Tuesday, May 27, 2008

Should the government cut fuel tax?

Demonstrations and protests over rising fuel prices have been hitting the headlines over the past few days.

I can't help thinking, though, that most people miss the fundamental economic principles which underlie the whole issue.

The fact is, demand for oil is increasing at a far greater rate than supply. Thus, prices will inevitably rise in order that the scarce resources are allocated as efficiently as possible. In other words, higher prices encourage consumers to think carefully before making a decision to purchase.

I don't deny that rising prices are severely damaging many businesses, particularly those in the Road Haulage Industry. However, cutting or capping fuel prices will not solve any problems because it will not address the real issue, i.e., not enough oil is being produced to meet demands. In fact, price cuts would probably aggravate the situation because they would likely result in a fuel shortage. When prices are kept artificially low, demand tends to soar. Unfortunately though, supply doesn't change, resulting in a shortage of the resource.

Even if tax on petrol was cut, I'm quite sure our overall tax payments would not be cut; the tax burden would simply be shifted elsewhere. Alternatively, the government would have to cut spending, which seems unlikely. Why do people think tax cuts will benefit them?

Believe it or not, I think there are actually a number of benefits which increasing fuel prices may bring. For example:

1) It will hopefully encourage people to look for alternatives to oil or look for ways to use it more efficiently.

2) People will be more inclined to use alternative transport methods - let's admit it, most people could do with a bit more exercise!

3) I don't believe in global warming. However, I don't deny that atmospheric pollution is a bad thing and we would be better off with less of it.

So, in answer to my question "Should the government cut fuel tax?" I would venture a "no". I dare say this is an oversimplified interpretation of what I know is quite a complex issue. However, I want people to look beyond the impacts on their personal lives and make some attempt at understanding the bigger picture.


~Tori~ said...

Hello Suzanne!

Thank you so much for the comment that you left on my blog! I was so excited to realize that you are from a different country! How neat!

I will be checking back here again, as I hope you will check mine again - I typically update quite often. :-)

Anonymous said...

The government should cut fuel fax. It's a form of tax that's completely unfair and is biased against people who don't live in cities.

They could certainly find ways that were more fair to tax people... or just stop wasting money!

Suzanne said...

Hi Tori, thanks for your comment!

Um.....I think I should have chosen a less controversial subject...

Even if the government did cut fuel tax, it would only be delaying the inevitable - oil prices are rising and will probably continue to rise. Whatever percentage of the price is tax, people in rural areas are always going to be hit harder when prices increase.

Anonymous said...

Prices would still increase, but they'd be an awful lot lower than they are now!

At the moment well over 60% of what we pay at the pump is tax!

Suzanne said...

Hmm....I'm not convinced that cutting the tax rate would make people any better off.

If prices fell drastically, demand would also shoot up. Thus, prices would rise once again.

At the end of the day, the problem stays the same: demand is rising at a faster pace than supply. High prices are inevitable. I'm inclined to think that what percentage of those prices go to the government is really irrelevant.

Anonymous said...

high prices are inevitable, but not as high as they are now!

Prices are rising in the US too but they're still half what they are here!

Suzanne said...

yes well you've made a very valid point! :)