Have High Gas Prices Left You Feeling Down? Increase the Gas Tax!

June 13, 2008

With gas prices being what they are, many in the US and around the world have suggested that we temporarily suspend the 18.4 cents-per-gallon gas tax. The argument is that it would help working families make ends meet during this period of rising costs (we have written previously on why this is a bad idea).

But on the other side of the spectrum is Roger Harrabin, environmental analyst for the BBC. He sees the gas tax issue a little differently. From his article High Fuel Prices: Good or Bad?:

Say for sake of illustration that the price of a gallon of petrol in Highfueltaxland is 25p and the tax on a gallon is £1. That makes petrol at the pumps £1.25.

Now say the price of petrol doubles to 50p. The driver at the pump in Hightaxland pays £1.50 – an increase of 20%.

The opposite extreme is Zerotaxland. There when the cost of oil doubles from 25p pence to 50p, the cost as the pump doubles too – sending a shock through the economy.

It hurts all the more because the Zerotaxland motorist hasn’t budgeted for high fuel costs.

Most of us don’t think in terms of pounds and pence (it’s just like dollars and cents: 1 pound = 100 pence), but his point should be clear: having a high gas tax makes the comparatively small changes in the actual pre-tax cost of gas seem inconsequential. The high tax acts as a “price buffer” so that the big price changes don’t seem as big anymore. You and the economy will both feel much better about the increasing price of gas. You just have to ignore the fact that you are actually paying much more for your gallon of gas. I don’t know about you, but increasing the price of gas would probably not help me stick within my budget.

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