Thursday, 28 June 2018

The new fuel tax will be regressive, provided you understand what regressive means

I really despair over the economic literacy failures of our government and media. The latest example, reported in the New Zealand Herald this morning:
By late 2020, new fuel taxes will mean Aucklanders are paying an average $5.77 more a week for petrol, according to figures to be released by Government ministers today.
And in a startling revelation, the ministers claim that the wealthier a household is, the more it is likely to pay for petrol. They say the wealthiest 10 per cent of households will pay $7.71 per week more for petrol. Those with the lowest incomes will pay $3.64 a week more.
That's all good so far. Higher income households spend more on most goods (what economists term normal goods) including fuel, and so it makes sense that they would end up paying more of the fuel taxes. It's what comes next that's problematic:
This is a complete reversal of the most common complaint about fuel taxes, which is that they are "regressive". That means, the critics say, they affect poor people more than wealthy people.
Finance Minister Grant Robertson will join Transport Minister Phil Twyford and Associate Transport Minister Julie-Anne Genter this afternoon in Auckland to reveal the details of the new excise levies on fuel...
The MoT figures break the population into 10 segments, or deciles, from poorest (decile 1) to wealthiest (decile 10). They show that the wealthier a household is, the more money it is likely to spend on fuel.
In the first year, the average increase for Aucklanders, who will pay both taxes, is $3.80 per week. Decile 1 Aucklanders will pay on average $2.40, for decile 5 the average will be $3.75 and for decile 10 it will be $5.08.
"It's simply not true that fuel taxes cost low-income families more," Twyford said. "The figures show that the lowest-income families will be paying only a half or even a third as much as those on the highest incomes."
It's hard to tell here if Phil Twyford is being economically illiterate, or deliberately misleading. While it is true that, according to his figures, higher income households will pay more of the tax, that doesn't mean that the tax is not regressive. A regressive tax is one where lower income people pay a higher proportion of their income on the tax than higher income people.

So, you need to compare the tax paid with income to determine if the tax is regressive or not. It isn't enough to simply look at the tax paid by each group, and conclude that the tax is not regressive because higher income people pay more. This will be true of every excise tax on a normal good.

The latest data from the Household Economic Survey I could easily find using my slow hotel internet connection was this data for June 2016 (side note: trying to search for data on the new Statistics NZ website may actually be more difficult than for the old site - that's quite an accomplishment!). It doesn't give average incomes for each decile, but it does tell us the ranges. It also isn't limited to Auckland, but I don't think that will make much difference.

Decile 1 (the lowest income households) goes up to an annual income of $23,800. At that income level, the tax paid ($3.80 per week) would be 0.8% of their annual income (and would be a higher percentage for households with income below $23,800). For decile 10 (the highest income households), the minimum income is $180,200. At that income level, the tax paid ($5.08 per week) would be 0.1% of their annual income (and would be a lower percentage for households with income above $180,200).

Clearly, lower income households will be paying a higher proportion of their income on the tax than higher income households. The fuel tax is a regressive tax. Which just leaves the question: Is Phil Twyford being economically illiterate here, or wilfully misleading us in the hopes we wouldn't notice?

1 comment:

  1. Fuel will be a normal good holding everything else constant.

    But across the country, and even within Auckland, the car-owning poor buy more fuel than the rich.

    One reason is that what people actually demand more of when they get richer is transport. But the rich have greater access to public transport than the poor. Public transport's only really available in Auckland and Wellington, and a little in Christchurch. Poor rural regions don't have it. And then poor areas of Auckland are poorly served by public transport.

    Then when you consider that the poor have less fuel efficient vehicles, and generally bigger families, it's not really a surprise that they buy more fuel and pay more tax even in dollar terms (not just as a percentage of income).

    See here: