Second-Best Optimal Gasoline Taxes for Ontario and the Greater Toronto-Hamilton Area
25 Pages Posted: 19 Dec 2014 Last revised: 9 Apr 2015
Date Written: April 8, 2015
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: Suggested Citation