasoline taxes might be regressive in Canada and the United States but are less likely to be so in other countries. However, any regressive effect on household expenditure is unimportant, given the small amount of total expenditure affected, and has probably been overstated. The possibility of transfers offsetting regressivity and the impact on horizontal inequities from higher gas taxes might be considered more important than vertical inequities.

Effects on Rate of Inflation

The impact of higher gasoline taxation on prices in general has become a major preoccupation of authorities. In considering the effects, if any, of higher gasoline taxation on the rate of inflation, three points need to be kept clearly in mind:

(a) the distinction between relative price changes and the general rate of inflation;

(b) the distinction between a price increase resulting from an increase in a domestic tax, as opposed to a price increase resulting from a deterioration in the terms of trade; and

(c) the fact that direct expenditures for gasoline probably account for less than 5 per cent of private consumption expenditures as represented in consumer price index baskets. 22

Economists traditionally have tended to belittle the impact of a price rise of a single commodity on the general rate of inflation, arguing that relative price changes, of themselves, imply nothing for inflation. More generally, the view implies that relative price changes can have inflationary consequences only if the authorities pursue an accommodating monetary policy in which inflation is defined as a dynamic disequilibrium phenomenon rather than as an increase in a consumer price index.

Some recent empirical evidence for the United States might be considered a challenge to the traditional distinction between relative price changes and inflation. Based on an analysis of individual components of both the consumer price index and the wholesale price index over the period 1948–74, it was concluded that

  • the behavior of the general price level is related in a statistically systematic manner to the behavior of individual prices relative to each other … as the general price level becomes more unstable or less predictable relative to its trend value … so does … the dispersion in relative prices increase. 23

Vining and Elwertowski do not speculate on the direction of causality between individual price change dispersion and general price change instability. Recently, Robert Solow claimed to have generalized Schultze’s demand-shift inflation to include “supply-shift inflation” or “any-shift inflation.” 24 Like Schultze, Solow assumed downward wage and price inflexibility, stressing the role of evaporation of the discipline imposed by the fear of recession rather than oligopolistic pricing practices. Also like Schultze, Solow’s theory pays little attention to government policy responses. 25 While these theories may bear closer examination, they do not appear to contradict the basic proposition that relative price changes per se do not generate inflation. Rather, they seem to imply two propositions: first, that given downward price inflexibility in the short run, a relative price increase will result in an increase in the overall price level; and second, that relative price changes might generate accommodating policy responses that can validate or sustain inflation. The flavor of the chain of events is well illustrated in the McCracken report, discussing the late 1973 and early 1974 OPEC oil price increases:

  • Had this one-shot price increase been accepted as such—as an excise tax levied by OPEC—it could have passed through the distribution process and resulted simply in a staged adjustment to a new higher price level. But energy and energy-intensive products loom large in private consumption and in price indices; the increase represented an evident reduction in real income. The process of attempting to restore real wages in the face of this sudden price increase set in motion further rounds of the wage-price spiral, as demand management was partly accommodating in an effort to avoid an even more severe recession. 26

Clearly, unless it was possible to negotiate a reduction in real wages and profits equivalent to the deterioration in the terms of trade, the authorities were faced with accommodating the increases—leading to inflation—or not accommodating them—leading to bankruptcies and unemployment (both politically and economically damaging).

It is important to emphasize the difference between an increase in the price of gasoline emanating from an increase in imported crude oil prices and an increase resulting from an increase in gasoline taxation. The former involves a real income loss for the importing economy as a whole, whereas the latter does not. It can be expected that economic agents will react more strongly to resist the former situation, and thus the pressure for an accommodating policy response might be greater. That said, it must be acknowledged that economic agents may often react as if higher gasoline taxation involved a real income loss, ignoring the cuts in other taxes or the increases in government expenditure that the higher gasoline taxation makes possible.

This point also raises another obvious distinction between the two situations. In the case of higher gasoline taxation, the government at the same time obtains the wherewithal to offset any direct impact on the overall price level and any deflationary impact on aggregate demand by reducing other indirect taxes, for example. Clearly, increases in imported oil prices will have similar cost and demand effects without at the same time providing government with the resources to counteract these effects.

Thus, while the consumer may regard the source of an increase in gasoline prices as irrelevant, gasoline price increases caused by higher gasoline taxation pose considerably fewer difficulties for macroeconomic management than do price increases caused by imported oil costs.

Balance of Payments Considerations

Only two issues will be addressed (briefly) here. The first concerns the impact of higher gasoline taxation on the trade account and on the overall balance of payments. The second concerns the impact of gasoline taxation on industrial competitiveness between OECD countries.

