Joe Hockey’s inability to sell the indexation of the petrol excise and his seeming cluelessness regarding progressive taxation suggests little hope of his being able to handle any much bigger policy issues this government might have planned, such as changes to the GST.



While Hockey apologised for his dopey comments about poor people and cars, he failed to acknowledge he was wrong when he suggested a petrol excise was a progressive tax. Progressive taxation is the bedrock of our tax system – richer people pay more of their income in tax than poorer people do. It’s why our income tax rates rise the more you earn.

In the ABC radio interview that sparked all his troubles, Hockey said the fuel excise was a progressive tax because “the wealthier people or middle-income people pay more”. He even suggested it was “according to the Treasury, a progressive tax”.

He has not produced any Treasury modelling to suggest it is progressive, but he issued a media release on Thursday defending his position. However he used only the absolute dollars spent each week by households on petrol to support his claim – noting that the lowest quintile spent $16.36 a week on petrol compared with the richest quintile spending $53.87. (A quintile is the population divided up into lots of 20%, thus the poorest quintile is the poorest 20%).

And yet progressive taxation is (and always has been) about the proportion of your income you pay in tax. Given it is a foundation element of our tax system, it is a bit concerning that our treasurer seems rather confused about what it means.

This is especially worrying because the proposed funding cuts to the states foreshadowed in the federal budget had many commentators and state premiers suggesting the government was hoping to increase or broaden the GST.

But indirect taxes such as petrol excise and GST, as a rule, are regressive because while poorer people spend less money each week on items than do the wealthy, they do spend a higher percentage of their income. Indeed, the richest households spend 3.9 times more than the poorest, but they earn 8.8 times more.

Hockey does sometimes seem to grasp this. Last Thursday when journalist Marius Benson suggested poorer households spend “a higher proportion of their incomes in fuel excise and it hits them harder”, Hockey replied, oddly unaware he was contradicting his own claim that the petrol excise was progressive: “That is the case with any indirect tax.”

The problem is indexing the petrol excise to inflation will cost the average household just 40 cents extra a week. If Hockey can’t even sell that in a way that shows his understanding of the issue, then he has no hope when it comes to changes to the GST.

When we look at broad categories of spending we see that in each one poorer households spend more of their income than do the richest:

Thus, across the board, a GST will undoubtedly be regressive.

There is nothing inherently wrong with a regressive tax, but it behoves the government to justify making poor people pay more of their income than the rich – just as the government also needs to justify why for its paid parental leave scheme it is giving more money to the rich than the poor.

For example the poorest households spend 2.2% of their income on tobacco compared with 0.4% by the richest. By itself this would make the excise on tobacco a pretty harsh measure, but its purpose is not just to raise tax but also to reduce smoking.

Similarly, while petrol excise is regressive it is an efficient way to raise tax that may also encourage people to buy more fuel-efficient cars, or – in theory at least – encourage greater use of public transport, which in turn would reduce emissions.

But there are political realities as well. Before Hockey made his comments perhaps he would like to have known that one of the few categories in which the poorest households spend more in absolute terms than the richest is in “subscription to motor organisations”.

Yes, poor people do like their cars – they spend around 19% of their weekly income on transport costs. And given nearly 50% of the poorest households are made up of people over 65, I’d suggest “the grey nomads” would not be too impressed with Hockey’s statements:

But while, in general, poorer households spend more of their income on all items, there are some notable exceptions.

The richest households spend more of their income on mortgage repayments than do the poorest (5.1% to 4.7%). They also spend more on airfares, women’s suits and parking fees.

Perhaps most importantly, especially in terms of taxation policy, the richest households spend more of their income on school education fees:

Again, partly this is because of the higher number of pensioners in the poorest quintile, but even the second, third and fourth quintiles, which all have a similar number of dependent children, spend less of their income on school fees than the richest.

In this case a GST levy on such fees, raising $3.3bn in taxation revenue, would actually be a progressive tax and is certainly one worth considering.

Raising the GST on food however would be much more problematical.

When looking at all food expenditure, we see the biggest disparity between rich and poor is the amount spent on food that is currently GST exempt. The poorest spend 16.7% of their weekly income on such food, compared with just 4.4% by the richest households.

The Treasury suggested levying a GST on food could bring in an extra $6.1bn a year in revenue, but there would have to be a massive increase in benefits to the poorest to compensate.

The pattern of health expenditure shows the real impact of the older age of those in the lowest quintile. The poorest households spend far and away more of their income on medical expenses than any other.

But the big difference is not GP visits or even health insurance, but the amount spent on specialist doctors’ visits.

Excluding the lowest quintile (and its high proportion of seniors) sees a much more even spread of expenditure, and thus levying GST on health might not be as regressive as this chart first suggests. And given increasing the GST on anything would require a large increase to the pension, the increase in costs might be quite easily compensated.

A GST, as Paul Keating, John Hewson and Peter Costello can attest, is probably the toughest economic policy to sell. It is tough because by and large it requires dealing with the regressive nature which can see the poorest hit much harder than the wealthiest.

It requires a treasurer to be not only able to sell policy, but also to be completely across the implications of who will be affected by the tax. The treasurer must know that the impact of taxation is more complex than just working out who pays the most in absolute dollar terms.

Nothing done last week, nor really any time since the budget, has suggested Hockey is up to the task.