Fred Lum/The Globe and Mail
Mike Moffatt is a chemical industry consultant and a Lecturer in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business
A third question on the proposed HST gasoline tax cut from readers:
"If we give people money to compensate them for higher gas prices, won't they spend a lot of that money on gasoline? How does that help the environment?"
An excellent question. If we give families, on average $150, some of that money will be spent on gasoline. But how much?
We will consider the situation for a typical Ontario household. The median household earns roughly $70,000 a year, so after income and payroll taxes, its take-home pay is roughly $50,000 a year. Assuming the family does not have to pay payroll taxes or income taxes on the $150 rebate cheque, its after-tax household income would rise by 0.3 per cent.
Next we need to know how a family's gasoline consumption changes as its income rises. Economists have a term for this: "The income elasticity of demand", which measures how responsive consumption is relative to income. An income elasticity of 1.5 indicates that for a 1 per cent rise in income, consumption would increase by 1.5 per cent.
A meta-study by Espey (1998) examines the literature on the subject and finds that, in the median study, the income elasticity of demand for gasoline is 0.39 in the short-run and 0.81 in the long-run. Since incomes are rising by 0.3 per cent, we can estimate that gasoline consumption for this family would rise by 0.12 per cent in the short-run and 0.24 per cent in the long-run.
Increasing the take-home income of families does increase their gasoline consumption. However, these increases (0.12 per cent, 0.24 per cent) are nearly an order of magnitude smaller than the estimated increase from halving the HST on gasoline (0.9 per cent, 2.0 per cent).
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