Gasoline Tax Rates from the Perspective of Optimal Taxation Theory: Comparison among Japan, the U.S., and the UK

There is a great discussion about controlling the energy consumption by economic means from the necessity to reduce the greenhouse gas emissions. However, there was no discussion as to what the desirable tax rates should be when reform of the system of tax revenues earmarked for road projects was discussed, and the discussion instead centered on temporary tax rates. With regard to levels of tax rates for gasoline, the desirable tax rate should be studied in a way that also takes externalities into account. From the standpoint of an environmental tax that bears external expenses, this paper calculates the optimal tax rate on gasoline in Japan by using the framework of Parry and Small (2005) and the parameters of external costs used in Kanemoto (2007). To be specific, I assume a world in which the only taxes are the gasoline tax and labor income tax, and I calculate tax rates for gasoline and labor income that the government would maximize social welfare under tax revenue neutral.

The optimal tax rate for gasoline that I derive from this analysis is ¥118.3/liter as the first-best and ¥142.4/liter as the second-best. The current gasoline tax in Japan (¥53.8/liter) is approximately half this estimated optimal level. Among the factors that compose the optimal tax rate, the impact of external congestion cost is substantial, and thus from the perspective of external costs it is desirable to implement policies to eliminate congestion. As uncertain parameters such as estimates of external costs are substantial, it would be preferable to interpret estimates as having substantial ranges. Nevertheless, from the standpoint of the burden of external costs it is obvious that there can be no justification for policies to abolish the temporary rates for gasoline and lower the rates for gasoline taxes.