People in the UK don’t want to pay more fuel tax

And I’m not bloody surprised either.  They already pay a very significant fuel tax, one that I feel covers the externalities associated with their fuel consumption.  When you have an externality, the government should tax to the point where the marginal cost of consumption is equal to the social marginal cost of consumption, taxing anymore than that is government failure.

However, in New Zealand we should pay more fuel tax, and I know one guy that agrees with me

What do you think?  (bonus points for picking up the obvious economic inconsistencies in the above article, as it will give me the opportunity to say what I really think)

  • JamesE

    The incosistency here is that a person’s need isn’t always commensurate with their ability to pay for that need. A poor person’s degree of need may be greater than a more wealthier person’s need, but the wealthier person may be able to bear it with equamity despite their need being less. It would be very difficult, if not impossible to structure the tax to reflect this.

    Perhaps they should just use their current funds more efficiently rather than tax us more to hide their current inefficiencies.

  • Matt Nolan

    By need, I assume you mean the relative value of that good to the individual. Now value is subjective, first we could say that price represents the value of the good to the person. Now a wealthy person may be willing to pay more for a good, but willing to pay a lower proportion of their income to use that good. In this case a poorer person may have a greater need.

    Now you are saying that since someone is poor, their opportunity cost from having to pay the tax is greater than for someone who is wealthy. I agree with that. However, their actions are still having a negative impact on the rest of society, and so they should have to pay for it.

    Now, why don’t these ‘poor’ people take the bus? In fact, many of the very poorest people do. The group with the most inelastic demand for petrol (so the group that will ‘suffer’ the most) are middle income folk.

    Also, a fuel tax is different to income tax, in that a fuel tax is set to make the social cost of driving equal to the actual cost to the driver. If the cost is lower (which it is without a tax) then the driver is actually being subsidized to drive by society, a tax corrects that. An income tax is around solely to make revenue and ‘redistribute’.

    A fuel tax does increase efficiency, while an income tax decreases efficiency. The great thing about a fuel tax is that is creates revenue that can be used to improve public transport and the such.

    Now if you are determined to say that poor people suffer, as they are poor and being taxed, then the solution is simple with a tax. Rebate the poor, give them fuel vouchers or increase their benefit to make them just as happy as before. In that case fuel consumption still falls, as the wealthier people are being taxed.

  • JamesE

    Matt Nolan.

    “Now, why don’t these ‘poor’ people take the bus?”

    What if the bus doesn’t go where they’re heading? What if the goods they need to take with them is beyond the carrying capacity of the bus?

    “Rebate the poor, give them fuel vouchers or increase their benefit to make them just as happy as before.”

    Like we need more public servants lol. The cost to administer the scheme would likely amount to more than the savings from the improved “efficiency” and increased convenience of the other road users. So in effect you’re saying that only the wealthy are worthy of using the roads as they’re better able to justify it in monetary terms.

    As it is the “poor” pay more for petrol as a proportion of income as they have to make do with less fuel-efficient cars. To expect them to pay even more for the sake of a richer person’s convenience is ludicrous. The only externalities that car drivers force others to bear are pollution and drivers who don’t have insurance. Trying to fairly account for everyones pollution impact on everyone else would be an administrative nightmare. Why should car drivers be singled out just because they’re a convenient target? The other can be sorted out with a Pay at the Pump Insurance scheme like is proposed in the US. http://www.rff.org/Documents/RFF-DP-99-14-REV.pdf

    How about we call for a freeze on tax increases and tell the pollies/beauracrats to use our money more efficiently or else we’ll sack ’em? Makes much more sense.

  • Matt Nolan

    Like I said earlier, the group that actually spends the largest proportion of its income on car travel, and the group with the most inelastive demand is actually the middle class, people around the average wage.

    Now, I take a bus everywhere, that is fine for me since I live in Wellington and there is lots of buses. If petrol was taxed, then the bus service in other regions could be improved so that it acted as a substitute to taking a car. Of course if people have to give up cars they have to sacrifice something, but I don’t agree with the term need, it is too absolute and doesn’t apply to much apart from the necessities of life. As the necessities of life are still avaliable when you take a bus, it doesn’t impact on a persons needs.

    I don’t think we should rebate the poor either as it is unnecessary. However, I don’t think a coupon system that was given out with the benefit would lead to a large increase in public servant numbers. The coupon thing was an example, for people who seem to think society is out to bully the poor.

