A New Method for Estimating the Effects of Fuel Taxes: An Application to Thailand

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Abstract
This article proposes a new methodology for estimating the impact of fuel price and tax changes on the general price level and the distribution of income and applies a model to Thailand using data for 1975–76 and 1981–82. Because the model allows for pricing under international competition where tax increases must be partially absorbed in reduced factor income rather than always being passed on in higher consumer prices, the results are significantly different from those generated by the more conventional cost-plus pricing rule. The inflationary impact of fuel tax changes is slight because of both the openness of the economy and the low energy intensity of manufacturing and other production in Thailand. In contrast, taxes on imports engender price increases not only for imports but also for goods which substitute for imports. The model also indicates that the net effects of taxes on petroleum products (other than kerosene) are progressive in their distributional impact, relative to a tax on imports or consumption. A main policy conclusion of the study is that fuel taxes could be used to increase both equity and allocative efficiency without inducing significant inflationary responses. It follows that in the current circumstances of falling world oil prices, developing countries could generate revenues needed for structural adjustment by increasing fuel taxes to maintain domestic petroleum price levels.

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