The Cruelest Tax Of All

A “progressive” tax is one where the wealthier you are the higher percentage of tax you pay. On the other hand, I’ve said before that a tax on energy, the so-called “carbon tax”, is one of the most regressive taxes available. It is the reverse of progressive, it hits the poor the hardest. This is because poor people spend a larger percentage of their income on energy than do rich people.

Someone challenged me on this claim about energy taxes the other day, and I realized I believed it without ever checking it … bad Willis, no cookies. So of course, having had that thought I had to take a look.

The Energy Information Agency (EIA) collects data on this, with the exception of gasoline usage. I got the most recent data, for 2009. (Excel workbook). Gasoline usage figures are here from the Bureau of Labor Statistics. Finally, income averages by tiers are available here from the Census Bureau.

Putting all those data sources together, here are the expenditures on energy as a percentage of the average income.

percentage-income-spent-on-energy

As always, data brings surprises. I didn’t expect the main expense to be heating (water and space heating) and the smallest to be gasoline.

In any case, it is quite clear that my original intuition was correct. The wealthiest of our households spend about 6% of their income on energy, while the poorest spend just over 40% of their income on energy.

And of course, this means if energy costs go up by say 25%, the rich will get a bite out of their income of 1.5%. But the poor will get an additional bill for no less than 10% of their income …

Sadly, in reality it is worse than that. At the poor end of the spectrum, there is very little slack in the budget. There is a concept in economics called “disposable income”, money that you have at the end of the month that isn’t already spoken for to pay some bill or other.

People living on the economic bottom floor not only don’t have disposable income, they never heard of disposable income. Every dollar is spoken for, and often over-promised.

So the poor get it from both ends. Not only does any price increase bite the poor harder than it does the wealthy, but the poor have much less available money to pay for any increase. That means the energy price increase has to come out of their kids food or the doctor bills or somewhere else important … bad news.

The rich pay a percent and a quarter, and the poor pay ten percent? This is the action that will save the planet in fifty years, to shaft the poor with an incredibly regressive tax?

I say again: fight CO2 if you wish, but fighting it by increasing the price of energy harms the poor more than anyone. Look at the graph above. Energy taxes are wildly regressive, and the worse off a family is, the harder any such “carbon tax” or any energy tax will hit them.

Best to all,

w.

PLEASE, if you comment QUOTE THE EXACT WORDS YOU ARE DISCUSSING, so we can all be clear about your subject.

Crossposted to Watts Up With That

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15 thoughts on “The Cruelest Tax Of All

  1. Spot on Willis. Here in tropical Oz we don’t spend anything on heating, but poor people are typically in regions and outer suburbs so spend a lot on transport fuel. Electricity cost increases are going to be steep here too. We have mandated ethanol content, renewable energy targets,and our wonderful state government wants to have 50% renewables by 2030. Idiots.

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  2. Hi Willis. The numbers fit for my household to (in Switzerland). Your chart is misleading though. At first I thought ‘what, the poorest pay over 80% for energy? I didn’t see the 50% label for a long time.

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  3. These are, of course, not the only regressive taxes in our societies – sales tax in the US and VAT in the EU are equally as nasty, VAT especially so as the rate is often high – where I live it’s nearly 20%. Most foodstuff is exempt, but things like children’s clothes, fuel, and even sanitary towels are subject to this awful tax.

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  4. For the most part, I’ve stopped trying to argue the holes in climate science with my progressive friends because it just ends up which scientists they trust; they trust NASA and NOAA and unless they wish to devote time and an open mind, there’s nothing I can do. But there are a few arguments I will still have with them and one is over their support for a regressive carbon tax. I admonish them that they cannot call themselves a progressive while supporting such a regressive tax. I’ll bookmark this post as a resource to call upon. Thanks for that.

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  5. Remember tHugo Chavez going to the governors of northeast states and offering discount heating oil for the poor? Here in PA there are heating subsidies for the poor in all counties, and don’t you dare ask them why they don’t just stop increasing taxes on energy instead. Boy does that piss them right the f**k off. Best part? The Evil Marcellus Shale has ripped the guts out of their “freeze the poor to get more votes” agenda. Democrats here are scrambling desperately to raise natural gas prices and failing. It is a Glorious Day in America, all hail Evil Marcellus Shale!!!!

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  6. All taxes, while admitting that some are necessary, pull money out of the economy. But there is another disguised tax that is sold as helping the poor and that is the minimum wage increase. Huh?
    Think about the social security tax increase that the government collects with each $1 per hour per employee increase that is forced on business owners. Remember that the business pays this tax on both sides. First they have to pay the wage increase which the government then takes 7.5% for SS, then the business must match that with an additional 7.5% of the increase. All of that is taken directly from the business revenue and put into the hands of the government without having to pass a SS tax increase.

