Should the tax rate of fuel depend on price?

In Britain, 'fuel duty' and value added tax add up to a large chunk of the final price.

LM Otero / AP / File
In this Feb. 24, 2011 file photo, Juan Zuniga gasses up a SUV in Dallas. In Britain, fuel is currently taxed at a rate of 175 percent. Should the government use taxes to manipulate fuel prices?

It sounds a good idea. When the price of petrol rises, as it has been doing, the government tax on it should fall, so that the final price has more stability. That would help families, but in particular it would help small businesses to plan ahead.

I'm against any tax of any size on any thing for any reason, but I do not think that messing about with taxes like this is a good idea, nor do I think that it will work. Fuel duty – the government tax levied on hydrocarbon oil – is now around 59p per litre. And then there is the new, higher rate of 20% VAT on both the price of the petrol and the duty. So the total tax is far more than the cost of the fuel itself. Indeed, petrol is taxed at a rate equivalent to 175%. (That's a far higher rate than could be justified under any environmental criterion, by the way: if we had simply a 'carbon tax' on fuel, it would be very, very much cheaper!) So, say campaigners, the present tax on fuel amounts to quite a chunk of cash that, arguably, the government could shave off in order to counteract the effect of rising oil prices and stabilise the price at the pump.

There is a flaw in this argument, though. Nobody really knows where the price of oil is going. There is no 'natural' or 'just price' one can use as a reference point for the decision on whether taxes should be cut, or then restored. The price of fuel is volatile in the short term, and over the long term it sometimes trends down and sometimes trends up. If it carries on like it has been, the government would lose billions by trying to stabilise the price by cutting taxes. And should it do so anyway? Part of the idea of rising prices is that they reveal increasing scarcity – and encourage people to look for alternatives or to economise on the use of the commodity in question. That is why, when you allow governments to try to manipulate prices, you always get trouble.

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