There never was any strong reason for John Howard pegging the petrol excise at 38 cents per litre and plenty of sound reasons for at least indexing it with respect to inflation. The tax provides a rough (and admittedly imperfect) tax on congestion and fuel-induced air pollution and provides quite a reasonable application of the benefits (or “user pays”) principle of taxation in relation to funding of new roads and the maintenance of existing roads – those who use lots of petrol, particularly heavy vehicles, should pay much of these costs. An excise also provides motorists to think forward and shift away from liquid fuels which will inevitably become more expensive. Finally, in terms of deadweight losses (or “excess burdens”) a tax on fuels has only moderate inefficiency costs because the demand for fuel is relatively price inelastic. To achieve these desired features in a growing economy subject to inflation the tax should grow with the economy and not be set in stone.
I therefore support moves to revisit the setting off the excise. The tax yield from the fuel excise has fallen by about 40% which costs the government around $5b. Increasing the tax by 20 cents and then indexing it to inflation would recoup much of the revenue lost because of the Howard decision to reindex the tax and would cut the size of the underlying structural deficit facing the economy by about 1/3.
Longer term one would hope that road use charges related directly to congestion, pollution and road damages would be introduced. These are better ways of taxing externalities than a rough fuel excise. But still I think the fuel excise should be retained. It is a broad-based tax that still would have the desirable properties mentioned of generating relatively low efficiency costs and of forcing us all to shift our allegiance away from fossil fuel-based energy sources.
The inevitable cry will be that such a tax is regressive and that it falls on the poor. The Grattan Institute have begun this very standard sort of moan that is raised whenever any efficiency-based reform (e.g. congestion pricing) is proposed. What matters is the overall incidence of the tax-transfer system not the equity character of a small part of the tax base. Of course the level of excise in Australia is low relative to excises in most European countries.
Update: 8/5/14. It seems that a 3 cent increase in the levy will happen. I don’t think, however, this would raise $1b as this article suggests. More like $500m.
I’ll give a plus to Tony Abbott if he seriously pursues the suggestion of charging heavy trucks for the damage they do to roads by using GPS technology that measures the mass of the truck, the distance it travels and the roads it travels on. There are transaction cost issues here but this “telematic” technology is, anyway, already used by trucking operators to manage the behaviour of their fleets – checking that safety breaks are being taken and so on.
The basic economics is that almost all damage done to roads is caused by heavy vehicles and this damage is concentrated on roads with thin pavements. There are strong incentives to use ever-larger trucks to exploit economies of scale in trucking. There are also strongly increasing scale economies in investing in pavement thickness. However in a country like Australia, where traffic densities are low compared to European and American roads, there is no economic case for building all our roads with maximum durability like the Hume Highway.
The procedure of banning trucks from certain roads is inefficient. It is better to charge them the damage cost and then to leave it to the trucking operator to decide whether the road should be used.
Charging truckers high fixed registration fees to cover damage costs doesn’t work since these charges apply irrespective of distances travelled and road types employed. Moreover replacing these charges (which do cover damage costs) with efficiency-based charges should enable lower costs to be imposed on truckers – they should be able to share in the efficiency dividend.
A famous problem in trucking is the “last mile problem”. The benefit of using a truck rather than, for example, a train is that it enables “point-to-point” pick up and deliveries of goods. But should a truck be allowed to pick up or deliver on low quality roads using low quality bridges where possibly huge damage costs are imposed? With the pricing reform suggested the problem is solvable. A central agency assigns prices to using particular roads and agrees to pay these revenues to the local governments in charge of the local roads. Local government then does the cost-benefit calculations to determine whether it is desirable to allow large trucks to access local roads. Will the revenues generated exceed the increased damage costs or not? If so allow access. This is a much better solution than a blanket solution of always allowing or not allowing such heavy vehicle traffic.