Regarding the impact on the trade balance, higher gasoline taxation will, via conventional price elasticities of demand, imply lower oil imports and, ceteris paribus, an improved trade balance. This improvement will to some extent be offset by lower exports to OPEC countries. Given a sufficiently high elasticity, the ceteris paribus assumption with respect to the exchange rate may not hold. However, a lower total oil import bill for the OECD countries is also likely to reduce capital inflows from the oil exporting countries, and thus the overall balance of payments result may be little changed. 27

Another issue concerns the impact of higher gasoline taxation on industrial competitiveness between various OECD countries. It is difficult to accept that, within the bounds of observed levels, gasoline taxation could have an important impact on industrial competitiveness. The major mechanism underlying assertions to the contrary presumably rely on wage/price/monetary expansion mechanisms rather than any once-and-for-all impact on the price level of higher gasoline taxation (discussed earlier). A second mechanism may be that higher gasoline taxation might induce an appreciation of the exchange rate via its impact on oil imports and hence on the trade balance. However, as mentioned above, lower oil imports are also likely to be associated with lower autonomous capital inflows; possible impacts of the exchange rate on the overall balance of payments result—not merely on the trade balance—need to be recognized.

Another mechanism linking gasoline taxation and external competitiveness derives from the impact of gasoline prices on, say, foreign tourist activity. However, to state the obvious, tourist choices will be determined by the relative price level (between different countries) of the aggregate basket of goods and services they will consume, not merely gasoline. The weight given to gasoline in this basket is difficult to know, but casual observation suggests it cannot be high.

The major impact of higher gasoline taxation on the balance of payments is probably the longer-term influence on the cohesion of OPEC and the minimization of risks of large increases in the relative price of imported oil. This factor would appear to be far more important than the somewhat tenuous mechanisms outlined above.

Possible Reaction of Oil Exporting Nations

Another possible explanation for the apparent underutilization of gasoline taxation is the chance that higher gasoline taxation would induce retaliatory action by the oil exporting nations via oil prices. According to this view, higher gasoline taxation would be viewed as an attempt by the consuming nations to gain a larger share of the value generated by a barrel of crude oil, and oil exporting nations would respond by restricting output and increasing prices in order to restore their pretax profit margins. 28 This view assumes that the major oil exporting nations (a) can be regarded as a monopolist or tight cartel, (b) are not presently maximizing their profits, and (c) have the market power required to at least restore their profit margins when faced with increased gasoline taxation.

It is beyond the scope of this paper to evaluate this or other models of oil exporters’ behavior. However, it is important to note that this retaliation model does not necessarily argue against higher gasoline taxation. Indeed, the model, as developed by Adelman, was intended to demonstrate how higher taxation by the oil consuming governments would eventually lead to a situation where consuming governments would have the power to pre-empt most or all of the profit of the oil exporting countries:

  • No consuming country would today contemplate such a policy. Yet they may inadvertently do, step by step, what they would never dream of doing deliberately. Large sudden changes in oil prices might induce action to check imports, including taxes or tariffs on crude oil products. The moral for the cartel nations: minimize risk by raising the price in small increments, and at times when the world economy is most healthy. 29

However, if gasoline taxes are actually reduced in real terms to offset, in part, the increase in crude oil prices, consuming nations are foregoing part of the market value element of this commodity. They are transferring potential revenue to the producing countries (and relieving the gasoline consumer at the expense of other taxpayers), thus at the same time inducing budgetary difficulties, worsening their balance of payments, and sacrificing the objective of reduced dependence on oil imports.

The message for oil consuming policy may be to establish the upward trend of prices through taxation.

IV. Summary and Policy Implications

The major objective of energy policy in most OECD countries since 1974 has been to reduce their dependence on imported oil. This objective was formalized in October 1977, when IEA ministers adopted the so-called group objective of limiting oil imports to 25 million barrels a day by 1985. This group objective was in turn related to both economic and noneconomic objectives, and market forces alone could not be relied upon to achieve the 1985 target. Higher gasoline taxation was one instrument advocated to supplement market forces. However, the experience of seven OECD countries over the period 1970–79 indicates that gasoline taxation, in general, declined in real terms. The IEA’s report for 1978 stated that the group objective was unlikely to be met, and that a major reason for this was the underutilization of gasoline taxation.

The generally declining importance of gasoline taxation does not derive from skepticism regarding its efficacy as an instrument of energy policy. Rather, the apparent under-utilization appears to derive from concerns that higher gasoline taxation would conflict with other objectives, most notably the containment of inflation but also with equity, economic growth, and external equilibrium.

This paper has attempted to evaluate these alleged conflicts with other objectives. The tentative conclusion is that the importance of the conflict can easily be exaggerated, and that, in general, excessive stress has been placed on the macroeconomic implications of an essentially microeconomic issue. Regarding the alleged conflicts with counterinflation objectives, within the bounds of observed ranges of gasoline taxation, higher gasoline taxation would have very modest direct effects on the aggregate price level. Even these direct effects can be offset by utilizing part or all of the proceeds to reduce other indirect taxes (as proposed in the McCracken report and other OECD forums). Indirect effects depend on a series of subsequent wage, price, and monetary adjustments, which are by no means automatic and some of which may be under the control of government. More generally, the inescapable conclusion is that the general rate of inflation in OECD countries since 1973 has much to do with the appropriateness of fiscal and monetary policies and virtually nothing to do with the rate of increase in gasoline prices.

