-THE DISTRIBUTIONAL EFFECTS OF TRANSPORT COST AND ITS IMPACT ON INCOME INEQUALITY: EVIDENCE FOR LISBON AND PORTO METROPOLITAN AREAS

The impact of fuel consumption on climate change has prompted governments to increase the taxation of fossil fuels. This is often referred to as a Pigouvian tax, in other words, a tax that attempts to internalize a social cost (i.e., negative externality). However, indirect taxes like this risk being regressive – i.e., affecting disproportionally more the poorer members of society -, because their rates are invariant with consumers’ income level. To ensure social justice in fuel taxation it is important to analyse the regressivity of fuel taxes. Furthermore, since richer people tend to pollute more, to effectively decrease pollution from fossil fuel consumption, it might be important to tax the richest people relatively more. On the other hand, public transportation is more fuel and energy efficient compared to motorized private cars, which combined with the nature of its cost technology (i.e., large, fixed costs, average cost higher than marginal cost), justify subsidizing public transport use. In contrast to fuel prices and taxes, public transport pricing often includes social fares for more vulnerable groups of society – e.g., children, the elderly, and the unemployed -, which promotes social justice. This paper analyses the degree of progressivity, or regressivity, of transport costs relating to driving (i.e., fuel, tolls, parking) and public transport use in the metropolitan areas of Lisbon and Porto. We use data on transport expenses and analyse the degree of progressivity, or regressivity, and the impact that these expenses have on income inequality by comparing the Gini index of income before and after transport expenses. The findings indicate that transport expenses increase inequality and that taxes can be slightly regressive. To evaluate the progressivity of fuel taxes we use the Suits index, which shows a slight regressivity of the fuel taxes. The policy implications from this analysis show the importance of investment in alternatives to reduce the use of private motorized vehicles, as well as in reducing the price of public transportation, at least in big cities where this kind of transportation is more viable.