Question

Economists regularly suggest that the United States needs to raise the gasoline tax.

a) The following table lays out the share of expenditures spent on gasoline and motor oil by households with different levels of income. Using the table, a higher gasoline tax would be

• regressive because higher income groups pay more in gasoline tax.

• regressive because higher income groups pay a lower proportion of income in gasoline tax.

• progressive because lower income groups pay less in gasoline tax.

• progressive because higher income groups pay a lower proportion of income in gasoline tax.

b) The data for the table come from 2014. Between 2014 and 2015, the price of gasoline fell sharply.

You would expect spending on gasoline as a share of total spending to have

• increased unless people bought a lot less gasoline.

• stayed the same no matter if there was any change in quantity or not.

• decreased unless people bought a lot more gasoline.

Income	Spending on Gasoline as
	Percentage of
Level	Total Expenditures, 2014
Less than $70,000	5.3%
$70,000–$79,999	5.1%
$80,000–$99,999	5.0%
$100,000 and more	3.6%
Source: Bureau of Labor Statistics.

Answer 1

1. The higher gasoline tax would be regressive because higher income groups pay lower proportion of income in gasoline tax because their spending on gasoline as a percentage of total expenditure is less for higher income groups than the lower income group which has the implication that the lower income group despite of lower earnings end up paying more tax. The correct option is (b).

2. If the price of gasoline fell sharply: then if the quantity bought stays same then the expenditure falls as a percentage of total expenditure. If the price fell and quantity bought increase proportionately more than the price fall, the expenditure would increase otherwise the expenditure percentage will fall. Thus the correct option is (c) that is decrease unless people bought a lot more gasoline that is quantity effect outweighs the price fall effect.