Did Japan's Gas Tax Holiday Work?

I'm puzzled at the claim in various places that economists say a gas tax holiday would merely pass the money on to the producers. Even if world supply is perfectly inelastic, one country can still bid gasoline away from another. So one would expect a drop in the gas tax to be partly a gain to domestic consumers, partly a gain to world producers, partly a loss to foreign consumers.

And the smaller the economy effected, the larger the fraction of the savings that would go to domestic consumers--which is consistent with the claim about Japan. Isn't that obvious?

In reply to David Friendman, what you say is semi-obvious; I said the same thing once before here. I think that many economists would add, though, that for regulatory reasons the U.S. (and often individual states) basically has to do its own refining, and add that our refineries are at capacity. Even if the supply of oil were quite elastic, this implies that - at our current margin - refiners get 100% of the tax cut.

Of course, it would also imply that a large fall in the price of oil wouldn't reduce the price of gas, at least until we have time to build more refineries. Hmm.

The Nikkei newspaper, Japan's business daily, reported on this fact in early May. Anecdotal reports confirm that the consumers benefited. I wonder why more US economists do not look at this data. Maybe it is uncomfortable when the real world does not fit models.

From the Nikkei.

Thursday, May 1, 2008

Reimposed Surcharge Pushes Up Retail Gas Prices By Y30 Per Liter

TOKYO (Nikkei)--With provisional gasoline and other road-related tax surcharges reimposed on Thursday, a number of gasoline stations around the country have raised their prices by around 30 yen per liter in a bid to offset the additional 25.1 yen in taxes and higher crude oil costs.

(The Nikkei Thursday evening edition)

Friday, May 2, 2008

89% Of Gas Stations Raised Prices On Tax Surcharge's Return

TOKYO (Nikkei)--About 89% of gas stations in a Nikkei survey said they hiked prices at the pump Thursday to reflect the restoration that day of the gasoline tax surcharge of 25 yen a liter.

Of the 108 gas stations that raised their prices Thursday, 80% did so by at least 30 yen a liter. The poll drew valid responses from 121 gas stations.

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Bloomberg: The expiration of the gasoline tax lowered the average price of the fuel nationwide by about 17 percent in April, according to the Bank of Japan. The levy was reinstated this month, bringing regular gasoline prices to a record 160.1 yen a liter ($5.84 a gallon).

While this expiration was more or less involuntary, President Sarkozy proposed a concerted action in a similar vein on the European level yesterday (to no avail, as one may assume).

I second David's comment with my own thinking on the matter.

Petrol supplies are actuality quite elastic for each country. Impose a $5 tax on a gallon and producer surplus will not plummet since they can easily shift supplies to a different country. To go the other way then and remove the tax would not simply result in higher profits for the sellers, since petrol from other countries can come back in a regain that producer surplus.

I never liked the economists (not all) criticism of the gas holiday. Just think: if Europe suspended it's gas taxes do you expect their prices would stay at $7-$10.

@Bryan

The US in fact refines a significant amount of oil which is then exported to countries such as Mexico. These exports could be reduced as needed to move more petrol to US consumers. I will try to hunt down some more data on your claim that refining must be done domestically for most countries.

Last post for me

http://www.eia.doe.gov/emeu/cabs/Mexico/Oil.html

Mexico imports 25% of its refined oil consumption, mainly from the US. The US shouldn't have too much of a problem adjusting to new tax levels.

http://www.dollardrops.com/dollar/2008/05/14/officials-to-weigh-exports-of-japan-refined-gasoline-to-us/

Japan has excess refining capacity, so it should come as no surprise that they were able to increase supplies of petrol.

http://tonto.eia.doe.gov/dnav/pet/hist/wpuleus3w.htm

US refining utilization appears to be below the 10 and 15 year average. While some of this can be explained by extended maintenance needed, there exists excess capacity in the medium run, whatever that is.

I'm sure there exists more evidence to prove this point for other countries as well, though I don't doubt that restrictions do exist.

I'm mostly critical of the holiday part.

Also, I think price pressure causes people to do things they think are effient, but aren't. And may also increase demand through other mechanisms.

Bryan,

You argue for the gas tax holiday on the basis that it's "doing something" while not really doing harm and the gains go to producers. What happens though when voters see that a gas tax holiday has been put in place but fuel prices at the pump haven't changed much. If folks aren't up in arms against the oil companies now, what'll they be like after gas prices fail to move much with the tax cut?

I thought we'd argued this one to death before. As a gas station owner, taxes are built in to my wholesale price. If my wholesale price drops, I will cut my retail price because I know all my competitors will do the same.

In 2004, Florida cut its tax on gasoline by 8 cents for one month. Gas stations lowered their prices by a similar amount, and then raised them Sept. 1. I remember, I was there. Article

The real reason a gas tax holiday is going nowhere is that, at the federal level, taxes are based on unit volume rather than sales price. Price has tripled since the rate was last set, so we are in effect getting 2/3 of a tax holiday already.

With the resulting decline in fuel consumption pinching the federal highway fund, look for fuel taxes to go up and not down over the long term.