Should Gas Taxes Be Lowered?

[Remiel]

What exactly do you mean that the world price of oil is elastic from our standpoint? Something about your logic here seems suspect to me, but I would like to make sure that I am understanding what you mean properly first.

[August1991]

What exactly do you mean that the world price of oil is elastic from our standpoint? Something about your logic here seems suspect to me, but I would like to make sure that I am understanding what you mean properly first.

We can buy/sell as much as we want on the world market without affecting the world price.

Your local gas station faces a perfectly elastic demand curve and you, as an ordinary consumer, face a perfectly elastic supply curve. You, your local gas station and Canadians in general are price takers in the world context.

Edited May 25, 2008 by August1991

[Remiel]

Your local gas station faces a perfectly elastic demand curve and you, as an ordinary consumer, face a perfectly elastic supply curve. You, your local gas station and Canadians in general are price takers in the world context.

...Wha...?

August, why do you think that it is the individual supply and demand that count towards determining price and not the aggregate?

[August1991]

August, why do you think that it is the individual supply and demand that count towards determining price and not the aggregate?

Because the "aggregate" doesn't buy gasoline. You and I do.

As to supply, at $130 a barrel, Canadian suppliers don't matter and even the Saudi king is just another player.

[Remiel]

Supply does not matter? Supply of gasoline is determined at the refineries, not at the oil wells. That is why a sextupling in the price of oil has not caused a sextupling in the price of gas. Yes, you and I buy gas (or we would if I still drove a car). So do a 10+ million of our fellow Canadians. We are included in the aggregate of all demand for gasoline. Our supply curve is not elastic, it is inelastic. Our demand curve sure the hell is not elastic, it is inelastic. If demand was perfectly elastic, like you say, then gas stations would never be able to raise the price of gas because then no one would buy it at that price. But, that clearly is not what happens. The price of gas goes up, the purchase of gas goes down by a lesser amount. If the price of gas was elastic to anyone, we would have price wars a hell of a lot more often. But clearly we do not.

[Wild Bill]

Linked from another thread...

But should the federal government cut the excise tax? Why should gasoline be GST exempt?

The problem is NOT that there's GST applied to gasoline! It's the way it's calculated!

When Mulroney first instituted this unpopular tax we were told that it would simplify taxes and be more visible by removing the compounded tax situation often found with some products.

When it was applied to gasoline it became a unique exception. With gasoline GST is applied to the total after federal and provincial taxes. In effect, it is a tax upon a tax.

This puts gasoline in an enviable position for any government. No longer do they get a fixed tax revenue regardless of market fluctuations. If the price goes up, the net tax revenue also increases!

This gives the feds a clear incentive to allow the price of gas to climb through the roof!

To be a fair tax, GST should be calculated BEFORE the other taxes are added! This of course would be a much lower take and one that would not vary with changes in the pump price.

It's a gouge, plain and simple. Any and all taxpayers who understand it resent it! Governments get away with it because both major parties will not change it. So when you vote you can't make an alternate choice.

If you think about it, there are a LOT of such issues where we are not given a choice...

[margrace]

The last piece of 4 laning is being finished south of North Bay, the cost 400 Million, who pays for that?

[scribblet]

The problem is NOT that there's GST applied to gasoline! It's the way it's calculated!

.

If you think about it, there are a LOT of such issues where we are not given a choice...

There always are no matter who's in power, that's why we need more issues on the ballot.

I wonder what would happen if the gov't simply capped the price of oil, at say $1.00 a litre.

[oreodontist]

There always are no matter who's in power, that's why we need more issues on the ballot.

I wonder what would happen if the gov't simply capped the price of oil, at say $1.00 a litre.

What ould happen? Why would any gas station sell gas and lose 25 cents a liter? Why would traders pay world prices and then sell to refineries for less than they paid?

A trader purchasing Aramco oil for an Ontario refinery isn't going to get a drop for 1.10 a barrel when the other 50 traders on the international market are offering 1.30

What would happen? No gas.

[msj]

Your local gas station faces a perfectly elastic demand curve and you, as an ordinary consumer, face a perfectly elastic supply curve. You, your local gas station and Canadians in general are price takers in the world context.

Okay, I'm still scratching my head over the above. [i bolded the part above]

Oil demand has been considered inelastic in the short run because people still demand the same amount of oil (gas etc) even as prices increase.

If oil demand is elastic then consumers would demand less of the product as it goes up in price. In the short run this does not hold.

However, it does seem that as prices increase relatively substantially then neither elasticity nor inelasticity are truly perfect, especially over the longer run: people do find "substitutes" to reduce their demand for oil - we walk more, drive less (combine trips etc), ride bikes, buy smaller vehicles etc...

Which brings me back to your use of the term "elastic."

Are you sure you don't mean "inelastic" rather than elastic? And are you sure you want to leave the term "perfect" in?

[August1991]

The problem is NOT that there's GST applied to gasoline! It's the way it's calculated!

When Mulroney first instituted this unpopular tax we were told that it would simplify taxes and be more visible by removing the compounded tax situation often found with some products.

When it was applied to gasoline it became a unique exception. With gasoline GST is applied to the total after federal and provincial taxes. In effect, it is a tax upon a tax.

To the extent that the excise taxes reflect environmental or road fees, then the GST should apply to them. But let's follow your idea and exempt these excise taxes from GST and do away with the "tax upon a tax" as you call it. At the same time, we'll just raise the federal excise tax and the effect would be exactly the same as what we have now. Note that the excise taxes don't change as the world price of oil changes (and the retail selling price changes).

