Second-Best Optimal Gasoline Taxes for Ontario and the Greater Toronto-Hamilton Area

25 Pages Posted: 19 Dec 2014 Last revised: 9 Apr 2015

See all articles by Joel Wood

Joel Wood

Thompson Rivers University - School of Business and Economics

Date Written: April 8, 2015

Abstract

This paper uses a representative agent model and Canadian data to calculate the optimal gasoline taxes for Ontario and the Greater Toronto-Hamilton Area (GTHA) in a second-best setting with pre-existing distortionary income taxes. The results suggest a second-best optimal gasoline tax (40.57 cents per litre in 2006 Canadian dollars) for the GTHA that is much higher than the current tax rate (24.7 cents per litre), and also higher than recently proposed increases. The resulting value is insensitive to whether the additional revenue is used to reduce taxes on income or to incrementally fund increased public transit infrastructure (The Big Move plan). However, in the absence of a regional tax, the second-best optimal gasoline tax for Ontario as a whole (28.51 cents per litre in 2006 Canadian dollars) is slightly higher than the current tax rate and in-line with proposed increases.

Keywords: Gasoline tax, externalities, Ramsey rule of taxation, Ontario, Toronto

JEL Classification: Q5, Q58, H23

Suggested Citation

Wood, Joel, Second-Best Optimal Gasoline Taxes for Ontario and the Greater Toronto-Hamilton Area (April 8, 2015). Available at SSRN: https://ssrn.com/abstract=2539814 or http://dx.doi.org/10.2139/ssrn.2539814

Joel Wood (Contact Author)

Thompson Rivers University - School of Business and Economics ( email )

900 McGill Road
Kamloops, British Columbia V2C 0C8
Canada

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