The income distribution effects of higher gasoline taxation are several: they include progressive and regressive elements, are not demonstrably substantial, and are at least partially amenable to offsetting government action using part of the higher gasoline tax proceeds.

Alleged disruptive effects on resource allocation attributable to higher gasoline taxation might be based in part on misconceptions concerning the nature of the adjustments to such increases. The more sophisticated studies show that the major adjustment to higher gasoline prices comes, admittedly in the longer run, by way of increased efficiency of the stock of motor vehicles rather than by any substantial reduction in the volume of miles driven.

While several mechanisms have been suggested whereby higher gasoline taxation has implications for the balance of payments, by far the most important relationship is the long-run reduction in economic costs associated with reduced vulnerability to shocks caused by price or output decisions of the major oil exporting countries.

The foregoing is not intended to convey the impression that higher gasoline taxation is costless, but rather that at a macroeconomic level the costs appear to be more modest than suggested in most public debate. More to the point, a relevant comparison for these costs is the costs associated with the adjustment to, for example, the July 1979 oil price increases. On the basis of the experience of the past several years, the OECD countries will regard this latest round of oil price increases as rendering it more difficult to restore or increase the real value of gasoline taxes. However, the price increases might also serve to emphasize that lower gasoline taxes helped to make such price increases possible.

*

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.

1

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.

2

If anything, higher prices for gasoline would suggest less traffic, lower highway costs, and, hence, lower taxes to finance highway construction or maintenance.

3

Elasticity data are provided and discussed in Section III, below.

4

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.

5

See International Energy Agency, Energy Policies and Programmes of IEA Countries: 1978 Review, Organization for Economic Cooperation and Development (Paris, 1979), p. 295.

6

Ibid., p. 12.

7

For an extensive discussion of public goods, see Jesse Burkhead and Jerry Miner, Public Expenditure (Chicago, 1973), pp. 125–33.

8

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.

9

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.

10

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).

11

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.

12

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).

13

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.

14

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).

15

James M. Griffin, Energy Conservation in the OECD, 1980–2000 (Cambridge, Mass., 1979), pp. 188–89.

16

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).

17

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.

18

Yoshi Tsurumi, “The Case of Japan: Price Bargaining and Controls on Oil Products,” Journal of Comparative Economics, Vol. 2 (June 1978), p. 138.

19

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.

20

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).

21

Leon Rothenberg, “Energy Taxation for Highway Financing,” National Tax Journal, Vol. 31 (September 1978), pp. 285–89.

22

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.

23

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.

24

Robert M. Solow, “The Intelligent Citizen’s Guide to Inflation,” The Public Interest, No. 38 (Winter 1975), p. 63.

25

“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).

26

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.

27

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).

28

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.

29

Ibid., p. 6.

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Cover IMF Staff Papers
IMF Staff papers: Volume 27 No. 2
Author:
International Monetary Fund. Research Dept.
Volume/Issue:
Volume 1980: Issue 002
Publisher:
International Monetary Fund
ISBN:
9781451946864
ISSN:
1020-7635
Pages:
250
DOI:
https://doi.org/10.5089/9781451946864.024
  • Figure 1.
    View in gallery
    Figure 1.

    Nominal and Real Prices of Arabian Light Crude, 1970–79

    (In U. S. dollars a barrel, f.o.b.)

  • Figure 2.
    View in gallery
    Figure 2.

    Real Retail Gasoline Prices, by Country, 1970–791

    (In U. S. dollars a gallon)

  • Figure 3. Figure 3. Figure 3.
    View in gallery
    Figure 3.

    Nominal and Real Retail Gasoline Prices and Gasoline Taxes, 1970–791

    (In units of domestic currency a U. S. gallon)

Figure 1.

Nominal and Real Prices of Arabian Light Crude, 1970–79

(In U. S. dollars a barrel, f.o.b.)
Figure 2.

Real Retail Gasoline Prices, by Country, 1970–791

(In U. S. dollars a gallon)
Figure 3.

Nominal and Real Retail Gasoline Prices and Gasoline Taxes, 1970–791

(In units of domestic currency a U. S. gallon)
Figure 3.

Nominal and Real Retail Gasoline Prices and Gasoline Taxes, 1970–791

(In units of domestic currency a U. S. gallon)
Figure 3.

Nominal and Real Retail Gasoline Prices and Gasoline Taxes, 1970–791

(In units of domestic currency a U. S. gallon)