Friday, May 2, 2008

Should The Government Cut Tax on Road Fuel?

The price of Petrol in the UK has reached 110p a litre as we mentioned in this post on petrol price.

Many Argue the Government Should Be Cutting the Tax on Petrol, at least during this temporary rise in petrol prices.

Arguments For Cutting Taxes

  1. Taxes are placing a burden on consumers disposable income. Fuel prices now account for a high % of people's disposable income creating 'fuel poverty
  2. High petrol prices are damaging the Road Haulage Industry at high prices firms are struggling to stay afloat.

Arguments Against Cutting Tax

  1. If Petrol tax is cut, the government would have to make up the shortfall elsewhere, by either cutting spending or increasing taxes on other goods / incomes. Cutting petrol tax would not reduce the tax burden but merely shift the tax burden from one place to another.
  2. High petrol prices are causing a rise in transport costs. Ultimately, they will lead to higher prices for consumers. Alternatively, people will seek to transport goods by rail, which uses relatively less petrol. Having more goods travel be freight is no bad thing.

Long Term Benefits of Rising Oil Prices

  1. Less Congestion. Congestion on UK roads costs the economy over £20 billion a year, higher fuel prices encourage people to find other ways to travel to work. Although demand for petrol is inelastic, the higher prices are reducing the growth in demand for car journeys. If petrol prices were 20% lower, there would be significantly more cars on the road and more congestion as a result.
  2. Incentives to Develop Greater Fuel Efficiency. When oil prices shot up in the 1970s, car manufactuers drastically improved engine efficiency. They sought ways to decrease fuel emissions. However, the falling prices in the 1980s and 1990s, saw these incentives evaporate. This led to the rise of high level polluting SUVs and 4*4s. Given the problems of global warming, there are many long term benefits of creating incentives to develop more fuel efficiency.
  3. Would Only Delay The Inevitable. Oil prices are rising because of economic fundamentals; demand increasing faster than supply. As supply diminishes the price rise will only get worse. Opec talk of a $200 barrel. Cutting taxes only delays the reality that we need to deal with the reality of expensive oil prices.
A Note on American Petrol Prices. American prices are very cheap compared to the rest of the world. The US should be looking to increase prices closer to world levels. Fuel prices around the world

I'm sure there must be a Presidential candidate promising to increase taxes on gas prices so that America can do it's bit to fight the problem of global warming....


brightstar said...

In fact, the National Surface Transportation Policy and Revenue Study Commission released a report in January 2008, which recommended increasing the taxes on gas prices in America.

"The Commission recommends that the Federal fuel tax be increased from 5 to 8 cents per gallon per year over the next 5 years, after which it should indexed to inflation."

However, as far as I know, no one from the congressionally appointed Commission is running for President.

See above link to read all about it.

hgvlgvtraining said...

The Haulage industry for one is suffering through high fuel prices. What seems to be driving this is a government heel bent on ruinning the transport industry

class 2 training said...

It is not just in the UK,every part of the world where petroleum is being imported are pricing up. It does affect the economic all over the world!