When I moved to Denmark, not too long ago, the market value of my car increased by roughly 80%. If you think that sounds too good to be true, then note that I never said that this windfall profit ended up in my pocket. All of it, and actually a bit more than that, ended up in the coffers of the Danish tax authorities, or SKAT as the Danes call them.
As an amusing aside: the Danish word skat is the same as the Dutch word schat and German Schatz. Apart from the tax authorities it also means treasure (the kind that dragons guard) and sweetheart. I will leave it up to the reader to decide whether the Danes are very good at irony or have a very special relationship with their tax system.
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| The Danish tax authorities. You decide…. |
The reason of this enormous value increase is the car registration tax in Denmark. Whenever a car gets newly registered in Denmark (new or otherwise imported) it gets taxed a whopping 180% – excluding the 25% VAT. This registration tax is taken up in the market price of the car, that is, whenever someone sells their car they try to recover a part of the tax and as such cars are way more expensive in Denmark. Having brought our car into Denmark we were also obliged to pay this tax.
Why do the Danes tax cars at such an incredible rate? When you look up the registration tax on the SKAT website it is listed as an environmental tax. As an environmental economist I am really fond of this idea. Have anything you don’t like? Tax it! People will then automatically reduce their purchases, and consequently you reduce the problem. In addition this allows you to reduce some of the other taxes. Given the current tax rate I pay on my salary and the VAT rate (25% on all purchases), I don’t even want to know what I would have to pay if the car tax was not present!
However, I cannot help but wonder if taxing cars is the right thing to do in this case. After all, it is not directly the cars we are worried about, but mainly their emissions. If that is the case then we should not tax the cars, but their emissions. In terms of emissions I fear that the car registration tax has actually quite the opposite effect.
The reason is that everyone tries to pass on the paid tax, and this increases the price of all cars. In addition, even though salaries are somewhat higher in Denmark, income taxes and prices in general are also higher, so that roughly the same amount is available for purcasing a car. As a consequence everyone buys a cheaper car than they otherwise would, and these are usually the older cars. This is also what most of my international colleagues have done when they moved to Denmark: they sold their car in their country of residence and bought an old car in Denmark. As my colleague, Villy Søgaard pointed out in a previous post, (among other things) older technologies are generally more polluting.
Admittedly taxing emissions is not easy. How do we measure emissions? Do we install a measurement devise at each and every car? We only need to consider the recent VW scandal to identify potential problems with that. Another possible solution is perhaps to introduce a tax per km driven and require that everyone reports their amount driven each year. The tax rate should then be dependent on the car model. There is also the problem of under-reporting your amount driven, so regular checks would be needed. On the other hand the level of trust in Danish society is very high, so perhaps the checks are not as often needed as one might think. Also, emissions vary depending on where you drive, and how you drive. Still I think we can figure out a few clever ways of avering that out. Although far from perfect, it is probably a better way to address emissions.
As a final note if it really are the cars we care about and not the emissions (for example for congestion reasons) then we could alternatively give out a fixed number of (tradable) permissions to drive. This can easily be combined with the driving license, and reduces the number of cars on the road. Economic theory predicts that in a perfect economic world the effect is equivalent to a tax. As we do not live in a perfect economic world, I do not think that the effect would be exactly equivalent, but close enough and perhaps somewhat better. The reason is that the permit price is not attached to the car price. When selling their cars people would no longer try to pass on the tax, because when selling their car they do not necessarily also sell their license to drive. As a consequence the price of cars would go down, and people can afford newer cars (depending on how the price of driving permits evolve). With better technology these will probably be less polluting cars.
It may sound unfair that a driving license is to be sold. What about young people that do not have enough money to pay the price of a license? This is something to think about, but then again the high car taxes are equally unfair. You can only drive a car if you can afford one.
Did I miss anything important you would like to address?
