Time to Excise Fuel Duty?

December 4, 2012

Years of research and data collection provide a common lesson on taxes: low rates help overall economic activity. More specifically, a good tax policy adopts a neutral approach by treating all economic activities similarly and letting individuals decide the best ways to change their activities to reduce tax payments, says Richard Wellings of the Institute of Economic Affairs in London.

However, the government tends to interfere by taxing certain activities or goods to encourage a certain behavior. This is seen in fuel duties, which currently stand at 58 pence per liter of petrol or diesel in the United Kingdom. These fuel taxes place companies at a competitive disadvantage and hamper overall economic growth.

  • Taxes comprise 60 percent of the cost of a liter of petrol or diesel.
  • The fuel duty contributed about £33 billion (about $53 billion) to the Treasury in 2012.
  • However, the fuel duty places industries that rely on road transport at a disadvantage, and also reduce labor mobility and prevent economies of scale.
  • Poorer motorists are disproportionately affected considering that road fuel accounts for about 10 percent of their spending.

Advocates of the fuel duty offer several arguments in favor of it:

  • Road-users should pay for the maintenance of the road network.
  • Road-users should contribute additional funds for general government expenditure.
  • Taxation should reflect the external costs of road-use.
  • Transport taxes encourage a shift to public transportation and cuts in carbon emissions.

However, there are several flaws with those arguments:

  • The amount paid has little relation to congestion levels, accidents and local environmental impacts. There are several external factors that have more of an influence on those impacts.
  • Furthermore, politicians don't efficiently allocate funds for maintenance of infrastructure.
  • Modes of public transportation produce significant noise and environmental costs.

There are several avenues the government can pursue to finance a reduction in the fuel tax:

  • Cut government spending on various services like traffic management and public transport.
  • Projects such as High Speed 2 should be canceled and train/bus subsidies should be phased out.
  • Additionally, introduce a limited peak time road pricing in hotspots.
  • Finally, privatize the road network.

Source: Richard Wellings, "Time to Excise Fuel Duty?" Institute of Economic Affairs, November 16, 2012.

 

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