    Now, i’m not saying that people should be paying more for petrol for convenience, I want people to pay for the environment and health costs they have on society. The most efficient way to deal with that is to get people to pay the full social cost of their action. It is the same with ciggaretes, they hurt other people, they take up a larger amount of a ‘poor’ persons income, yet it is still fair to tax that.

    Since carbon emissions depend on the amount of fuel you consume, I don’t think it would be an administrative nightmare to put a per litre tax on petrol, all it involves is increasing a number that the government already admisters. Like I said earlier, a petrol tax is very different to income tax. The ultimate goal is to make a petrol tax ‘revenue neutral’ so that all the money that comes in is invested back to solve for the externality, in this case by paying off liabilities from the Kyoto protocol, funding improvments in public transport etc.

  • rauparaha

    I’m curious about the kind of dynamic modelling the guy did in the article you cite from Infometrics. I’d really like to see the work that went in to those numbers he uses: it must have been quite a technical exercise coming up with data like that on traffic flows and the time cost to people!

  • Matt Nolan

    Hahaha. If it makes you feel better there have been quite significantly technical studies that have come up with similar numbers for the cost of driving. As its a sort piece not everything I would have like to discuss was in their. The main point of the article was to tackle the political economy question of whether petrol taxes were fair, compared to the externality type question we would normally cover. However, I think on equity grounds a petrol tax is fair, make people pay the full cost of their actions.

  • JamesE

    “Like I said earlier, the group that actually spends the largest proportion of its income on car travel, and the group with the most inelastive demand is actually the middle class, people around the average wage.”

    Thats assuming that they a) hurts them sufficiently enough to change their behaviour or b) don’t just get angry and demand the fools who implemented the tax to dismantle it. Just look at the outcry of Aucklander’s after the call to charge an extra 5 cents on the fuel tax in Auckland, which would all be spent on public transport.

    No one least of all the middle classes like pollies or beauracrats telling them what is or isn’t good for them. It never ceases to amaze me that Labour or my Party leadership hasn’t wised up to this yet (Greens, may suprise you).

    Petrol prices are going to increase in the future anyway particularly when our dollar drops, which it inevitably will, so I don’t see a point in implementing yet another unnecessarily punitive tax.

    “The most efficient way to deal with that is to get people to pay the full social cost of their action. It is the same with ciggaretes, they hurt other people, they take up a larger amount of a ‘poor’ persons income, yet it is still fair to tax that.”

    The old tabacco tax argument. Its been demonstrated in various studies that the revenues collected from tabacco taxes far exceed any externalities that result from smoking. Its just a cynical and transparent revenue generating exercise by the government and environmental taxes will no doubt be any better. http://www.cato.org/pubs/regulation/reg20n3c.html

    I think that anti-smoking and environmental lobbyists over estimate the power that punitive taxation has to change peoples behaviour. I believe a better tactic would be generally better awareness and education regarding the costs of their behaviour, regulation of the production activities of the energy/tobacco industries, and the provision of superior alternatives.

    http://www.ash.org.uk/html/regulation/html/additives.html
    “When the Swedish CO2 taxes were first introduced in January 1991, their rates varied according to the average carbon content of different fossil fuel types, but they were applied equally across “basic” users (households and non-manufacturing industries) and industries (mining, manufacturing and horticulture.”
    http://www.iisd.org/greenbud/sweden.htm

  • JamesE

    As an addendum. Why should “consumers” bear the costs of their government’s incompetence and short-sightedness?

    “Does Russell’s (co-leader of Greens) statement mean the Greens are the first party to admit that the utopian quarter acre sections policy of Seddon and most subsequent governments is the root cause of most of New Zealand’s woes? Especially our car dependence and ridiculous urban land prices. After all, not allowing sensible section sizes during the first three-quarters of the 1900s meant New Zealanders were denied the choice of living in anything other than low density suburbs, a feat that even Los Angeles wasn’t stupid enough to try. So its not really surprising that Auckland has much worse traffic congestion than L.A. and even less likelyhood of ever solving it.”

    http://blog.greens.org.nz/index.php/2007/06/22/stabilising-the-housing-market/
    http://www.oilcrash.com/articles/auck_iss.htm

  • Matt Nolan

    I think that we are debating at cross purposes. There are definitely many things that we would agree with in a positivist sense, such as that cigarette taxes have been set too highly in some countries. This is an example of government failure, when the government starts using the tax as a revenue gathering device, instead of using it as a way to fix an externality. However, the only way to discuss this objectively is to talk about it in normative terms. In those terms there is scope for a fuel tax to improve outcomes, the question is how big the tax should be.

