The impact of suspending fuel taxes on welfare
Date
2023-01-10
Authors
Regala, Christine Venice E.
Remigio, Raphael Gavin G.
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Abstract
Fuel is a vital commodity that is used in almost all transportation services around
the world. Thus, increases in its price produce inflationary effects on the economy.
A big part of this price is the 12% VAT tax and, depending on the type of fuel type,
excise taxes, which have been increased further by the TRAIN law. This paper
utilized the Extended Linear Expenditure System to compute the demand
elasticities of fuel. Simultaneous equations were employed to instantaneously
regress the expenses on different goods with respect to each other. The study found
that a suspension in fuel taxes, which would lower the overall price of fuel and
increase the disposable income of households, would reduce the quantity demanded
for fuel products as households reallocate their income to other commodities, which
would increase their utilities more. We observed that an increase in fuel prices
would lower households' income so much that they would forgo buying other goods
in favor of more fuel. Moreover, families were found opting to buy other substitutes
than fuel if it is available. Both of these effects are more felt by poorer households
because of their greater relative magnitude compared to other income groups,
which implies that a suspension of reduction tax would be helpful to them the most.
The paper suggests that policymakers opt for discriminatory taxing schemes to
balance extending help to the poor while still generating revenue from the rich.
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Keywords
fuel, tax, welfare, household