Years ago COAG were close to agreeing to such pricing proposals. I don’t know what happened subsequently but the whole propose got put on the back burner. As I say, I’ll give Tony Abbott a tick if he puts this proposal back on the COAG agenda. Here is a longer piece I wrote on the economics of heavy vehicle pricing.
I was out of the country when it happened but belatedly now want to express my sadness of the passing of Paul Mees. Paul and I did not see eye-to-eye on some transport issues (e.g. congestion pricing) but I strongly supported his endorsement of the key role of public transport. He had a far more refined knowledge of the practical character of private and public transport issues in Melbourne than I ever did or will have. I liked the fact that he was a transport visionary and a wonderful public transport advocate. Paul was disgracefully treated by the University of Melbourne and worked most recently at RMIT.
Paul was 52. A sad loss.
I have often discussed the taxi industry on this blog and have not disguised my links with the Victorian Taxi Association, the VTA. My general attitude is that I think the industry does need to be reformed and that most of the proposals in the Fels review were sound – the proposal to cut the ridiculous 10% charge on credit card payments by Cabcharge is an obvious example . My single major concern was with the proposal to effectively peg license values at the equivalent of $20,000 per annum (by freely offering licences at this rate) and to eventually do away with such values entirely – the fixed charge of $20,000 was to be fixed in nominal terms so that inflation would gradually erode license values. In addition Fels argued that the bailment arrangement that split taxi revenues 50:50 between driver and license owner should shift to 60:40 in favor of the driver – a move that would in itself reduce licence values by 20%. (more…)
About half of Australia’s population live in the east coast cities of Brisbane, Sydney, Canberra and Melbourne – it is well more than half if people living at points adjacent to this corridor are included. The most recent proposal for a high speed rail (HSR) link has been predictably debunked by government officials and the press alike. One positive feature of such a link is the way it would help reduce carbon emissions by reducing air traffic and car traffic along this corridor. It would also help the establishment of larger satellite cities along the corridor that would reduce the congestion, pollution population pressures on it. (more…)
Taxis are an important part of our urban transport system. The recent inquiries in NSW and Victoria show they are among the least efficiently managed industries in our community. The issue of reforming them is difficult because of the evident need to compensate those who have paid huge amounts for licences with any deregulation. But one reform is self-evident and should go through immediately. I think no-one but the shareholders of a single firm could argue with this one.
Cabcharge has substantial monopoly power in the market providing electronic/non-monetary payments for taxis. It controls 97% of the market and levies a 10% fee on fares for providing this service – that’s true whether you use a taxi voucher or a credit card. The average fee for similar services in the rest of the community is 2% and the cost of providing the service about 1% of revenues. Cabcharge’s move into operating taxi networks intensifies its monopoly position.
The Reserve Bank should legislate to limit such charges to something less than 5% as is now currently proposed. The fee as it stands unnecessarily damages the taxi industry and taxi driver incomes as well as commuters because, by substantially increasing the cost of taxi travel, it reduces the quantity demanded of taxi services.
The stock market seems to be forcecasting that this reform will go through. Yesterday’s Cabcharge share price was $3-93 down from its peak of $6-57 this year.
I gave a talk to (in the main) taxi licence holders at the Dallas Brookes Hall this afternoon. It drew on my recent blog post – indeed I was introduced as the author of then post. It was a tricky situation for me as I do support reform of the taxi industry but I am sympathetic to the plight of licence holders. In the end I think that my position is the right one and a stance that is supported by many in the industry. My guess is that the Taxi Industry Inquiry will not succeed directly in slashing licence values but that some of the reforms on hire cars, pre-booked taxis and altering assignment rates and the operating costs attributable to owners will expropriate taxi licence wealth by stealth. This would be an efficiency reform financed by unfairness.
To those who are gung-ho about such reforms I would simply ask how would you feel if the government confiscated half of your superannuation savings? It is exactly analogous because many of the 1000 people at this meeting are holding licences as assets for their retirement. I met a couple of them and the fear is real.
