Background report of the Norwegian Economic Council: Flat-rate transfers are the most effective way to deal with unequal fuel taxes for low-income households

However, the burden is higher for low-income car-owning households. The Economic Policy Council’s new background report analyzes different compensation models. The report was written by a doctoral researcher Selina Clarke and empirical analysis by the researcher Palanne.

“In summary, a flat-rate transfer would compensate for the costs to low-income households, but it would not encourage more driving,” says Clarke.

Low-income car owners have a relatively high fuel tax burden

Looking at all households, the share of fuel expenses in income is relatively small, about less than 4 percent, and it is the highest in the 6th-8th. with households in the tens of incomes. However, when looking only at car-owning households, fuel consumption as a share of income is significantly higher in low-income households – fuel costs are more than 10 percent in the lowest income deciles and less than 3 percent in the highest.

A lump sum transfer is the most effective way to reduce fuel costs

Compensation can be used to effectively smooth out differences in the tax burden between income groups. A flat-rate transfer is the most effective way to reduce the tax burden for the lowest income earners. In addition, one- transfers are expected to produce less environmentally harmful incentives compared to, for example, fuel tax reductions. The latter would make driving relatively cheaper.

Conversely, reductions in income or fuel taxes would disproportionately benefit higher-income households, which drive more and pay more in taxes.

Based on the comparison of different compensation measures, household one-off compensations seem to reduce income distribution effects slightly better compared to income transfers proportional to the size of the household. The stronger the allowance is tied to household size, the more households in the higher income deciles benefit, as they tend to be larger. In addition, fixed-amount transfers are also likely to result in lower administrative costs.

“As an example of a lump sum transfer, households in some Canadian provinces receive a tax refund four times a year. The refund is paid from the province’s tax revenues,” says Palanne.

The analysis uses data from the Agency Traficom (2016) to determine the vehicle owners and the annual distance traveled by each car in kilometers. Secondly, with the help of ’s FOLK dataset, it was possible to divide car owners into households and calculate the total fuel costs of each household and their ratio to the household’s disposable income. In 2016, 1,295 million euros were collected in excise taxes and 1,362 million euros in diesel oil excise taxes. The estimated revenue of the components was EUR 809.7 million. The tax refunds modeled in the report are based on the distribution of these carbon tax revenues.

On Wednesday 1 February, the Council will publish its annual report for 2022, which will assess recent economic policy decisions. The green transition is one of the topics of the report seminar.


Source: Economic Council

Source: The Nordic Page

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