A few weeks ago, my ECONS102 class covered taxes. One aspect of that topic is consideration of whether income taxes are progressive or regressive. A progressive tax is one where higher income people pay a higher proportion of their income in tax than lower income people, while a regressive income tax is one where higher income people pay a lower proportion of their income in tax than lower income people. Note that whether income tax is progressive or regressive isn't determined by whether higher income people pay more tax or not. That happens under all but the most regressive tax systems. This is about the proportion of their income that higher income and lower income people pay.
Anyway, the same descriptors (progressive or regressive) not only apply to income taxes, but can also be applied to other taxes (as well as to subsidies, property rates, surcharges, and basically any sort of government fee). If lower income people will end up paying a higher proportion of their income in the tax (or other fee) than higher income people do, then the tax (or fee) is regressive.
To illustrate this point in class, I usually talk about cigarette taxes. However, they are far from the only example. Take this example from the New Zealand Herald this morning:
Efeso Collins raised eyebrows in 2018 when he opposed Auckland's regional fuel tax, designed to not only fund low and zero-carbon public transport but slash emissions.
After all, the Manukau ward councillor is a strong believer in taking action to address climate change.
But his opposition was rooted in arguments that have long divided climate action debates, about equity.
For people living in central Auckland, on high incomes, in walking or biking distance of their jobs, close to fast and frequent public transport, the fuel tax impact was minimal, and for many had the desired impact of a reduction in driving.
But for many in Collins' ward, on lower incomes with large families and poor public and active transport choices, many Māori and Pasifika, there was little choice but to continue driving.
The tax made up a much larger share of their income, essentially subsidising projects miles away like the City Rail Link in the central city.
The regional fuel tax in Auckland is an excise tax on fuel, set at ten cents per litre of fuel. People who spend a higher proportion of their income on fuel, will also spend a higher proportion of their income on the regional fuel tax. If lower income people spend a higher proportion of their income on fuel than higher income people do, then the regional fuel tax is regressive.
Collins essentially argues that this is the case because lower income people live further from central Auckland, therefore travel further and spend more on transport. It's fair to make the assertion that the fuel tax is regressive, but I'd want to see that backed up by some evidence. Maybe lower income people drive less (they are lower income after all, and driving is already expensive), and make more use of public transport. If we want to really know whether the regional fuel tax is regressive or not, it pays to look at some data.
Statistics New Zealand collects data on household expenditures, and it is reported in two places: NZ.Stat and Shinyapps. Unfortunately, neither of these sources quite do what we want, which is to disaggregate spending on fuel by income group. However, the detailed data on Shinyapps suggests that a little more than 70 percent of spending in the category "Private transport supplies and services" is petrol and other fuels and lubricants. That is one of the categories that NZ.Stat uses in disaggregating spending by income group, so we'll use it as a proxy for spending on fuel. [*]
In 2019 (the latest Household Expenditure Survey data), the top income group (Decile 10; incomes above $199,400 per year) spent $116.70 per week on "Private transport supplies and services". Using the bottom of the income bin ($199,400), that spending works out to about 3.0 percent of their annual income.
Moving down the income distribution to the middle, the fifth income group (Decile 5; incomes between $60,800 and $77,199) spent $72.50 per week on "Private transport supplies and services". Using the middle of that income bin ($69,000), that spending works out to about 5.5 percent of their annual income.
Moving further down to the bottom of the income distribution, the bottom income group (Decile 1; incomes below $23,700 per year) spent $38.60 per week. Using the top of that income bin ($23,700), that spending works out to about 8.5 percent of their annual income.
It is pretty clear that lower income households spend a higher proportion of their income on "Private transport supplies and services". It therefore seems highly likely that they spend a higher proportion of their income on fuel, and so they also spend a higher proportion of their income on the regional fuel tax. The regional fuel tax is regressive.
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[*] Spending on "Private transport supplies and services" is not a perfect proxy for spending on fuel. As a category, in addition to petrol, and fuels and other lubricants, it includes vehicle parts and accessories, vehicle servicing and repairs, and "other private transport services". Those other spending categories make up around 30 percent of the spending on "Private transport supplies and services". However, provided the share of this category that is spent on fuel doesn't differ too much by income, then we should be ok. So, we're essentially assuming that, for all income groups, about 70 percent of their spending in the "Private transport supplies and services" category is on petrol, fuel and other lubricants.
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