The Vehicle Tax Is Unfair: It Should Be Folded into the Fuel Excise Tax

I am continuing my series of posts on taxes and taxation.

There is a basic principle of taxation known as the "principle of fairness." In other words, every taxpayer should pay an equal amount of tax.

This principle is the subject of much debate, because fairness depends on the tax base, the tax rate and the very nature of the tax.

In this respect, there are several ways to compare taxes in terms of fairness.

1. Comparing the taxes themselves. In theory, taxes on income are fairer than taxes on consumption. For example, personal income tax (PIT) is fairer than VAT, because people on average consume about the same amount, while their incomes differ widely. Consider a specific case: a pensioner spends her entire income on food and pays 12% on it, so her tax burden is 12%. A company director spends exactly as much on food as she does, but that amounts to only 5% of his income, so his burden is 0.6%. This is why Western countries rely mainly on income taxation rather than indirect taxation. In developing countries, by contrast, indirect taxation predominates because it is easier to administer.

2. A progressive tax system or a flat one. Many countries use a progressive tax system. Which is fairer, progressive or flat taxation, is a highly contentious question. It deserves a separate post of its own, so I will come back to it later.

3. Differences in the tax base. Here the tax rate changes depending on the tax base. The classic example is the vehicle tax, and I would like to dwell on it in more detail.

I believe that our vehicle tax system is inadequate and unfair. It looks more like a luxury tax than a tax on vehicles.

I do not want to go into the theory of the vehicle tax, but it is important to understand the main motives behind it.

All taxes are either earmarked or general. Earmarked taxes are those directed to specific purposes. The social tax is one example: it cannot be used to pay the salaries of the staff of a city administration or akimat. Such taxes form separate budget items that are tied only to them. General taxes are distributed across all budget items.

The vehicle tax has always been regarded as an earmarked tax, and it was used to fund road repair and construction. I do not know how it works now.

Today our vehicle tax probably serves first to support car manufacturing in the EAEU, then to protect the environment, and only after that to support road repair.

In my view, the vehicle tax should address the problems of roads and environmental protection and be earmarked, rather than serve as a tax supporting the EAEU auto industry.

Depending on the purpose, we need to ask which tax base is fair. Engine size, fuel consumption or something else?

If we start from the goals I have proposed, then logically the best measure for the tax is fuel consumption. The more you consume, the more you drive and the more you pollute the air.

It is also the best base on other grounds. If my car sits in the garage, why should I pay tax? Or suppose my German car with a 5-liter engine uses half as much gasoline as a Russian-made car with a 2-liter engine. Why, then, should I pay 20 times more tax?

Therefore, the best option for the vehicle tax is to include it in the excise tax on fuel, which would make the tax as fair as possible.