Taxation of Petroleum Products - Theory and Empirical Evidence


WP/94/32-EA
Taxation of Petroleum Products: Theory and Empirical Evidence by Sanjeev
Gupta and Walter Mahler


The taxation of the domestic consumption of petroleum products is an
important source of revenue in most countries. It usually provides far more
revenue than any other product, including tobacco or alcoholic beverages.
However, the extremely wide variation in the retail prices and tax rates on
petroleum products across countries is not found in other products whose
consumption is also taxed. This paper discusses the reasons behind
petroleum taxation policies, examines petroleum tax data for some 120
countries, and shows how tax rates for major petroleum products have changed
between 1973 and 1991.

Because the level of petroleum taxes depends on a broad range of
considerations, it is reasonable to expect some variation in petroleum tax
rates among countries. Most countries do not seem to take explicit account
of road usage, pollution or congestion costs in setting the tax rates on
petroleum products. The overriding justification appears to be that these
products can be taxed easily. However, the appropriateness of both
extremely low petroleum prices and taxes and extremely high petroleum prices
and taxes can be questioned on both economic efficiency and welfare grounds.
A significant reduction in present extremely wide variation in petroleum
prices and tax rates is therefore likely to improve economic efficiency and
welfare in many countries.