Friday, 2 May 2008

The gas tax issue

Montreal, Quebec: Watching some of the coverage of the US presidential election from just across the border, one of the big issues this year has been a federal gas tax holiday. Hillary Clinton wants a tax holiday and proposes to pay for it with a windfall tax on big oil which strikes me as a classic piece of populist opportunism. McCain is in favour but wouldn't charge big oil. Barack Obama is against - after all it would only save the average family $30.

I was trying to work out with an American colleague last night the difference between motor fuel prices in the US and the UK, but we reckoned that UK consumers are paying more than twice as much. US consumers are nevertheless howling with pain. In the UK there has been another protest by hauliers and there seems to be a popular view that the tax should be cut.

What the proponents of a tax cut never say is which other taxes should be raised or which areas of public expenditure should be cut. If you cut fuel taxes you have to do either or a mixture of both. You can't responsibly borrow any more to cover the loss of revenue.

It was interesting to note the President of Shell saying the other day that easily recoverable oil production in the world will peak in 10 to 20 years. In other words, the cost (including in some cases the environmental cost) of recovering oil will rise. Given that many countries in the world subsidise the consumption of oil by industry and consumers, demand is not going to fall. So it is difficult to see how an increase in hydrocarbon prices can be avoided in the medium term.

Given that, some sort of adjustment has to start to be made. Of course, demand for motor fuel is very price inelastic. Even so, a cut in tax would not discourage consumption and given the long-run picture it doesn't seem to be a very smart move.

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