The Political Economy of OECD Gasoline Taxes: Evidence from Pair-Wise, Panel Long-Run Causality Tests

Abstract

Despite the current interest in using fuel taxes as an instrument for climate policy there has been little study of current automotive fuel tax regimes. We expand on two earlier cross-sectional studies on why fuel taxes differ across countries by using OECD panel data and employing panel cointegration and long-run panel Granger-causality techniques. We confirm those earlier studies’ conclusion that governments view gasoline taxes as simply another revenue source. Further, we find that governments that rely more on consumption-based taxes for revenues will have higher gasoline tax rates (than governments that rely on income and wealth/property-based taxes). But more significantly, we determine that higher gasoline demand among consumers “causes” democratic governments to set lower gasoline taxes — a finding with important implications for today’s climate/energy policy debate.

Keywords: determinants of OECD gasoline taxes, gasoline tax/price endogeneity, long-run panel Granger-causality, cross-sectional dependence, panel heterogeneity

JEL Classification: C23, H20, R40, R48