Sunday, June 06, 2010

Oil taxation

The recent move of the government to bring down oil tariff from 3 percent to zero is good -- one of the few good moves by the outgoing President. Thus, in the coming days, there will be only one tax for diesel, the value-added tax (VAT), and two for gasoline, the excise tax of around P4.50 per liter and VAT.

One consideration that the new government should entertain, is to abolish the excise tax on gasoline products. Excise taxes are slapped on so-called "public bads" like alcohol, tobacco and petroleum products. But oil is never a "public bad". It is a necessary and very useful commodity. People who think that oil is bad for the economy, bad for the environment and bad for their “man-made warming” faith, may consider riding bicycles and walk-commute more often.

So if oil is a useful commodity, government should not make it more expensive through more taxation.

There is a view that oil is taxed not because it is a public bad but “because it is a scarce and strategic commodity, imported and should be used with efficiency.”

But almost everything can be scarce. So government should tax everything?

Diesel is not slapped with excise tax because of politics, nothing else. The jeepney drivers and operators and their street militant partners will rally everyday if government will slap an additional tax of P4.50 per liter on diesel.

Talking about “strategic commodities”, drinking water is more strategic than oil. Should bottled water be made more expensive by the government through more taxation?

Galunggong and tilapia are more strategic commodities for the poor than oil. Should these "poor man's fish" be made more expensive by more government taxation?

Government slaps two taxes on gasoline products because there is big money to be collected from it, not because they are “scarce and strategic.” Government is also displaying hypocrisy in saying that it wants to promote energy conservation when it is actually happier when people are buying more gas-guzzlers, those cars that run on only 8 kilometers per liter or less.


A person has both a Ford Expedition, a gas-guzzler, and a Toyota Vios, a fuel-efficient car. He has to travel, say, 210 kilometers in one particular day.

a) If he drives his Expedition, running at 6 kms/liter = 35 liters consumption. If average tax is P10/liter [import tax + excise tax + VAT], then he pays P350 in petroleum taxes.

b) If he drives his Vios, running at around 15 kms/liter = 14 liters consumption. At the same assumed tax of P10/liter, then he pays only P140 in oil taxes.

So the government as a tax-hungry institution is actually jumping with joy when people will drive their gas-guzzlers than their fuel-efficient cars.

To argue that government should increase the price of oil so that people will use this resource more efficiently is courting further government intervention in pricing of many other commodities.

The State should not intervene in the demand-supply dynamics between sellers and buyers in a competitive environment. Without state intervention, the price of a commodity will naturally rise if demand will increase faster than supply, or if supply will decline relative to the demand. The price of a commodity is a reflection of its abundance or scarcity relative to demand by consumers. Air is free when we are on the surface because there is unlimited supply of it. But air has a price and is sold in gas tank when one goes scuba diving.

When people drive their cars to go to a store which is just 100 meters away, meaning they are not economizing on oil, so what? Let them spend their own money -- assuming that they buy their own gasoline and do not get free gasoline like in many government vehicles.

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