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Hockey’s amazing discovery: Bigger households use more of everything

August 14th, 2014

I’m a bit late joining the pile-on to Joe Hockey for his silly claim that poor people won’t be hit by fuel excise because they don’t drive (or not as much). Obviously, that’s true of just about every tax you can think of: poor people, earn less, spend less and therefore pay less tax. The big question, as the Australia Institute and others have pointed out, is how much people pay as a proportion of income. Food and fuel represent a larger than average share of spending for low-income households, so taxes on these items are more regressive than broad-based consumption taxes like the GST which in turn are regressive compared to income tax.

But there’s a more fundamental problem with the ABS Household Expenditure survey data cited by Hockey to defend his claim. In the tables he used, the ABS sorts households by income, with no adjustment for the number of people in the household (the ABS also provides “equivalised” figures, which adjust for household size). To quote the ABS

This difference in expenditure is partly a consequence of household size: households in the lowest quintile contain on average 1.5 persons, compared to 3.4 persons in households in the highest quintile. Lone person households make up 63% of households in the lowest quintile.

This makes a big difference to the figures quoted by Hockey, that top-quintile households spend $53 a week on fuel, and bottom quintile households only $16.

Comparing expenditure per person, the top quintile spends $16 per person and the bottom quintile $11 – a very small difference. Of course, the income figures need adjusting also, but here the difference remains huge. Income per person in the top quintile is about 5 times that in the bottom. And Hockey’s argument would look even worse if the ABS sorted households by income.

This is the kind of mistake that’s easy enough for an individual politician to make, but Hockey has the entire resources of the Treasury at his disposal. If he’d asked them before making his bizarre claim, I’m sure Treasury officials would have warned him off. As it is, they have had to provide him with the statistics most favorable to his claim and watch him get shot down.

Still, it was good enough to fool Andrew Bolt.

The fact that a fuel tax is regressive does not mean that a return to indexation of the fuel excise is necessarily bad. There are good reasons for taxing fuel, and no sensible rationale for allowing the tax to be eroded by inflation. But fuel taxes bear most on the poor, so they need to be put in the context of a budget that it is progressive in total. That’s the exact opposite of what Hockey is doing.

  1. August 19th, 2014 at 11:03 | #1

    ZM, fossil fuels are the main source of carbon emissions and with a high carbon price people would use very little of them. Other emissions sources would be reduced as well. For example, under a high enough carbon price the air in cattle feedlots could be passed though filters to break down the methane and the cement industry would use a low emission source of heat instead of fossil fuels. The CO2 released from making cement is reasonably pure and so on site capture at cement plants would allow underground or another form of sequestering. And this process could be used to intentionally remove carbon dioxide from the atmosphere. Limestone could be heated with solar energy, the CO2 released sequestered, and then the calcium oxide produced would absorb CO2 from the atmosphere whether it was used in cement or not. While this method may not be cheap, if the carbon price was high enough it would be done if cheaper options weren’t available. So with a high price all emissions fall and it becomes possible to remove the remaining emissions from the atmosphere.

  2. Nathan
    August 19th, 2014 at 11:44 | #2

    @faustusnotes

    Note that I haven’t said carbon taxes don’t play a role in this; I’m not ignorant of the role of markets in efficiently allocating resources and reflecting preferences. What I’ve said is that carbon taxes won’t do the job by themselves. Do you see the difference between the first steps and the endgame in this? I suspect you are of the belief that we don’t have a budget or a strict timeline.

    This seems very reasonable. I would argue that at this point, precisely because we are on such a tight timeline, the priority really has to be the first steps (carbon pricing mechanisms). We need to start making significant reductions in the short term, and with such a lot of low hanging fruit around, price signals are an excellent way to do this.

    Also, for the record, having read a lot of your comments on this thread, until the above sentence I thought “carbon taxes don’t play a role in this” was very much what you were arguing. I’m not saying this to have a go, I just genuinely think the conversation would have had less static if this point had been clearly made earlier on.

  3. Collin Street
    August 20th, 2014 at 09:24 | #3

    Joe Hockey appears wobbly on Budget details, as Peter Martin writes on Fairfax Media, because there is insufficient expertise left in Treasury to explain issues to him.

    I think that “difficulties treasury has with explaining things to hockey” are more a result of hockey-centric factors than treasury-centric factors: Wayne Swan didn’t have the same problems, after all.

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