taxation, growthOn the basis that not only has there been a reduction in the total volume of fuel purchased despite its relative inelasticity, I would suggest that the increase in disposable income that would come form cutting fuel duty would create growth.
Is it that simple? The retail and leisure sectors would benefit from any increase in disposable income, assuming it was spent and not saved.
I’ve stated “in the UK” as we have a particularly high rate of fuel duty in relation to other countries.
It is hard to say without having past data about fuel prices in the UK. I strongly suspect that the effect on GDP will be negligible in the short run and small to average in the long run.
Please remember also however that using fuels leads to negative externalities (pollution, congestion) and thus a part of the duty is justified even on efficiency grounds.
The effect on income is not obvious as government expenditures are included in GDP and, I assume, the government spends the tax revenue.
If all of the usual neoclassical assumptions hold, then removing a tax will eliminate what’s known as the dead-weight cost of taxation. In short, the market decisions that individual agents would make are distorted by the tax, causing an efficiency loss. But, the usual assumptions don’t hold. For example, as @user68 points out, petrol consumption yields negative externalities–including the more mundane wear-and-tear on the road system and congestion along with environmental externalities.
In answer to your question, then, it is not so simple unfortunately. It seems that the same argument could be constructed against any tax.
All content is licensed under CC BY-SA 3.0.