An interesting feature of current licence values is their scale – around $470,000. This yields an annual income of around $30,000 from which a whole range of costs must be met. Given that inquiries over the years have consistently mooted the possibility of deregulation a reasonable question is “where is the risk premium here?” – returns just seem far too low given the prospect of capital losses from expropriation. The only plausible answer is that licence purchasers assume there is zero probability of uncompensated reforms getting up. Perhaps some hold out hopes for a substantial payout.
I attended a meeting today on proposed reforms for the Victorian taxi industry prepared by former ACCC guru Allen Fels with a major input by David Cousins. Opening the PDF version of the Fels Draft Report (here) at least gives you a helpful contents page to what is a long document. There is an executive summary, but it is avoids some core issues. (more…)
We know that as a rule the probability of a car accident increases with the distance you drive – for some background on these costs see here. There are also of course personal factors – young hormonal males, for example, are more accident prone. A useful efficiency-based reform that has appeared in insurance markets is therefore a personalised policy where premiums also depend on distance travelled. This would reduce the aggregate cost of the community insuring against property and human damages caused by driving by providing incentives for safer driving. DavidP has made me aware of a new US product that goes further than simply distance-based policy. It involves an issued insurance policy that delivers an in-vehicle unit to your automobile (a telematic device) which records not only the distance you travel but when you travel and how hard you break – the latter being a proxy perhaps for both speeding and dangerous tail-gating behaviour. The time at which you travel is highly related to your accident risk – the period midnight to 4am is a high-risk period.
If you drive safely over a 6 month period you get up to a 30% discount on your policy. Thereafter a snapshot of your driving behaviour determines your premium. Your incentives as a driver are to minimise distance travelled, drive at reasonable speeds without being continually on your brake and for driving at safe times of the day. Driving safely reduces the likely accident costs of your car travel and enables the insurance firm to offer you a discount. Accident costs then tend to get concentrated on the riskiest drivers.
It is a neat scheme although one that the private insurance industry may not readily endorse. 70% of car accidents in the US involve another vehicle so that many of the cost-saving benefits of this scheme accrue to insurance companies who do not employ it. There can be a case to regulate to help foster these forms of insurance in ways that internalise these externalities. The issue is not a minor one in Australia where the total costs of car accidents have been estimated to comprise about 4% of GDP.
There are more traffic accident fatalities in the US (both motorist and pedestrian) on April 15 – the final day that US citizens have to complete their tax returns. Frustration? Angst? Increased nervous tension? Should this be added to other deadweight losses to work out the true cost of a tax?
I’ll talk on local road transport issues tonight in Heidelberg, Melbourne to the Friends of Banyule. It is a public meeting so anyone is welcome. Details at the link.
Notes for the talk are given over the fold. (more…)
Allan Joyce’s move to ground the entire Qantas fleet today was an inevitable attempt to break the backs of trade unionist reactionaries. As a Qantas shareholder I am dismayed at the current outcome but, as Qantas has not paid dividends for a couple of years, I support attempts to force the airline to gain competitiveness and staying power. Having pilots paid up to $500,000 – the average is $350,000 – annually is inconsistent with this task and the attempts by maintenance engineers and pilots to trash the Qantas brand suggest that the best outcome for these clowns is to be sacked and then sued. Ungracious, overpaid pilots who lie to me about their employer when I travel on their airline arouse nothing within me but contempt. When a firm is losing $2m per day because of a strike the fact that the CEO is paid $5m per year is irrelevant. He is worth $20m if he can give these reactionary trade unionists the kick up the backside they so richly deserve. Qantas sells air services as an internationally traded good and international travellers are voting with their feet to support other airlines which offer cheaper and better quality service. Domestic air services in Australia remain expensive and the service is anything but great. The Australian travelling public deserve better and Australia needs a viable international carrier not a sheltered workshop.
