Mark Wadsworth

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Fuel Duty Fun

From The Daily Mail:

The Treasury is facing a £637 million deficit after fuel sales dropped by one billion litres this year, the AA revealed.

Service stations in the UK sold 835 million fewer litres of petrol and 247 million fewer litres of diesel in January to March 2011 compared to the same period three years earlier. The [15.2] per cent dip in petrol sales and the 6 per cent fall in diesel sales were caused by higher fuel costs and consumers tightening their belts.

Shock horrors! Fuel prices up and sales down! The demand for fuel is price-elastic! Moreover, the demand for diesel (primarily lorries, so we’d expect diesel sales to fall in line with sales of food and so on) is far less price-elastic than the demand for petrol (which is discretionary spending to some extent). Well who’d have thought?

More to the point, the £637 million tax shortfall is mathematically correct but logically flawed. Let’s stick those figures in a spreadsheet:

First quarter 2008:
Million litres of petrol sold = 5,493
Million litres of diesel sold = 4,117
Total = 9,610
Average price (from here) = 106 pence/litre
Fuel duty = 53.65 pence/litre

Petrol sales down 15.2% = 835 million litres
Diesel sales down 6% = 247 million litres
Total = 1,082

First quarter 2011:
Million litres of petrol sold = 4,658
Million litres of diesel sold = 3,870
Total = 8,528
Average price (estimate) = 135 pence/litre
Fuel duty = 58.95 pence/litre

So how much is the fall in tax revenues?

If we just multiply 1,082 million litres by 58.95 pence, we arrive at £638 million (the AA’s figure).

Oh no, it isn’t!

The £637 million figure is of course complete nonsense and is comparing apples with pears on several levels – for example, they overlook VAT – which used to be 17.5/117.5 of a smaller number and is now 20/120 of a bigger number.

So how much is the increase in tax revenues?

The true tax per litre in the first quarter of 2008 was 69 pence (15p VAT and 54p fuel duty); in the first quarter of 2011 it was 81 pence (22p VAT and 59p fuel duty). So the AA could argue (if it so wished) that the tax shortfall is £881 million (1,082 million litres x 81p), but it would be far more correct to say that total revenues were £273 million higher in first quarter 2011 than in first quarter 2008:

Q1 2011: 8,528 million litres x 81p = £6,946 million
Q1 2008: 9,610 million litres x 69p = £6,673 million
£6,946 million – £6,673 = £273 million.

So it’s quite clear we are still not past the top of the Laffer Curve (although we may be getting near it) and there is no ‘revenue shortfall’. Whether you think that fuel duty is a better or a worse tax than other taxes is a separate issue; to my mind it’s like Land Value Tax for roads, so is on the “good” side of the line, as opposed to VAT generally, income tax, National Insurance etc, which are on the “bad” side of the line.

Just sayin’, is all.


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