So, I don't quite understand your rant against the GST and Mulroney except that you don't like taxes. Neither do I but I'll admit that governments need to pay for the services they opffer us.

Oil demand has been considered inelastic in the short run because people still demand the same amount of oil (gas etc) even as prices increase.

If oil demand is elastic then consumers would demand less of the product as it goes up in price. In the short run this does not hold.

The market demand is relatively inelastic in the short run. My local gas station sees a perfectly elastic demand curve though. If he raised his price as little as one cent, he would lose all his customers. If he lowered it by one cent, his pumps would be working non-stop. IOW, he's a price taker just as Canadians in general are in the world market. Canadian consumers will bear the weight of a gasoline tax. Edited May 25, 2008 by August1991

[Remiel]

My local gas station sees a perfectly elastic demand curve though. If he raised his price as little as one cent, he would lose all his customers. If he lowered it by one cent, his pumps would be working non-stop.

Two questions: 1. Are you referring to the behaviour of your actual local gas station or a theoretical local gas station that you believe would behave in this fashion? 2. How do you explain the difference in prices between two gas stations within sight of each other under this perfectly elastic scenario?

Edited May 25, 2008 by Remiel

[August1991]

Two questions: 1. Are you referring to the behaviour of your actual local gas station or a theoretical local gas station that you believe would behave in this fashion? 2. How do you explain the difference in prices between two gas stations within sight of each other under this perfectly elastic scenario?

There are two stations on a corner near where I live and I was thinking about them. I recall once being in a station when the clerk received instructions to lower the price. Within seconds of changing the large sign, cars stopped to buy gas.

It happens sometimes that one station has a slightly higher price than others nearby. Perhaps it offers better service, loyalty points or the station is in a slightly better location. Some customers want to pay with a specific credit card. By and large though, each gas station faces an extremely if not perfectly elastic demand curve. Retail gas sales is an extremely competitive business.

In the same sense, you and I face a perfectly elastic supply curve. We can't generally negotiate the price we pay at the pumps.

[msj]

The market demand is relatively inelastic in the short run. My local gas station sees a perfectly elastic demand curve though. If he raised his price as little as one cent, he would lose all his customers. If he lowered it by one cent, his pumps would be working non-stop. IOW, he's a price taker just as Canadians in general are in the world market. Canadian consumers will bear the weight of a gasoline tax.

Okay, that makes sense.

Well, except that "perfect" is still not correct: you fail to account for the longer line up at the other gas station which would make it just as well for me to pay that $0.01 more in order to save time (and fuel spent while idling).

[Wild Bill]

To the extent that the excise taxes reflect environmental or road fees, then the GST should apply to them. But let's follow your idea and exempt these excise taxes from GST and do away with the "tax upon a tax" as you call it. At the same time, we'll just raise the federal excise tax and the effect would be exactly the same as what we have now. Note that the excise taxes don't change as the world price of oil changes (and the retail selling price changes).

So, I don't quite understand your rant against the GST and Mulroney except that you don't like taxes. Neither do I but I'll admit that governments need to pay for the services they opffer us.

The market demand is relatively inelastic in the short run. My local gas station sees a perfectly elastic demand curve though. If he raised his price as little as one cent, he would lose all his customers. If he lowered it by one cent, his pumps would be working non-stop. IOW, he's a price taker just as Canadians in general are in the world market. Canadian consumers will bear the weight of a gasoline tax.

i don't follow your math. My point was that a tax on a tax increases the net with increases in the price. You seem to be describing a new fixed excise tax as equivalent. That's where I get confused.

A fixed tax is subject to federal and provincial budgets. Theoretically they can be stopped or at least amended. With a tax on a tax the government's take just automatically goes up.

I also don't understand why you see no problem with the GST on gas prices being unique. Should I therefore assume you support the idea of the same situation being extended to anything else that is taxed?

As for the corner gas station raising and lowering his prices by 1 cent, perhaps you've never examined the situation. He may not have 1 cent of profit margin to play with! His refinery dictates his cost, often with a cost above the resale price and then kicks back with volume rebates. Even an independent must play ball or risk losing his supply.

There are other factors of course, just enough to legally confuse the situation so that it would be difficult if not impossible to make a price-fixing charge stick. In reality of course that's exactly the way it is.

BTW, in my part of the country Petro Canada was always the first to raise their price and the last to lower it. That's why I've always refused to buy from them.

[eyeball]

In the same sense, you and I face a perfectly elastic supply curve. We can't generally negotiate the price we pay at the pumps.

Canadians enjoy lower drug costs because their provincial governments can negotiate a lower collective price with drug companies. Perhaps we should do this in lieu of a standard oil nationalization scheme.

[Riverwind]

Canadians enjoy lower drug costs because their provincial governments can negotiate a lower collective price with drug companies. Perhaps we should do this in lieu of a standard oil nationalization scheme.

A policy that has led some drug makers to delay or forego selling certain drugs into the Canadian market. There are plenty of willing buyers for oil at market prices right now which means no one in their right mind would 'negotiate' lower prices with the Canadian government. Such a policy would inevitably lead to oil shortages in Canada.

[msj]

Almost totally off topic, but since we were talking about elasticity and inelasticity I can't help but point out this little article: Spam: The Ultimate Inferior Good?