Already the Labor politicians are shaking in their boots at Joyce’s move because it is hardly a good look for the Labor Government but reading Joyce’s press release I support it. The Government should keep out of this one. Qantas will fail without decisive action and, even though this might cost me money, I’d prefer to see this fight resolved now – it offers the best prospect for competitiveness reforms. Pilots, engineers, baggage handlers – accept the need for reform or find yourself new jobs. As the Qantas AGM showed you have no support among shareholders and the travelling public will see you for the contemptible grasping reactionaries that you are. That you attacked the customer base of Qantas as a negotiating tactic should never be forgotten.
Update Qantas management wins. After two days back to work with further strike action outlawed.
Australia is a geographically large country with a dispersed though highly urbanised population. This creates intrinsically difficult – ‘tyranny of distance’ – transportation issues. Australia relies heavily on trucking as a means of transporting raw materials to population centres and ports but also experiences significant congestion in its capital cities. Traffic accident deaths, injuries and property damage have significant economic and social impacts.
A crucial remaining area of microeconomic reform for Australia lies in road transport. Good policies for accurately charging users for the costs they create when roads are used encourages efficiency in road use. These user charges attack ‘social bads’ such as excessive congestion, road damage and traffic accident costs. There is an opportunity to levy taxes that limit these ‘bads’ and simultaneously allow reduced taxes on the sorts of things – savings and work effort – that as a society we value. There are potential ‘double dividends’ associated with road sector tax reform. (more…)
I always think it crass of people to ask to get invited to a party. In my life I have not received invitations on more than a few occasions so that generally, these days, I am miffed only momentarily. But I was crass enough* to seek an invitation to the Government’s October Tax Summit and, as Peter Martin records, I was able to get an invitation. The academics attending include quite a few economist colleagues of mine – John Freebairn, Flavio Menezes, Peter Whiteford, Neil Warren to name a few.
I’ll talk on my standard hobbyhorse – road user charging – congestion, heavy vehicles, distance-related insurance and so on. I’ll post the remarks I am drafting for presentation shortly.
* To be accurate the crassness emerged from a suggestion by commenter Uncle Milton that I request an invitation. Thanks Uncle Milton.
When I worked on transport sector externality issues recently I became aware of the issue of the impact of air pollution from vehicles on human health. Concern with this issue has subsided a lot over recent years because of improved emissions performance by vehicles. Most attention gets focused on traffic congestion issues and road accident costs. In fact the health concerns from vehicle remain severe particularly for children as this study by Christopher R. Knittel, Douglas Miller, and Nicholas J. Sanders shows. Its worth reading in full but I extract a crucial segment:
“In our preferred specification, a one-unit decrease in PM10 (around 13% of a standard deviation) saves roughly 18 lives per 100,000 births. This represents a decrease in the mortality rate of around 6%. This is consistent with the findings of prior research on ambient particulate matter, and suggests that even at todays lower levels are substantial health gains to be made by reducing both ambient pollution and traffic congestion”.
Update: There is an extended discussion of this argument at Larvatus Prodeo.
Hat Tip DP
I had a business breakfast in Melbourne city this morning and was rewarded with a free train trip to the city with the ‘early bird’ fare arrangements on offer. This provides free travel if you leave early and arrive in Melbourne city before 7-00am. Apart from saving a few dollars it gave me a pleasant lift because it is a simple instance of peak load pricing. Train congestion at peak periods – a problem in Melbourne – is smoothed by encouraging people to make journeys before the peak on the basis of a financial incentive. Apparently this ‘early bird’ arrangement has operated since 2009 – I am remiss in not being aware of it. Judging by the number of passengers on this morning’s train the arrangement seems efficient – everyone who wanted a seat got one but there were not many empty seats.
With the Myki fare card system this type of arrangement can be finessed. Financial incentives can be offered to people travelling after the morning peak and before and/after the evening peak.
It’s a small change but a simple example of how pricing can improve the quality of life for commuters. Of course the big change would be to congestion price Melbourne’s roads. Same principal and useful effects but there would be much larger welfare gains.
