Guide Through the Fuel Taxation Jungle

The two major theories in the field of optimal taxation are the Ramsey rule of efficient taxation and the Pigouvian tax. As is the case with most economic theories, they are based on stark simplifications. In this thesis I show that, using a multiple regression model with time fixed effects, although merits accrue to both theories, neither one succeeds at properly explain the excise rates that countries charge on both gasoline and diesel. Based on a panel of 20 countries monitored over 29 years, numerous other factors have been found to lead countries to choose a higher or lower excise rate than can be explained by the two theories. The theories may still drive actual taxation policy. However, other variables can cause the observed excise rates to deviate from the optimal level prescribed by either of the two theories, which are thus insufficient to fully explain the taxation policy