Road Tax in UK

I was interested to read about a recent ‘I Pay Road Tax Campaign‘ (I have talked about this before – Should cyclists pay road tax) At the risk of repeating myself, here are some more thoughts on the issue.

I Pay Road Tax

Of course, nobody pays road tax because it was abolished in 1930. But, most adults will pay Vehicle Excise Duty (which is popularly known as Road Tax)

Cyclists are often criticised for not paying ‘road tax’ and this is a worthy campaign to raise awareness that we all effectively pay for the road and its maintenance. It helps to provide a defence against aggressive motorists who would like to see cyclists pushed off the road, because occasionally they have to slow down to overtake someone.

As well as being a cyclist, fortunately or unfortunately, I am an economist. One particular interest in economics is the concept of  optimising social welfare in the presence of consumption or production externalities. In an ideal world, externalities would be internalised through Pigovian taxes or subsidies to reflect the true social cost of different activities.

If I haven’t lost you already, – hang on. What does all this mean in practical terms?

There is a private cost of driving – petrol and taxes e.t.c. But, driving a car also creates negative externalities which are borne by society – not the individual driver. These external costs include:

• - Congestion – estimated to cost the UK economy in the region of £22bn a year. A huge economic cost and also high personal cost of being stuck in traffic jams,
• - Pollution – For example, CO2 emissions which contribute to global warming. Higher rates of asthma e.t.c
• - Accidents. Motorised vehicles cost the lives of over 3,000 a year. Typically, cyclists may cause the deaths of 0,1 or 2 people a year.
• Wear and tear on roads which increases disproportionately with vehicle weight.

For driving a car the social cost is much higher than the private cost. To get an efficient allocation of resources – to help reduce congestion, pollution and accidents, – the cost of driving should be much higher than the free market price. Petrol tax helps redress the balance, but, it is not enough to reflect the social cost.

External cost of driving

By contrast, cycling doesn’t have the same negative externalities. Therefore, the social benefit of cycling is higher than the private benefit. Cycling should be subsidised. The idea of taxing cyclists who don’t create the negative externalities would not make sense

In a free market, we get an overconsumption of cars (best illustrated by interminable traffic jams). When deciding to drive people ignore the external costs of driving. When cycling people underestimate the social costs. Therefore we get underconsumption of cycling.

To cut a long story short, cyclists shouldn’t be paying the same level of tax as motorists. It is possible to argue how high the external cost of driving is. But, I’d rather support a campaign where people who cycle to work get a subsidy equal to say £100 a year – (the cost of Vehicle Excise Duty.)

So maybe I’ll make a bike jersey which reads.

“Higher Pigovian taxes for Motorists! Subsidies for cyclists! Let’s try and achieve a Pareto optimal outcome on our roads!”

-  Now if that doesn’t sound catchy I don’t know what does!

BTW: I am a motorist, but, would welcome higher taxes on driving.