I wrote a brief note earlier this year on how Beijing should resolve its traffic problems. The interesting news over the past few days is that the Beijing administration has announced a whole set of anti-traffic congestion policies. The Vice-Mayor of Beijing in charge of traffic ‘resigned’ the day the measures were introduced and is off to western China – I am an uneducated foreigner in China but it looks to me that someone was upset with his performance.
Many of the proposed policies I really like. Some I don’t like much. Overall the policies are a dramatic determination of the administration in Beijing to address looming terrible traffic concerns in the city and I congratulate them for adopting that sense of urgency.
- The main policy is to restrict the number of new car licenses to 240,000 per year by means of a quota. Cars under this quota will be issued by a lottery system.
- There will be a 5 year ban on official cars although I did not understand how this was consistent with the report that official cars would get up to 10% of the quota.
- Car numbers will be limited on basis of odd and even number plates. This was the policy adopted during the Beijing Olympics.
- Parking fees will be increased and will be highest in congested zones.
- Congestion pricing will be introduced at an ‘appropriate time’.
- Bicycles will be publicly-provided to make free short trips from 200 locations in the city.
- Extra trains and buses will be provided
- Park-and-ride facilities will be provided at subway stations at low cost.
- A whole set of new roads and tunnels will be built.
The big policy is the car quota which will cut growth in car numbers by more than 50%.
The policy will have an impact. Note that the quota is not being auctioned so the gains from the policy will accrue to those who get a number plate. Gains will also be conferred on existing car owners since the resale value of their vehicles will increase. If the cars can be resold these will be real capital gains to some. You get some measure of efficiency but it is imperfect since the price here is related to car ownership not congestion-causing travel.
Having got a car there will be triple convergence incentives to use it a lot. In simple terms once you get a car you will have enhanced incentives to use it given that there are fewer other drivers on the road. Depending on the size of these ‘rebound’ effects (and ultimately on the scale of latent demands for travel) these effects can range from insignificant to effects large enough to destroy any advantages from the licensing scheme.
Of course too this scheme will only slow the growth of new cars. Unless the quotas are tightened there will still be catastrophically large numbers of vehicles in Beijing but it will take longer. This extra time is an interim solution which permits introduction of a more efficient longer-term scheme such as congestion pricing.
Of course I would have liked congestion pricing now which directly targets the externality in an efficient way. Those with high-valued journeys will pay for them.
Presumably the park-and-ride policies will involve very large subsidies to those using these services. The subway stations in Beijing are in areas where property values are very high.
The supply options are inevitably subject to triple convergence problems. My guess is that most will work short-term but fail longer-term.
It will be interesting to see how this scheme works out. I asked my BEDA students to keep me posted!
Can anyone explain to me why Qantas operates only a single daily flight to China, namely to Shanghai? Why don’t they operate direct flights to cities such as Beijing? China is Australia’s fourth largest source of tourists – in 2009 366,000 tourists came from China – and many Australians are now visiting Chinas for business and tourism reasons - 278,000 in 2009. I ask this because a Chinese operator – China Southern Airlines – is now quadrupling it flights to Australia. It will now offer twice-daily flights from Guangzhou to Sydney, daily flights to Melbourne and three flights per week to Brisbane. By March it plans to have twice-daily fights to Melbourne, daily flights to Brisbane and, if successful, flights to a fourth city such as Cairns. Where is our national carrier Qantas in all this? (more…)
I’ve been in Sydney most of this week attending the Australia’s Future Tax System – A Post-Henry Tax Review. It had some excellent speakers and was for me – not a taxation specialist – very informative. I particularly liked John Freebairn’s overview and a superb paper by Ben Smith which clarified my views on the resource super tax. My own contribution – joint with David Prentice – is on the road transport sector and is reproduced in draft format over the fold. Comments are very welcome as the paper is now being revised. All the papers from this meeting will be published in a forthcoming book. The opening address by Ken Henry was characteristically forthright but in my view terribly misrepresented in blogs, the press and by commentators such as Warwick McKibben and others. Henry was suggesting that economists get unreasonably cantankerous about second-order issues and, on climate change policy, I agree. I’ve got some more substantial comments on this issue that I will defer. I have much respect for Ken Henry and on how he operates the Commonwealth Treasury. He is a straightforward person with high intellectual honesty who has vast experience at dealing with government. He is also amazingly knowledgeable on tax issues – hardly surprising given his background.
