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Does Britain or the United States Have the Right Gasoline Tax?

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Author Info
Ian W. H. Parry
Kenneth A. Small

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Abstract

This paper develops an analytical framework for estimating the second-best optimal gasoline tax, accounting for passenger vehicle externalities and the efficient balance between excise taxes and labor taxes in financing the government's budget. We estimate the optimal tax for the United States at $1.01/gallon, which is 2.5 times the current rate; for the United Kingdom, the optimal tax of $1.34/gallon is about half its current rate. However, welfare gains from replacing fuel taxes with per mile taxes are large for both countries. If taxes were on mileage rather than fuel, UK motorists would be undercharged rather than overcharged at current revenues.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 4 (September)
Pages: 1276-1289
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Handle: RePEc:aea:aecrev:v:95:y:2005:i:4:p:1276-1289

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  22. Parry, Ian & Small, Kenneth, 2002. "Does Britain or the United States Have the Right Gasoline Tax?," Discussion Papers dp-02-12-, Resources For the Future. [Downloadable!]
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