The role of labor-supply margins in shaping optimal transport taxes

Abstract

Transportation economists apply different labor supply models when examining transport pricing: (i) endogenous working hours; (ii) endogenous workdays; (iii) labor supply as a residual. We study whether the optimal level of transport taxes that changes the relative cost of labor supply margins is robust against the model applied. We find surprisingly strong differences in the level of optimal fuel and miles taxes and even variation in the sign of the Ramsey terms. For instance, the US and UK optimal fuel taxes vary up to 19% and 15% and the Ramsey terms up to 73% and 130%. Finally, we develop a recommendation for research on all issues that include decisions on commuting trips: Researchers should apply both a model of endogenous working hours and a model of endogenous workdays because the first provides the upper limit and the second the lower limit for optimal tax levels and Pigouvian and Ramsey terms.