Monday 17 January 2011

Fair Fuel Duty Un-Stabiliser

Here we go again. From The Daily Mail:

... families were warned there was little prospect of a lifeline on fuel prices – despite repeated pledges from David Cameron. The Prime Minister has reiterated his desire to introduce a fuel stabiliser to help motorists but that brings him into a public conflict with the Treasury, which does not want to enact the pledge.

Before they invent something new which moderates the effect of fluctuating petrol prices, how about looking at what they're doing to exaggerate them? From that article, a litre of petrol (about one-fifth of a gallon) costs 48p, to which is added 59p fuel duty = £1.07, plus 20% VAT = £1.28 pump price. Let's assume the raw material price fell to 38p, the pump price would fall to £1.164, and if it rose to 58p, the pump price would rise to £1.404, and VAT per litre falls or increases by 2p.

Fuel Duty is in itself a stabiliser, as it does not (necessarily) respond to changes in the underlying price (48p). So if they scrapped VAT, The Worst Tax Of All and increased fuel duty to 80p, prices would remain the same on Day One. So if the raw material cost went down 10p, the pump price would fall to £1.18 and if it rose to 58p, the pump price would 'only' rise to £1.38.

So by a simple tweak to the tax system (which simplifies things enormously for the petrol industry) we can reduce the relative price fluctuations from (in this example) a range of 17.1% to 14.5% .
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There's more idiocy further down the article:

1. Mr Cameron said today: 'I do want to see some method of sharing the pain between the taxpayer and the motorist.'

By and large, the taxpayer is the motorist, so what's his point?

2. Treasury Chief Secretary Danny Alexander... did reveal, however, that the Treasury was pushing ahead with a pilot scheme to offer discounted fuel to rural communities in the Scottish Highlands, which could extend to his own constituency of Inverness.

Nice bit of pork-barrel there, Mr A!

3. Underlying the whole article is the assumption that Fuel Duty is a tax on petrol, which of course it is not! It's a rationing device for road usage - total Fuel Duty + VAT is about £40 billion a year and they only spend about £10 billion a year on building/maintaining roads. This is all the more reason to keep Fuel Duty as a flat (higher) figure and scrap VAT.

As to whether we'd be better off by reducing taxes on petrol (thus having more crowded roads, slower and more expensive journeys and higher taxes on everything else, so it might actually be a net cost to the economy) and/or building more roads, those are separate issues.

22 comments:

Bayard said...

If VAT was zero-rated on necessities, fuel would be zero rated, although I am surprised that the oil companies didn't manage to get an exemption along with the supermarkets, the landowners and the bankers.

Nick Drew said...

yes they ought to be leaving this one well alone

Mark Wadsworth said...

B, don't fall for the 'zero rating on necessities' nonsense. VAT is a tax on profits (aka 'value added), so what this means in practice is that The Home-Owner-Ist élite (banks, land owners, house builders, home owners) pay a much lower rate of tax on profits than everybody else. It's just that unlike other countries, the oil companies never made it to the top table in the UK.

ND, you listed a few reasons why it was a daft idea and I've just filled in the gaps.

Deniro said...

You write that VAT is the worst tax because is surpresses commerce. However it may be that from the view of economic interventionism
that feature, (a way of trying to influence the total level of commerce minus and plus, by varying
the VAT rate) is not a bad side effect rather it is a positive feature.

Anonymous said...

Influence the total level of commerce?! What in the world? Under what principle do you determine what the *correct* level of commerce should be?

JJ said...

Isn’t this just indicative MW of making manifesto pledges that simply can’t be kept however well intentioned they might be? Senior civil servants are no pushovers when it comes to getting their way. They are more powerful than many people realise.

But hasn’t that always been the case?

Mark Wadsworth said...

Den, in words rather than figures, VAT is a tax on the free exchange of goods and services at point of exchange, and hence considerably more damaging than e.g. a flat income tax (which is purely a revenue raiser, and which merely depresses economic activity as an unfortunate side-effect). See also what Fraggle says.

F, ta for covering fire.

JJ, I'd have thought that civil servants would love a 'fair fuel stabiliser) as it would make the administration and collection of fuel duty far more complicated and give them the opportunity to decide what the price of petrol 'should' be on an ad hoc basis.

