Karsten Staehr: Why Tax Fuel?
Karsten Staehr, professor of International and Public Finance, on fuel taxation.
Fuel taxes are taxes on petrol and diesel used for transportation. For what purposes are fuel taxes used in other European countries? Are they used to finance the building of roads?
Some countries earmark taxes on petrol and diesel for road building, public transportation or the traffic police, while other countries do not earmark the taxes for any particular purposes. This is largely a matter of bookkeeping as there is no logic in any particular tax being spent on any particular purpose. Taxes should be levied so that they harm the least and public spending should go to the areas where it is most beneficial.
Earmarking of the revenue from different taxes to particular purposes does not make sense. In the extreme Estonia would then need to introduce a tax earmarked for spending on primary schools, another tax earmarked for street lightning and yet another one for defence. Taken to the extreme, such earmarking of taxes would make it impossible to manage the government budget and it would stand in the way of reforms and changing policy objectives.
What are the consequences in raising the fuel tax to the state, private citizens and to the economy?
The consequences of raising the fuel tax are straightforward. Those driving a car or truck will pay higher taxes and they may perhaps try to drive less or buy a car using less fuel. The government will have a higher tax intake. In this respect the effects of an increase in the fuel tax would resemble any other tax increase.
The effect on the overall economy will be small as long as the tax increase is modest. There might be a bit less car use and this might reduce congestion and pollution and this will generally be a good thing. The costs of some businesses may increase but the effect will also here be small. The planned increase of the excise taxes on fuel is supposed to bring in 46 million euros next year, while GDP, the overall size of the economy, is forecast to be around 22 billion euros. In other words, the planned tax hike amounts to 0.2% of GDP in 2016. In 2017 the tax increase amounts to perhaps 0.3% of GDP. It is unlikely that the planned tax increase would have any major effects on production and employment.
What are the functions of excise taxes in general?
There are two different types of taxes. The first type is broad-based taxes such as social tax, income taxes and value-added taxes. It is difficult to avoid paying these taxes for economically active persons by changing economic behaviour. One would still need to pay income tax if one changes from one job to another, and one would still need to pay value-added tax if one changes from eating potatoes to eating rice. Economic theory posits that broad-based taxes are preferable, because these taxes do not cause people to change behaviour and make people do things they really do not want to do.
The other type of taxes is taxes where a specific product or a specific economic activity is taxed. One example is excise taxes on alcohol, cigarettes and energy. The main purpose of such taxes is precisely to make people change behaviour. Taxes on alcohol might lead to less drinking and this is good for other family members and society at large. Taxes on petrol and diesel may lead people to drive less or buy more economic cars, and this might reduce congestion and be good for the environment.
In conclusion, the main purpose of broad-based taxes is to bring in tax revenue without people changing behaviour, while the main purpose of excise taxes is to make people change behaviour.
Do the high level of excise taxes on fuel undermine the competitiveness of Estonia compared to other EU countries?
The planned hikes of the excise taxes on petrol and diesel are relatively small and will have a minimal impact on the costs of companies in Estonia and hence the competitiveness of the Estonian economy. There could be some border trade problems if the prices of petrol and diesel will be much higher in Estonia than they are in Latvia and Russia. This is a situation which must be monitored carefully.
It should be recalled that taxes on car use are very low in Estonia compared to many other EU countries, in particular our Nordic neighbours. Many countries have very steep excise taxes on the purchase of cars, while the value-added tax is the only tax on cars bought for private use in Estonia. Many countries also charge an annual levy for the use of a car. If anything, Estonia has very low taxation of cars and car use, and this is of course what has led many Estonians to drive large and uneconomical cars.
So we should not be worried about the planned increase in the excise taxes on petrol and diesel?
Nobody likes to pay taxes, but the experience from southern Europe is that it is important that the government runs a prudent fiscal policy and raises taxes to fund new expenditures. One of the founding fathers of the USA summed it all up by pointing out that there are only two things that are certain in life: death and taxes.
Questions by Krõõt Nõges, TUT PR Officer.