Thursday, July 3, 2008

10 Reasons Not To Cut Petrol Tax

The Daily Express has a campaign, stop petrol tax robbery They are calling for a massive cut in petrol tax. Whilst this may be popular with motorists, does it make any economic sense to cut petrol taxes? These are 10 reasons why the Express is wrong and the government should persist with petrol taxes.

1. Congestion.

Congestion on UK roads costs the UK economy over £21 billion a year. Without petrol tax, the costs of congestion would be much worse. Higher petrol prices are forcing people to find alternative means of transport; it is giving the economy an unexpected boon of quieter roads, which leads to much greater efficiency and less time wasted in traffic jams

2. Pollution

Consumption of petrol causes CO2 emissions. High prices help to moderate demand and reduce pollution levels. This helps the UK meet its carbon emission targets; it also helps improve air quality in city centres.

3. More efficient driving

Higher petrol prices have encouraged people to drive more efficiently; people are driving slower. People are shopping locally rather than going to out of town supermarkets. In many ways, the higher oil prices are encouraging more efficient driving. See: Effect of higher petrol prices

4. More efficient Engines.

On the producers side, there is an increased incentive to develop more fuel efficient engines, rather than the gas guzzling SUVs.

5. Inequality

Often you hear an argument, higher petrol prices are not fair, because poor people cannot afford them. However, this is the wrong approach to reducing poverty. The role of petrol taxes is not to deal with relative poverty. The best way to reduce poverty is increase the incomes of the poor, not cut petrol taxes. Petrol taxes should be set at the socially efficient level; if the government is concerned about equity issues, it should adress them directly, not indirectly through altering indirect taxes on cigarrettes, petrol and alcohol.

6. Encourages Alternatives

Higher oil prices, encourages the development of alternative energy sources, such as electric cars, hydrogen powered cars. We need to find alternatives to oil; the sooner we do it, the smoother the transition will be.

7. Raises Revenue

If you cut petrol taxes, the government will have to simply raise other taxes. There is no welfare gain from cutting petrol taxes. It only changes the way taxes are collected. Whether we pay income tax or petrol tax it does not affect our living standards. If petrol tax has beneficial effects of increasing social efficiency, then we might as well pay tax this way rather than through more inefficient taxes such as income tax.

8. Rising Oil Prices are a signal we need to find alternatives.

You can't buck the market for ever. Oil is a non renewable energy source. The higher price of oil cannot be explained through speculation; prices are high because demand is rising faster than supply. To try subsidise lower oil prices is only to delay the necessary switch to other energy sources.

9. Petrol tax pays for the external cost of driving cars and lorries.

Driving cars and lorries create many negative externalties. Petrol tax helps covers these externalities. They include:
  • Cost of repairing roads worn out (especially by lorries)
  • Pollution costs
  • Congestion costs
  • Costs of accidents (over 3,000 deaths in UK alone). Less traffic will reduce this level of fatalities.

10. It is necessary to switch Transport Methods

There was a time when many people were employed driving horses and carts. Technological changes necessarily made these horse and cart drivers redundant. But, other jobs are created. If less goods are transported by lorry, it will create increased demand in other sectors of the economy such as trains.

There is a populist demand to cut petrol taxes, but, just because a tax cut is popular doesn't mean it is a good idea. To subsidise consumption of petrol at this point in time, would be the worst possible mistake. We need to develop an alternative to petrol, and the sooner the better. The effects of rising oil prices are actually very beneficial and future generations will welcome the changes that we are making now. To prolong the supremacy of cheap petrol prices would do nothing to help the environment, congestion and long term energy prospects of the economy.

Of course, politicians may not be swayed by economics, after all they have to get re-elected. But, that doesn't mean cutting taxes would be a good thing. Keep petrol prices high.


  • Why is price of oil rising?
  • How to deal with rising oil prices
  • 1 comment:

    Anonymous said...

    what a load of rubbish