July 14, 2007

Impact of Subsidies vs. Taxes on Gas Prices

Recently, Kenpo commented on my article from 2005 regarding oil company profits vs. Federal revenues. He observes:
on the "government making gas so expensive" front, isn't gasoline subsidized by the Federal government? In European countries where it isn't, gas is the equivalent of $5+ per gallon. Or so I've heard it said... - Kenpo
In reply to this, I have 4 points:

Primary Focus is Profit, not Price

First, the primary focus of my article was on profit, not price. Essentially, I was just pointing out how hypocritically it was for politicians to complain about corporate profits when the government itself profits more from the same industry.

Gas Price is Still Raised by Gas Taxes

Furthermore, regardless of government subsidies, the effect of government tax policies is still to raise prices. Furthermore, it should be noted that while these officials berated the oil companies for profiting off rising gas/oil prices, their response was not to attempt to lower their own contribution to the high price, or even to enact price controls (which would have been a bad idea, but would at least been an idea that attacked the alleged problem). No, their response was to recommend that government should increase taxes, which could only influence the price of gas by increasing it even more!

Government Taxes Exceed Subsidies

However, a limited amount of research turns up the following figures:
Subsidies$35 billionGreenpeace
Revenues$60 billionTax Foundation
Net$25 billion

Although the Greenpeace data is from 1995, the TaxFoundation article shows that government gas revenues remained at a fairly constant rate until 2004 (in fact, I think gas taxes have increased since then), and I suspect that subsidies did not change much either. Add to this government requirements on fuel blends, inclusion of expensive alternative fuels like ethanol, etc. and despite the subsidies, it seems quite reasonable to conclude that the government's influence on gas prices is to raise them, not to lower them.

European Gas Prices: Case Study

Finally, I do not know a whole lot about European gas policies, but I suspect the reason European gasoline is so expensive has to do with similar government controls and taxes that are more restrictive and higher than our own. For example, according to Wikipedia, average US gas taxes (state & federal) are around 42 cents per gallon. In contrast, German taxes on conventional gasoline amount to about 65 cents per liter, or about $2.46 per gallon, over 5 times US tax rates.

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