[Viewpoint]Easing the oil burden

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[Viewpoint]Easing the oil burden

Oil prices have kept on soaring since 2003 and the burden on consumers has increased continuously. Some years back, people complained that 1,000 won per liter($4.08 per gallon) of gasoline was too expensive, but in retrospect, those was the good old days. At some gas stations now, they already charge over 1,700 won per liter.
From the perspective of a consumer who cannot take part in the process of pricing, it seems absurd to pay such a high price for oil. Although it is common knowledge that Korea has to rely on imports for all its oil consumption, we cannot help but lay the blame on the government and oil firms for continuous oil price hikes.
At the National Assembly’s annual inspection of the administration, the problems related to excessive profiteering of oil firms and the opaque structure of oil pricing systems have been pointed out as the cause for high oil prices. And the Fair Trade Commission has recently imposed additional penalties on oil firms for conspiring to fix prices of some oil products.
It is natural, therefore, that consumers do not see oil firms in a favorable light. They are criticized for raising consumer oil prices immediately when oil prices rise in the international market, but not lowering them to the minimum when those prices fall.
Then, should oil firms be held responsible for the price increase of oil products at home? Recently, Korean media outlets have started to carry reports that the taxes on oil products are excessively high compared to those of other countries. Some of them have even used the expression “tax bomb” in their articles. In practice, the tax on gasoline and diesel fuel is 60 percent and 50 percent respectively. And the Ministry of Finance and Economy has recently announced that it plans to raise the tax on diesel oil for the reason that diesel oil causes more environmental pollution than other oil products.
The Ministry of Finance and Economy explained, through a press release, that “the tax on oil prices in Korea, which is 57.7 percent, is lower than that of other advanced countries such as France, which is 67.3 percent, the United Kingdom’s 64.7 percent and Germany’s 63.1 percent. However, in the case of Japan, the tax on oil is 41 percent, Australia 38, Canada 31 and the United States 14 percent.
If we consider the economic standing of these countries in the world economy, instead of nominal tax rate figures, Korea’s tax on oil is the highest level in the world.
If the gas price in Korea is 100 considering the gross national income, the price in Japan is 32, in Australia 29, in Canada 28 and in the United States 17, according to the International Energy Agency. And if Korea’s tax on oil is 100 considering the gross national income, the tax in Japan is 23, in Australia 19, in Canada 15 and in the United States only 4.
After all, taxes are one of the means for government intervention to correct the errors of the market when the latter fails. However, government intervention cannot be justified, even if there is a market failure. And government intervention can cause, more often than not, bigger problems than it solves.
That is, the excessively high tax on oil and inflexible tax policy will restrain necessary consumption by taxpayers and can ultimately cause social loss.
The government has to secure a certain level of revenue from oil consumption to keep balanced finances on the one hand, and it has to prevent excessive increases in oil consumption by manipulating the rate of taxes on oil, on the other.
However, it is a problem if the government evades responsibility for alleviating the pain of the grassroots people who suffer from high oil prices.
The fact that the consumption of illegal fuel additives has increased recently has also to do with the excessively heavy tax burden on oil. Considering the role oil prices play in the production costs of Korea’s exports, the government must take measures to secure the competitiveness of our products by lowering taxes on oil.
A tax on oil is ultimately a policy matter that is decided by the government. If the government does not lower taxes on oil, oil consumption will be restrained and it will cause discomfort to the consumer. An increased oil tax will bring only indirect benefits to the people through various welfare programs supported by tax money. On the other hand, if the government lowers the tax on oil, as a short term measure to stabilize oil prices, the economic burden on people will be reduced instantly. In the present situation where oil prices are soaring, I hope the government chooses wisely between these two alternatives.

*The writer is a professor of economics at Hanyang University. Translation by the JoongAng Daily staff.

by Yoon Won-cheol
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