Shedding light on the appropriateness of the (high) gasoline tax level in Germany

Abstract

Germany imposes an energy tax of 0.65€/l on gasoline which is one of the highest tax rates across countries. The effective tax is even higher when accounting for the consumption tax levied on top of the energy tax. Answers to the question whether such a high tax level is justified on efficiency grounds would add precious arguments to policy discussion debating the appropriate level of a car driver׳s tax burden. This paper sheds light on that issue by calculating the optimal gasoline tax in Germany using an optimal tax approach that accounts for gasoline/diesel car substitution and interactions of the gasoline tax with the broader fiscal system. According to the baseline calculation the optimal gasoline tax is 0.96€/l, thus, exceeding the (already high) current tax level by 48%. The corrective tax component exclusively reflecting the externalities associated with car driving contributes 0.64€/l to that optimal level while the positive net effect of the interaction of the gasoline tax with the other distortive taxes in the economy adds another 0.32€/l. Sensitivity analyses reveal that the optimal tax is very unlikely to fall below its current level. Even quite the contrary, the optimal tax rises dramatically (to approximately two times the current rate) when account is taken of the medium/long term EU fuel economy regulation legislation aiming at tightening CO2 emission standards of passenger vehicles. All in all, the present analyses suggest that there is no reasoning on efficiency grounds for adjusting the current gasoline tax downwards given the present practice of mainly levying fuel taxes rather than charging individual car drivers on a distance related basis.