The effectiveness of “flexible” specific taxation in stabilizing fuel prices. An empirical investigation on the Italian wholesale markets

In this paper we study the incidence of specific taxes in the Italian fuel markets, and exploit these findings to simulate the effects of fiscal policies aimed at mitigating oil price fluctuations. We estimate several reduced-form specifications, using as dependent variables the equilibrium wholesale prices for gasoline and motor diesel over the period 1996-2007. In particular, we assess the impact on wholesale gasoline and motor diesel prices stemming from the creation of an automatic fiscal mechanism consisting of a one-to-one reduction in specific taxes matching the rise in oil prices - a policy which has progressively gained political support after the sharp increase of oil prices experienced in recent years. Our simulations suggest that sterilization policies bring about an increase in the final wholesale prices. This evidence suggests that “flexible” taxation mechanisms, focusing on specific tax reductions (rises) to compensate oil price increases (decreases), could not be a proper policy for stabilizing price levels in fuel markets.