Tax oil

No one is going to like this – except, perhaps, Emmy Boncodin. But it is a most reasonable thing to do.

Two things are happening simultaneously and separately: oil prices are climbing down in the aftermath of a quick war in the Middle East and our fiscal deficit is climbing up and threatening to overtake projections.

A slight decline in oil prices will not push down the inflation rate. Drivers and operators will not decrease fare rates. Manufacturers and retailers will not bring down the price of goods if pump prices are brought down a few pesos.

Our economic experience tells us that prices of goods are downwardly inflexible. Whatever gains there might be from cheaper fuel are converted into private profit.

One the other hand, a large fiscal deficit will push up interest and inflation rates. It will invite adverse speculation against our currency. It will constrict public investments required to foster our economic expansion.

In a word, slightly lower pump prices for fuel will not significantly benefit our people. It will bring joy only to the rich who own American cars with large engine displacements.

A higher budget deficit, however, will penalize the poor. A weaker currency and higher inflation and interest rates will push up commodity prices. Less public investments will keep unemployment high and social services scarce.

The masterstroke in a situation like this one is to impose an oil levy.

We have already paid the inflationary premium for current pump prices for fuel. That current pump price level has been accepted by the market. We are used to paying this much for fuel.

Whatever benefit there is from declining world crude prices ought to be converted into public dividends to serve the public good.

An oil levy means that government collects the difference between current pump prices and the much lower costs of crude. That difference could spell billions in new revenues for a cash-strapped government.

Those billions from the oil levy could be used to fund new school buildings, better primary health care, tightly targeted agricultural support and new bridges. All of these will bring down the level of misery of the poor and support economic expansion that will create opportunities for the presently unemployed.

Most nations rely heavily on taxing fuel to fund public economic investments. It is wise to do so. Fuel taxes are easiest to collect.

Taxing fuel is also prudent. It is a consumption tax on the most income elastic commodity. Income elasticity means that the higher one’s income, the more disproportionately higher one’s consumption of fossil fuels tends to be.

A guy who drives an Expedition consumes a hundred times more fuel than a bus rider. In the bad old days, when fuel prices were subsidized under a regime of nationalization, the Expedition owner enjoyed a hundred times more of the subsidy than the poor bus rider.

Taxing fuel is also a moral thing to do. Burning fossil fuels causes tremendous pollution that, in turn, implies social costs (such as health care) borne largely by the public sector. It is right for the public sector to draw revenues from the use of fossil fuels.

Because of the populism that polluted our policy-making, we have one of the lowest fuel taxes anywhere in the world. Consequently, fuel prices here are among the cheapest, and its use is among the least prudent. It is cheaper, obviously, for bus operators to spew black smoke on pedestrians due to inefficient fuel combustion rather than regularly tune up their bus engines.

The social costs of fuel priced at the dictate of populists simply multiply – to the final disadvantage of us all.

Public opinion will, of course, be inclined towards instant gratification. Most people would want the short-term benefit of lower pump prices and will refuse to understand the long-term benefits to our nation’s development of an oil levy.

The poor, who will be most benefited by an oil levy, do not quite grasp the beneficial consequences of this re-venue mechanism. The rich, who will be immediately benefited by lower pump prices are quick to protest the levy. The populist politicians are even quicker at objecting to measures that will have long term-benefit in the name of palpable instant gratification.

As world crude prices climb down, government faces a short window of opportunity to impose an oil levy.

That will send a very strong signal to the investment community that this government is taking definite steps to contain the budget deficit – especially in a pre-election year. It will convince everyone that the present administration has the political will to do what is fiscally right.

An oil levy will also buy us relief from the chronic problem of revenue shortfalls until such time when our legislators find the wisdom to pass the revenue administration reform bill.

An oil levy must be imposed now. Otherwise the window of opportunity closes and we will be heir to the twin evils of higher inflation and a weaker currency. Beyond that, investors will continue to believe that this administration is unprepared to do what is right and inclined to succumb to what is merely popular.

As a fringe benefit, imposing an oil levy now will prevent Lito Camacho’s hair from turning white and cause Emmy Boncodin to smile more broadly.

Leftist groups and populist politicians will – predictably – seize the opportunity to raise a ruckus in the streets demanding an immediate rollback in oil prices. They are addicted to bringing public discourse to the lowest common denominator.

Government simply has to make its case before the public. It is a strong case. Our public is an enlightened one – if politicians desist from baby-talking to our people and if our leaders persist in addressing our people at a high level of statesmanship.