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  7. Long term this is going to hurt Social Security. Employers are dumping employees instead of paying more, which is a double whammy on SS for the very reason you explain. Instead of collecting double SS is losing double. And the employees who remain will be earning less, through reduced hours/part time status, which further reduces SS collections. Social Security tax is going to have to be increased dramatically just to keep it where it is, collections wise. Somebody best be figuring a way out of this trap, cause poor people ain’t got no more money to give and are going to have even less in the very near future if we allow Democrats to keep doing the stupid sh*t they have been doing for the last 50 years.

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  8. And of course that’s just one regressive tax. Sales taxes are also regressive especially when applied to necessities such as food and clothing. VAT (value added tax) strikes me as an even more regressive tax. Social Security is outlandishly regressive in that there is a cut off after which you don’t pay anymore and is only related to salary not other income.

    The percentage of gasoline at the lower income levels made sense after I thought about it. At some point the cost of an automobile becomes prohibitive and a great many low income people live in cities where other modes of transportation are available, so cars become a luxury.

    Another thing is that the poor are not able to avoid taxes by moving or buying elsewhere. Jimmy Carter almost destroyed the luxury boat building industry in the Northeast with his luxury tax. The wealthy boat buyer’s just bought offshore from places like Hong Kong. John Kerry parked his boat in Rhode Island to avoid Mass taxes. Even middle income people can drive out of a city to the suburbs to avoid the higher taxes the residence pay on staples.

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  9. Objective: Population reduction
    Objective: Deniability
    Action: Tax increase, forces poor to choose between heating and eating => pneumonia, bronchitis, etc.
    Bonus: Reduce number of old people (see Old Blighty’s mortality data for “pensioner” last few winters
    Bonus: Reduce medical costs to NHS.
    Bonus: No fingerprints or intent

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  10. Interesting graph of direct energy spend, but tantalisingly missing the big picture ?
    (Not aiming to challenge you here Willis – just wondering about a wider scope.)
    Wealthier people fly more, use Fed-Ex more, afford more food & supplies from distant sources.
    And all of that extra ‘stuff’ needs energy for its creation.

    Except for ‘collectibles’ and other goods of high value due to rarity, is not everything we consume cost-proportional to its energy input ? Food, furniture, entertainment, housing, tech gadgets… even schooling, local taxes and utility costs are ‘energy at work’.

    If so, does an energy tax work rather more widely, as a general sales tax – built into local production from the mine, well or keyboard through to the finished product – more of which will be bought by those with more disposable income. Hence, is it somewhat closer to an income-neutral result than shown in the direct-energy-only graph of consumption.

    If so, will it also encourage off-shoring of any local value-add to these costs of living ?
    Does a local energy tax simply become another regulatory cost for local business ?

    Please note: I dislike all of (a) energy taxes, (b) CO2 regulation and (c) AGM alarmism.

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    • Good questions all, Paul. You are correct. The energy tax hits everyone because as I said, energy is an input to all large-scale wealth generating activities. As a result, while it hits the poor the hardest, it is a drain on the economy everywhere which is out of proportion to the size of the tax.

      However, it is NOT acting like a sales tax. A sales tax is a tax on the “proper” end of the wealth creation cycle. By “proper” I mean the output side, the side that affects the economy less than pulling the same amount of money from the input side of the wealth generation process.

      w.

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  11. “Putting all those data sources together, here are the expenditures on energy as a percentage of the average income.”
    My interest led me to try and further understand by replicating “%~income” calculation (without gasoline). Missed something, not jiving even with gasoline generously factored-in, Care to entertain with some enlightenment, please?*.
    Source for below: CE4.11 End-use expenditures by fuel Totals, U.S. homes
    Results:
    Income Point, Percent of Income
    $15,000, 6.7%
    $30,000, 3.3%
    $50,000, 2.0%
    $80,000, 1.3%
    $90,000, 1.1%
    $110,000, 0.9%
    $150,000, 0.7%
    Calculation Detail:
    INCOME POINT: $110,000
    TTL HOUSEHOLDS: 6,500,000
    TTL INCOME: $715,000,000,000.00
    TTL ENERGY EXPENDITURES: $6,500,000,000
    PERCENT OF INCOME: 0.9%

    *ready for public schooling online, certainly would not be insulted if buried and addressed by email.

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