After listening to Ben Smith I’ve changed my mind on the resource super tax. It is a tax grab but, if implemented as stated, will not harm exploration effort unless there is the assumption that imposing it raises future further sovereign risk issues. There is a slight interaction issue, detected by Professor Jack Mintz, that means a non-neutrality will arise if the resource tax is imposed with a company tax but this is easily sorted out by making up-front cost refunds accruing to the miners non-taxable. Otherwise the debate between governments and the miners is just a ‘cake-eating task’ – who gets what share of the cake? The industry is lying about the distortionary effects on exploration of the tax to protect the stake in their firms owned by shareholders. This might be justified – shareholder values will be diminished – but it is still a blatant distortion since exploration activity will not be inhibited.
The tax has neutral effects on exploration and the scale of the industry because its not really a tax but a 40% government shareholding in ventures with the government contributing 40% to costs as well as getting 40% of dividends. There are efficiency gains in cutting royalties by eliminating them but refunding to the states from the Commonwealth’s income share these royalties. I’ll refrain from correcting some misleading comments in earlier posts – that suggested non-neutrality with respect to exploration effort – and make a general mea culpa here. When I get the time I’ll insert links between these correcting comments and the earlier posts. (more…)
The Intelligent Access Program offers heavy vehicles improved access to a wider range of Australian roads – and the ability to carry increased loads – in exchange for the vehicles agreeing to carry on board telematic devices that describe where the vehicles are as well as their self-assessed load characteristics (mass, vehicle dimensions, suspension) that need to be programmed by a driver into the device. This enables enforcement of adherence to travelling on admissible routes by collecting GPS signals sent via the telematic device to a satellite which relays the information to the IAP service provider and then to the regulator.
Over the last couple of days I have been listening to applications of this technology in NSW. It is amazing stuff.
Trucks are inspected to check on compliance and weighing stations check on pre-stated loads. Fines are administered for severe, repeated route violations.
This technology offers a realistic pathway into implementing user pays into heavy vehicle use of Australian roads. Instead of binary “allowed to travel”/”not-allowed-to-travel” decisions on various routes, fees could be set which reflect expected road damages from use of the routes. Then trucks can assess advantage against cost and make socially optimal routing decisions. These are important decisions given the pressure on trucking fleet operators to carry larger loads in order to realise increased scale economies.
The IAP has mainly been implemented so far on state-owned roads – even though they manage and own 80% of Australian roads local government have not embraced the approach because the extra costs they would incur from increased damages would not be funded. In NSW this is a severe issue as local councils are desperately short of funds given restrictions on council rate increases. This is a problem for the trucking industry since they typically can’t pick up in a specific local area and transport to a specific location in another local area because they cannot access the local roads. The widely-discussed “first (and last) mile problem” arises.
Getting away from the binary decisions by pricing access to roads and returning these revenues to the agency that owns the roads resolves the “last mile problem” in a way that is economically sound. If local councils have the potential to receive revenues from heavy vehicles they should admit these vehicles provided the value of the revenues received exceeds the expected road damage costs plus any congestion, noise or other externality costs that might impact on their local residents.
The local councils presumably should not have the ability to set the unregulated prices for access given their local monopoly power and their ability to access substantial rents for permission to travel the “last or “first” mile.
Slowly – but surely – we will achieve a more efficient trucking industry in Australia. This will deliver productivity gains through the economy.