Pass on the Gas Tax

Andrés Velasco

Rising fuel prices, whether from reduced subsidies or higher taxes, are tricky to offset, which is why they have spurred social unrest far and wide. What looks new in recent episodes is the sense of political illegitimacy: while paying more is painful enough, not trusting leaders to put the money to good use adds insult to injury.

SANTIAGO – French President Emmanuel Macron is not the first politician to run into trouble over gas taxes. Early last year, striking truckers brought Brazil to a standstill and helped elect uber-rightist Jair Bolsonaro to the presidency. The “Dump the Pump” movement in 2000 looked like it might keep Tony Blair from winning a second term. In the US, the issue is so politically toxic that inflation has been allowed to erode two-fifths of the value of the federal gas tax since it was last updated a quarter-century ago.

I was also once the victim of diesel-fueled rage. As Chile’s finance minister a decade ago, I tried to close a loophole that allowed truckers to get back what they paid in fuel taxes. The government’s political operatives assured me that we would not cave in under pressure. With trucks blocking major roads and supermarket shelves emptying, their iron will melted away in less than an week. Shame-faced, our government retreated, like Macron and so many others have since.

The economics of gas taxes is as old as the politics. The price of fuel in terms of other goods (what economists call a relative price) plays two roles at once. It guides consumption and production decisions: if diesel is dear, consumers will use less and producers refine more of it. It also redistributes income: expensive fuel means that heavy users are “poorer,” because they have less purchasing power left for other items.

With diesel and other fuels, the relative price that induces the right consumption and production decisions has the wrong distributive effect. Taxing diesel to make it more expensive reduces pollution and greenhouse-gas emissions. That makes educated urbanites who take the subway to work quite happy. It makes rural dwellers who drive long distances, and small business owners who rely on diesel-chugging pickup trucks, exceedingly unhappy.

Increasing a fuel tax is like cutting an import tariff: both moves reduce price distortions, but also produce winners and losers. The standard economics solution is to compensate the losers. When cutting tariffs, compensation is often discussed but seldom accomplished. When it comes to energy prices, compensation can work if the losers are also the poor. Three years ago, when Ukraine cut subsidies on domestic gas prices, a one-time cash payment helped penniless pensioners and low-wage workers heat their homes during the winter.

With diesel, the situation is more complicated. The very poor typically do not own big diesel-chugging vehicles. Nor is diesel used to cook food or heat homes. True, the buses in public transport burn diesel, but a poor citizen can share the extra burden of a price increase with the 20 or 30 others who also ride that bus.

The big losers from a diesel tax increase are solidly middle class, and finance ministers fear schemes to compensate the middle class for at least two reasons. It is politically unpalatable to hand over cash to those in the middle but not to everyone lower in the income scale, making the compensation expensive. And the precedent set in one case can be invoked in countless others. When the currency depreciates, consumer imports become more expensive; as cities prosper, choice real estate becomes dearer; as countries prosper, services – from haircuts to housecleaning – also increase in (relative) price. Is the treasury supposed to compensate the middle class for those losses of purchasing power as well?

So rising fuel prices, whether from reduced subsidies or higher taxes, are tricky to offset. No wonder they have spurred social unrest from La Paz to Lahore and from Cairo to Coventry – and now Paris.

What looks new in recent episodes is the sense of political illegitimacy. To have to pay more is painful enough, voters are saying. Not trusting leaders to put the money to good use adds insult to injury.

Take Brazil. For years, oil giant Petrobras sold fuels domestically at less than the world price, and its shareholders (the largest being Brazilian taxpayers) footed the bill. That much was known. What was not known is that Petrobras was also home to one of the largest corruption schemes ever. Some politicians used the company to hire friends and finance campaigns; others used it to line their own pockets. Tens of billions of dollars are still missing.

Fast forward to the recent past. Starting in 2016, Michel Temer’s new administration instructed Petrobras to end subsidies and begin charging world prices for its products. And when the currency depreciated, prices at the pump went up even more. Domestic consumers took the hit.

Most Brazilians, of course, took no notice of the intricacies of parity pricing. What they knew is that a famously corrupt company was jacking up prices and sticking its filthy hand into their pockets. So when truckers blockaded roads demanding lower diesel prices, 87% of Brazilians supported the strike. The CEO of Petrobras, a respected economist who had been brought in to clean up the company, was forced to resign.

In France, there has been no comparable corruption scandal – at least not recently. But a whiff of illegitimacy hangs over Macron’s laudable attempt to realign fuel prices. Maybe it was the inevitable consequence of the president’s background as an investment banker; or of his imperial and aloof style; or of the decision to abolish the wealth tax as his administration’s first priority.

Convincing middle-class French voters that higher fuel prices were actually good for them was always sure to be an uphill battle. Macron’s style and mistakes made it even tougher. What might have been a narrow taxation row became a clash of identities, of what the British author and editor David Goodhart calls somewheres versus anywheres. Warnings from the Élysée Palace about planetary responsibility did not go over well. Protesters griped that the president was fretting about the end of the world while they worried about getting to the end of the month.

Are such outcomes inevitable? I think not. One can imagine a popular president making diesel as expensive as it should be to prevent the planet from going up in flames, while forcing the wealthy to pay their fair share of government expenses and implementing some clever spending schemes to lighten the load on the middle classes. Much politicking to persuade voters that the president is on their side would also be needed.

Yes, one can imagine all of this. But imagining it is not the same as expecting it. Even Super-Macron could not pull it off. The next enlightened liberal is unlikely to succeed where he failed. /project-syndicate