On the economic policy in France, a powerful tool is used : the TIPP : « Taxe Intérieure sur les produits pétroliers », interior tax on oil products.
In the end of December 2003, this tax represented 60 percent of the price of oil in France. Hence, the average price of « sans plomb 95 » (one brand of oil) was 98.7 euros total taxes, 23.6 euros without taxes. The taxes TIPP represented 75.09 euros.
This TIPP provides a good percentage of the budget of the government. The expenditure on oil was inelastic in prices, the government can increase the price without risks. This tax has the advantage to reduce the interior consumption of oil, that implies on the reduction the energy dependance vis a vis of the others natural sources of energy.
Now, we can analyze the impact of this tax with a program of tax credit in France,”Le credit impôt”. This is a particular program to help and boost the consumption. It’s a rebate is a total or partial reduction performed on the amount of tax payable by the taxpayer : it differs from an abatement or exemption that affect the tax base, or reduced participant tax calculation .
The initial budget constraint is AB, and the consumer maximizes its utility under the indifference curve U2 by consuming the level of goods in C, buying 1200 liters of oil and expends 13 800 euros for another good.
If the tax is equal to 50 cents by liter, the price increases of 50 percent, shifting the new budget constraint to AD.
With the elasticity of price of -0.5, the consumption will decrease of 25 percent, from 1200 to 900 liters, represented by the point E maximizing the utility under the indifference curve U1. For a increase of 1 percent of the prices of oil, the quantities demanded decrease of 0.5 percent.
However, the program of credit credit impôt influence this effect.
For example, the surplus by person of the tax is equal to 450euros (900 liters x 50 cents per liter), each consumer receive a credit impôt of 450 euros.
How this increase on income can affect the consumption of oil ? The effect can be show graphically by shifting the curve of the budget constraint.
Which quantity of oil our consumer will be buy now ?
The elasticity of income of the demand of oil is on average equal to 0.3. Because 450 euros represents the increase of 3 percent of income (450 euros/15 000 euros=0.03 ), we can conclude that the reduction fiscal increases the consumption of 0.9 percent (0.3 x 3 percent) of 900 liters, or 8.1 liters.
The new choice of consumption maximizing the utility on H reflect this. With the program of credit impôt, the tax could reduce the consumption of oil to 291.2 liters, from 1200 to 908.8 liters. The elasticity of income of the demand of oil is relatively « low », the effect of income of program of credit impôt is dominated by the effect of substitution,(The substitution effect is one component of the effect of a change in the price of a good upon the amount of that good demanded by a consumer) and the program with the credit impôt decrease a lot the consumption.
A tax on oil good is putting in application when the consumer buys initially 1200 liters of oil on the point C. After this tax, the budget constraint shifts from AB to AD and the consumer maximize its preferences by choosing the optimal point E, with a consumption of oil equals to 900 liters. However, when the surplus of this tax is redistributing for the consumers under the form of credit impôt, the consumption increases to 9O8.8 liters on the point H. Despite this credit impôt, the consumption of oil by the consumer decreases and the level of satisfaction decreases also.
The figure 1 shows that the tax program on the oil products tends to increase the poverty of the consumers who has a low income, because H is under the indifference curve U2. Some consumers with a low income have a real surplus from this program if for example, they consume on average less oil than the group of consumers which the consumption determined the credit impôt.
In conclusion, by the introduction of this tax, the effect of substitution induces the poorest consumers.
So, we can ask us, why introduce this type of program ? Nowadays, the aim is to reduce the dependance of natural energy and to promote the protection of the environment and find a new way to have less pollution.