    Now the original point of this post was to say that the UK should not have higher petrol taxes, as that would be a case of government failure since the tax already covers the externality effect of driving. However, in NZ our fuel tax is a lot lower, and so does not cover the size of the externality and should be increased.

    Now I fully agree with you that education is a useful tool, however there is scope for fuel taxes and education on fuel efficiency to work in tandem.

    Also to the addendum, why should consumers bear the cost of government incompetence? As we are talking about externalities, I don’t see how government incompetence comes into it. Ultimately if we want to solve congestion, we form private-public partnerships where roads are leased out and private sector firms change tolls. A government that understand the importance of the market can do a lot to further the development of a country, focusing on mistakes that have been made doesn’t help improve outcomes.

  • JamesE

    Matt Nolan

    I think that we are debating at cross purposes.
    Perhaps we are, but any debate whether on topic or not is only healthy as it stimulates sharing of points of view and opening up your view to challenge your arguments is only beneficial in putting your methedology and logic up to scrutiny.
    http://economistsview.typepad.com/economistsview/2007/04/the_benefits_of.html

    In all honesty I wasn’t quite sure what “incosistency” I was originally supposed to be debating as the original comment was pretty vague.

    “I don’t see how government incompetence comes into it.”
    Because due to government short-sightedness and incompetence we’ve increasingly become more dependant on cars. See the above links.

    “A government that understand the importance of the market can do a lot to further the development of a country, focusing on mistakes that have been made doesn’t help improve outcomes.”

    The market is very good in some circumstances, but PPPs are just asking for manipulation, exploitation, and corruption. Look at the Sydney Cross City Tunnel in Australia.

    http://wsws.org/articles/2005/oct2005/tunn-o21.shtml

    http://www.smh.com.au/news/national/wrong-method-costing-state-billions-report/2005/10/26/1130302838987.html

    http://www.notolls.org.uk/oct05news.htm

    http://www.smh.com.au/news/editorial/light-at-the-end-of-the-tunnel/2005/10/21/1129775957104.html

  • JamesE

    The most important link.

    “Receivership light at tunnel’s end.”
    http://www.smh.com.au/news/business/receivership-light-at-tunnels-end/2006/11/16/1163266711907.html

  • Matt Nolan

    I think its a little inconsistent to criticize government solutions, the market solution and potential institutional solutions (such as PPP’s) ultimately their are issues no matter what solution we choose to a specific externality, we just have to weigh up the costs and the benefits and choose the best one.

    Now, the fundamental question in the post was, do you think we should pay more fuel tax? I think that was relatively straightforward. I’m stating here that a fuel tax makes sense for solving environmental and health related externalities from fuel consumption.

    If you want to talk about congestion instead, the solution is toll roads, make people who want to take a car to work pay for the lost productivity of all the people they are holding up.

  • JamesE

    Matt Nolan.

    “I think its a little inconsistent to criticize government solutions, the market solution and potential institutional solutions (such as PPP’s) ultimately their are issues no matter what solution we choose to a specific externality, we just have to weigh up the costs and the benefits and choose the best one.”

    I’m not criticizing the solutions per se. I’m criticizing how they’ve been implemented.
    I don’t trust our pollies/beauracrats not to make the same mistakes as made by others re. PPP. For a good example, care of the Labour government see the deal they’ve made with Fulton Hogan. http://blog.greens.org.nz/index.php/2007/03/21/an-open-cheque-book-to-fulton-hogan/

    “Now, the fundamental question in the post was, do you think we should pay more fuel tax.”

    No, I think it would be pointless to expect road users to pay even more tax on top of what they already pay in order to pay for “environmental/health externalities” and covenience of other road users. As I said before its in effect a tax on the less wealthy to pay for the convenience of their wealthier fellow road users.

    A better route to go is. a)regulate the fuel companies to produce cleaner petrol. It has worked in Sweden and it worked here regarding leaded petrol didn’t it? b)apply more stringent pollution requirements on car emmissions and get the offending vehicles off the road c) provide viable alternatives for people to use that would be just as convenient as cars d) ensure that our leaders show far more foresight and wisdom in their future city planning decisions.