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More on the Gifts of Diesel Price Rise - 'even overcompensate household purchasing power decline'


If the tax subsidy on diesel fuel is abolished, according to a research report published yesterday, it would probably also mean a reduction in income tax or other income transfers to those most affected by the increase.

The elimination of the tax subsidy on diesel, which has risen again in recent days, or virtually any increase in the price of diesel fuel, would affect practically every household.

This is because the increase would result in an additional cost for virtually all companies using road transport and diesel as an intermediate product, which would eventually end up in the prices of their final products, such as food.

In the case of households, the study therefore explored ways of compensating citizens for the effects of the increase in diesel prices, either by lowering taxes on income or by other transfers.

  • Read more: Here are the alternatives to the diesel paper that was made available to the government yesterday - the price per liter would rise to nearly two euros

Of particular interest is that the offsetting of any increase would be in principle the same pattern as the government of Prime Minister Sanna Marin (sd) has repeatedly flashed in the context of the tax hike, albeit without its more specific purpose than "low income".

In any case, a research report by the Pellervo Economic Survey (PTT) and Merit Economics states that, according to previous research, the removal of tax subsidies is likely to be more burdensome for low-income and rural residents than for non-citizens.

  • Read more: Exactly 125,439 citizens have signed up to demand a tax cut on diesel engines

In this study, compensation is assumed to occur through three different channels:

  • Abolition of propulsion tax in connection with the removal of diesel tax subsidies.

  • Refund to households of additional accumulation of tax on diesel by reducing income tax on operating income over and above income tax.

  • Refund to households of additional accumulation of tax on diesel as income transfers in excess of the tax on propulsion.

  • The first of these alternatives, according to the research report, is that the tax refund does not correspond to the additional accrual since the tax increase affects not only households but also business. It estimates the additional accruals that are returned to households under options 2 and 3.

    Option 3, on the other hand, would be equivalent to replacing the lump sum tax with a price changing tax, and the study also expected that the compensation itself would not be fully sufficient to offset the tax increase (which entails costs for the business and households).

    In option 2, instead, the accrual will be used to reduce the tax wedge on income tax, which reduces the cost of the tax system and, according to a research report, "even overcompensates the decline in household purchasing power with a moderate increase in consumption". By maintaining domestic purchasing power, compensation may also affect the adjustment of the economy by keeping the economy more focused on the domestic market.

    The ultimate purchasing power could even rise?

    Thus, a little shorter, in the model simulation, the reduction in the tax wedge and the multiplier effects of the reduction in the income tax even offset the decline in household purchasing power than the rest of the change.

    On the other hand, income transfers, such as a rebate on a child allowance or a pension, are not enough to offset the increase in diesel prices.

    However, both options would compensate for differences between households in different provinces.

    The research initiated by the Sipilä government now ends up as the working paper for the world's most ambitious climate policy

    A report suggesting the removal of diesel tax subsidies was already commissioned during Juha Sipilä's (central) government, but has only been completed. In practice, this is a report for use by the Ministry of Transport and Communications, the Ministry of the Environment and the Ministry of Finance, which will serve as a basis for future policy decisions.

    This is likely to happen soon, as Prime Minister Sannan Marin (SD) has pledged to make Finland a carbon-neutral society by 2035 and to halve traffic emissions by 2030:

    - Decisions will certainly be made in the autumn of 2020.

    Source: isfi

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