Cover Photo Credit: BMW i8 Concept at IAA 2011. View: front left. Author: Abehn
Mereconomics 
Dear Maarten,
Thanks a lot for your thought-provoking comment. The taxation of cars is but one of many examples of how policies come to have a life of their own long after their original purposes have vanished. Another example is the CAP of the EU, but I’ll leave that to another day. If my recollection is right, the car taxes were introduced after World War II as a way of protecting the balance of payments. In all fairness it should be added that there were good reasons to be concerned about it: for decades the trade balance was in red. Around 1980 Socialdemocratic Finance Minister Knud Heinesen warned that we were standing on the edge of the precipice. In 1987 the so-called “potato cure” forced us to tighten our belts, and seven meager years followed. One sunny day the news reported that our trade balance had become positive again, but by then the car taxes had become a cherished and indispensable source of revenue, and all of us natives had become used to it. From an environmental point of view it is not rational, of course, but that sort of “theoretical arguments” don’t seem to carry much political weight.
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Hi Maarten,
interesting comment. I enjoyed reading it, even though it reminds me of this painful car chapter, which I normally try to block out of my mind…
I think, you come up with an interesting idea about the driving licenses or a tax being paid on the kilometers driven. However, I was wondering, how this would work in practice. Taking me as an example, who drives most of the kilometers outside of Denmark, do I only need licenses/ or have to pay for the kilometers I drive within Denmark? And how about visitors from other countries? Will they need to buy licenses as well?
I think this demonstrates once again that these issues cannot be limited to national law, but need – in this case – at least a solution on a European level, something the Danes are sadly not bigs fans of…
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Hi Chris,
Ah yes, practice. Whenever economists with their models step out to the real world for some policy advise they are confronted with this nasty question 😉
I see your point regarding km driven out of Denmark and tourists and international firms driving into Denmark. Although I do agree that a solution at the European level would be best I do not think it is absolutely necessary. There are a number of examples where unilateral policy action has been taken, sometimes relatively succesful as with the carbon tax in British Colombia, and sometimes with less success such as the cap and trade policy for CO2 from electricity generation in the EU, or the airtravel tax in the Netherlands.
To answer your question: I think a possible solution could be to place cameras at the entries to Denmark (the Germans would need them for their upcoming toll anyway, thank you Horst Seehofer) and deduct a fixed no of km per day that you are out of the country. Similarly the visitors to Denmark could be registered and opt either for a fixed fee, or register their km on entry and leave. Admittedly, it is far from perfect, but that’s the real world for you 🙂
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Dear Villy,
Many thanks for placing this in a historical perspective. From a balance of trade perspective the tax actually does make more sense, especially given that Denmark does not produce any cars as far as I know. I wonder what the WTO would say about such a measure, but I’m not enough into its rules to do anything but speculate.
You are right about the politics bit, I guess. Things that are in place and worth a lot of money are best left alone in politics. In addition, having such a tax is easier to “sell” to the average citizen if you phrase it on environmental grounds. Many firms have long realized this as the “towel on the floor to get it exchanged, towel on the rack to use it another day” policy in many hotels shows!
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Where should I begin?
Taxing the right item:
Well, a gas tax is pretty closely related to emisssions, maybe DK should increase those…oh wait. Gas is already about 4 times more expensive here than in the US – what am I saying? Sadly, though, even at this price it is still apparently only about 2/3 of the way to covering marginal damages. So, raise that gas tax.
As for congestion and related spatial externalities, go for the all-in-one system such as Singapore, Hong Kong and others have tried – monitor the car in real time and charge accordingly. The road grid can then be treated akin to an energy grid, with flexible pricing responding to congestion. I’d like this better than the 235 kr (currently $35.50 USD) bridge toll (both directions) — though that does seem to keep traffic between Jutland and Zealand down – or perhaps that is something more cultural 😉 ?
Selling licenses:
You say license sales create income inequality – but getting a Danish license already costs around 10,000 kr and has an interesting incentive set-up… the instructors decide when you are ready for the test – guess what you need if you aren’t ready? more lessons!