Deniro said...

@ Fraggle, it is a well known concept in Keynsian economics to moderate ups and downs , I'm not promoting it, just noting it, I could have Written "consdered positive effect"

@ Mark VAT was decreased in 2010 your thesis semes to conseider that a promotion economic activity

Deniro said...

I think the Treasury might consider a "Fuel Price Stabiliser" to be a subsidy to petrol companies in the sense that it would cushion them to fluctuations in the oil price

Mark Wadsworth said...

D, you moderate ups and down by keeping the tax rate constant and running surpluses in good years and deficits in bad years (an automatic stabiliser). Even better, raise most taxes from land value tax and dish it out as a Citizen's Income. There's no particular need to cut LVT rates or the CI during a recession, you just keep going (there'd be little point in cutting both).

The VAT cut from 17.5% to 15% at the end of November 2008 was one of the few good things that Labour ever did (in tax terms), even though they did it for superficially wrong reasons.

Mark Wadsworth said...

Den, yes, an FPS would have that (undesired) effect, whereas a flat 80p is a flat 80p, job done.

Dick Puddlecote said...

Interesting stuff, MW.

All I saw when hearing about it this morning was a clever way of government being able to control the end user price of fuel.

If wholesale price is high, they supposedly reduce tax, if it is low, they cash in.

Of course, this way it is politicians who get to decide what the end user price of a litre should be. So what's the difference between that and what we have now?

Mark Wadsworth said...

DP, it's like what we have now but more complicated and worse, see also Nick Drew's post to which he links above (coming at it from a different angle).

Curmudgeon said...

One effect of this, of course, would be to increase business costs as businesses can reclaim VAT but not fuel duty.

Mark Wadsworth said...

C, that's a fair point.

So we'd have to sit down and calculate how much VAT is currently reclaimed, then deduct amounts that are 'passed on' to consumers (i.e. haulage businesses would just increase their prices slightly) and knock off corporation/income tax relief from the remainder, and maybe the fiscally neutral Fuel Duty is 78p per litre or something.

Dr Evil said...

If you factor in car tax too, then the take from motorists must be way in excess of that £40 billion figure.

And if we do switch to electric cars once they actually can go reasonable distances and back on one charge just watch road pricing charges per mile via satellite suddenly become the way to screw us yet again.

Mark Wadsworth said...

Ch, sure, there are loads of other really shit taxes on motorists (like car tax, VAT on new cars, benefit in kind charges and all the speeding and parking fines) but these add up to £5 billion a year or something (and would be far better being rolled into flat rate fuel duty or scrapped entirely).

I'm not sure why you think they will wait until everybody goes electric before introducing spy-in-the-cab for all cars, the EU has been lusting after this for years (if not decades).

Weekend Yachtsman said...

They can't abolish VAT because it's required by their (and our) bosses in Brussels. They can't lower the rate because 15% is the lowest their (and our) bosses in Brussels will allow.

They could lower the duty, which as far as I know is at the discretion of the local administration in Westminster.

But they won't, because they need the money to keep their schemes going and their clients employed.

Mark Wadsworth said...

WY: "They can't abolish VAT because it's required by their (and our) bosses in Brussels. They can't lower the rate because 15% is the lowest their (and our) bosses in Brussels will allow."

Yes of course, that's one of a million reasons for leaving the EU.

PS, it looks as if the permissible range of VAT from 15% to 25% is going to be 'harmonised' at 20% (and our Lib-Con adminstration were quick to fall in line on this).

Bayard said...

"They can't lower the rate because 15% is the lowest their (and our) bosses in Brussels will allow."

They can't? then what about 5% VAT on heating fuel, or is that about to go up to 20%?

Mark Wadsworth said...

B, there are certain things in the UK not subject to sales tax back in 1973 (books, domestic fuel, kids' clothes, new housing etc), and a basic rule of VAT is that a country can keep pre-existing exemptions, but cannot introduce any new ones or reduce a rate (how they got 8% on domestic fuel down to 5% again I do not know).

Anonymous said...

The Government now bleat that they can't do anything without EU approval. They also bleat that a tax reduction method would be difficult to implement.
Any household with a vehicle that has a RURAL POSTCODE could have discounted road tax instead.
No fix, no fudge, no paperwork.