Break in transmission: This blog has gone without updates for a few weeks due to illness and a family holiday. Things should now return to normal for the foreseeable future. In other news, today marks 3 years of this blog!
VIDEO: Hockey says poorest people ‘don’t drive very far’, ABC News (13 August 2014)
Suggestions that poor people either don’t own cars or drive their cars less by the Australian Treasurer Joe Hockey have resulted in Mr Hockey apologising for any hurt his comments have caused. The comments were made to ABC Radio on Wednesday, in which Mr Hockey said the following:
“The people that actually pay the most are higher income people, with an increase in fuel excise and yet the Labor Party and the Greens are opposing it. They say you’ve got to have wealthier people or middle-income people pay more.
Well, the change to the fuel excise does exactly that; the poorest people either don’t have cars or actually don’t drive very far in many cases. But we are actually, you know, they are opposing what is meant to be, according to the Treasury, a progressive tax.” – Joe Hockey, Australian Treasurer (13 August 2014)
Later that day he backed up this statement with a clarifying statement, which stated that “average weekly expenditure on petrol in absolute terms increases with household income, from $16.36 at the lowest income quintile to $53.87 at the highest income quintile”. Meanwhile, it also showed that households with low socio-economic advantage were more likely to own no cars and least likely to own 3 or more cars. The opposite was the case for households with high socio-economic advantage.
Critics were quick to take issue with Mr Hockey’s claims that this was a progressive tax. A progressive tax is defined as a tax that increases as a proportion of income as income rises. So to be progressive, an individual must not only pay more in tax as their income rises, but more tax as a proportion of their income. On this basis, although the richest quintile spent 3 times as much as the poorest on petrol ($53.87 vs $16.36), they also earned 11 times as much as the poorest ($3,942 vs $360) according to a report by the left leaning Australia Institute. The result is that the highest income quintile spent only 1.37% of their income on petrol, compared to 4.54% for the lowest income quintile. An increase in the price of petrol per litre would, according to this, disproportionately hit lower income households harder than higher income households.
The Shadow Transport Minister Anthony Albanese also criticised the increase in the fuel excise due to the government’s decision to cut all funding to urban commuter rail and other public transport. Doing so prevents individuals from being able to switch from the soon to be more expensive driving option to taking public transport, according to Mr Albanese.
RMIT Professor Jago Dodson analysed Mr Hockey’s statement as part of a fact check for The Conversation and found that it ranged from conditionally true to not necessarily true as well as partly unverifiable. Professor Dodson concluded that there was insufficient data available to fully verify that “poorer people either don’t own cars or don’t drive very far”, while finding the statement “higher-income people pay the most fuel excise” to be true on the basis of absolute spending on petrol. However, this did not hold up when considered as a proportion of income, which is the basis of determining whether a tax is progressive or not – another one of Mr Hockey’s claims.
In addition, Professor Dodson also stated a preference for using disposable income as the measure of income, rather than pre-tax/pre-welfare gross income figures that the Australia Institute report used. When looking at spending on petrol as a percentage of disposable income, it is the middle 60% of income earners who spend the most on petrol followed by low income earners and finally high income earners. The lowest income quintile spend less on petrol than all but the highest income quintile.
All this shows that the answer to Mr Hockey’s rhetorical question is actually a much more complicated answer than the headlines may suggest.
Commentary: Why the fuel excise should be indexed
Lost in the whole discussion over whether and how much poor people drive cars is the question of whether re-indexing the fuel excise is good policy. The answer is yes. The reasons are listed in detail by Alan Davies at Crikey.
In brief, this policy will raise an additional $2.2bn over the next 4 years via the elimination of a tax cut rather than a tax increase. Indexation merely prevents the erosion of the tax base as prices increase. It will also make public transport more competitive while acting as a price on carbon (which did not exist under the carbon tax as petrol was exempted).
When determining how taxes are raised, it is better to tax the things that we as a society want to discourage. That is why alcohol and tobacco are taxed, that is why there was a push to put a price on carbon, and that is why the fuel excise is a good tax. If we choose to shift the tax base away from these areas, then it means taxing things that we as a society want to encourage, like income taxes on salaries. Alternatively it means cutting back on government spending. Neither of these is preferable to taxing something like petrol, and it is therefore disappointing to see this being ruled out as a revenue source.
Where the government has made things difficult for itself is in ruling out funding public transport, urban commuter rail in particular. By doing so, it opens itself up to criticisms that it can’t use the price signal to encourage a shift from driving to public transport while simultaneously raising barriers to public transport by cutting funding. It would also make its life easier if it attempted to compensate the lower income earners from the impacts of re-indexation. This could be done at a low cost according to Mr Davies: “the poorest 20% of households could be compensated for indexation if just 8% of the additional revenue raised was returned to them through the tax-transfer system”.