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.

Sandro Botticelli - La nascita di Venere - Google Art Project - edited Dragon Efteling
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