New vs Old cars:
It always amazes me looking around that cars here are as nice as they are. Yellow or yellow/white tags are subsidized as work vehicles, but there are still plenty of white plated nice cars. Most of these are leased. The shift in ownership also affects equity.
Teslas have done very well here. In 2014 they sold 616 Model Ss. A top-of-the-line Model S is about 875,000 dkk ($132,000 USD) before the tax, And until 2016, it has not had the car tax! Fully electric cars have been fully exempt. (Hybrids have no such subsidy). Thus the Tesla goes from competing with the likes of a true luxury car to one of significantly lower luxury – to get a ‘comparable BMW 750i” for example, you have to get one that is 5-6 years old. Whereas for the Tesla money, in new cars you are talking a Volvo XC70 or if you throw in a little extra cash you can get a BMW 340i! (price comparison from bilbasen.dk)
DK is now however moving away from this subsidy and the green goals – phasing out the tax break completely by 2020. (http://www.bloomberg.com/news/articles/2015-09-29/teslas-hit-by-180-tax-in-denmark-as-green-goals-get-left-behind) In a country not shy of collecting personal data and using it, why the black and white? Certainly electric cars have externalities too – but as you can see in Viktor’s post – 40% of Danish electricity production is wind power with much lower externalities… The DFF mistakenly believe they will raise $100 million in tax revenues from this change! Someone should remind them of the substitution and income effects…http://gas2.org/2015/10/13/tesla-calls-danish-tax-plan-death-knell-electric-cars-2/
Of course, this tax is possible in the first place because DK has no auto industry. Neighboring Sweden and Germany have certainly not forsaken the automobile, whatever their environmental aims.
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Hi Brooks,
Some interesting thoughts here. Most are well taken, but let me give you a reply on some of the others.
Yes increasing the gas tax would also work to decrease emissions . A gas tax is more efficient if you only worry about emissions; my km tax would also address the usage and depreciation of roads. Admittedly I did not state that as an original goal, and it is usually a bad idea to address two externalities with one instrument. Incidentally, as I travel to the Netherlands on a regular basis, I think prices of gasoline are quite reasonable in Denmark (see http://www.globalpetrolprices.com/gasoline_prices/). It all depends on your frame of reference I suppose.
Solving the spatial externality like congestion with real-time monitoring is an interesting idea, and reasonable in a city level, but unless we equip all cars with monitoring equipment not feasible on a country level. Also equiping all cars in turn raises the question what to do with international visitors, that Chris mentionedearlier. We could offer them some form of opt-out again I suppose. I do seem to recall that there was talk about such a system in the Netherlands as well. Incidentally the idea of a km tax is not mine nor is it new in the blog-o-sphere. http://www.env-econ.net/2008/12/is-environmenta.html
I mainly raised the inequality thing to point out that there is inequality independent on whether one uses a car tax or a license fee. Apparently, there was even more inequality then I thought. Let me cross my fingers for the youngsters and hope for them that their parents pay for their driver’s license. Mine certainly didn’t, but given that prices and incentive structure are the same in the Netherlands AND the fact that I have three siblings I certainly don’t blame them.
Although Denmark is phasing out the tax breaks for Teslas (a pity if you ask me) in the budget for 2016 it was proposed to lower the registration tax to 150%, although I don’t know whether that actually made it (http://www.thelocal.dk/20151120/whats-the-deal-with-denmarks-car-registration-tax). If it did I am sorry that I imported my car last year
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Fine points all. But a gas tax can address roads – in fact in the US it is the direct source of (woefully inadequate) road funding. It’s also more closely tied to km driven in DK – one tank of gas can generally get you out of this country but won’t sustain your km driven abroad for very long.
Another equity issue not yet brought up here is regional – CPH/Sealand have good bus/train/bike infrastructure, but out here the bus schedule’s a little thin and the trains run pricey.
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awesome post… thanks for the sharing top one post… keep it up
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Or…it’s a tariff and the article and commentary are proof of how well it’s hidden.
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Nice article.. Thanks for sharing!
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