High fuel prices: Broad tax cuts for gasoline are the wrong way

In view of drastically rising energy prices, there are increasing demands that the state should shield citizens from the burdens.

The French government has announced that it will reduce petrol tax by 15 cents per liter for four months from April.

In Germany there is criticism that the state earns money from the increase in the price of petrol through VAT.

He had to return the additional income to the citizens.

Some are calling for only the reduced VAT rate of 7 percent to be levied on fuel.

Since VAT rates cannot be changed at will due to European legal rules, Federal Finance Minister Christian Lindner (FDP) wants to introduce a petrol discount: You should submit fuel bills to the tax office and get a part refunded.

That's well intentioned.

Politicians want to signal

that they take the concerns of their constituents seriously and respond to them.

Still, general gasoline price cuts are the wrong approach.

What amounts are involved?

In 2021, the average price for super petrol was 1.58 euros, diesel cost 1.40 euros.

VAT levied on household fuel expenditure was estimated at €10 billion.

If one assumes that premium petrol and diesel will cost 2.20 euros per liter in 2022 and, for the sake of simplicity, assumes constant consumption, VAT revenue will increase to an estimated 14.5 billion euros in 2022.

The additional revenue for the state would therefore amount to a maximum of 4.5 billion euros.

In fact, it would be less because consumption decreases.

A reduction in VAT to 7 percent would cost the Treasury almost 9 billion euros.

If you really only wanted to reimburse the 4.5 billion euros in revenue compared to last year, a tax exemption or a discount that corresponds to a good 5 VAT points would be appropriate.

A liter of petrol would then still cost EUR 2.10 instead of EUR 2.20, and only then if the producers passed on the tax reduction in full to the consumers.

This is not enough to noticeably relieve households that have been hit particularly hard, and it still costs the state a lot of money.

Significant burden on public budgets

One could limit the tax cut to four months, as in France, to reduce fiscal costs.

However, the relief effect would be correspondingly smaller, the whole thing would be more of a symbolic act. In any case, it is questionable to base any relief on the additional revenue from VAT, because higher expenses for petrol lead to lower expenses for other goods.

So the thesis that the state would make money from the price increases is far-fetched.

Irrespective of the level of relief, however, there are very fundamental arguments against general fuel tax cuts or rebates.

Politicians cannot really shield the German population from the burden of higher energy prices.

If the state lowers petrol taxes, private households will initially spend less on petrol.

But that does not create any real relief, rather an illusion of relief.

The state would initially incur more debt for this.

These debts must be serviced in the future, through taxes paid by the very households that are now supposedly being relieved.

The fact that the state first gives the citizens the money and later collects it again through higher taxes or spending cuts is ultimately more expensive than accepting that private households are now spending more on petrol.

Of course, one could argue that the tax cut will ensure more spending discipline in the future.

But there will probably be no lack of pressure on public finances, and a different, more targeted use of the funds would have the same effect on this point.

The state cannot eliminate the burdens of rising energy prices, it can only redistribute them.

This can make sense because not all households are equally able to bear higher fuel costs.

For example, it can specifically help households with low incomes or long-distance commuters.

If the state is assigned an insurance function, that is justifiable because it helps those who are more heavily burdened than others or who can bear higher prices particularly badly.

However, this means that the other households not only bear higher energy costs themselves, but also bear the costs of helping others.

The heating cost subsidy that has already been decided for housing benefit recipients is an example of targeted assistance.

Targeted support for travel expenses is more difficult, but possible.

One could increase the long-distance commuter lump sum or, so that the relief is independent of the marginal tax rate, supplement it with a tax subsidy, which is granted from the 20th kilometer, for example.

Companies are also affected in very different ways by rising energy costs, but here, too, targeted help is better than nationwide relief.

It is foreseeable that the public budgets will continue to be heavily burdened in the course of this crisis.

It is all the more important to ensure that there is a reasonable balance between fiscal costs and benefits when it comes to state aid.

Clemens Fuest is President of the Ifo Institute in Munich.