Saturday 11 December 2010

The Uselessness of Scrappage Schemes and other Tax Policies

The Greek government has, despite its earlier opposition, announced a scrappage scheme which offers a tax exemption of up to EUR 2,800 on purchase of a new vehicle, providing the vehicle has an engine capacity of under 2,000 cc. By doing so, it hopes to generate short-term tax revenue, since a “luxury tax” of 10% on purchases of vehicles costing EUR 15,000 – 20,000 applies, as does VAT. It also hopes to generate future tax income, since vehicle circulation taxes apply every year.

The current policy is, like many others, deeply inequitable and absurd. According to the current tax system, a middle-income family of five which buys a station wagon or mini-van which usually costs between EUR 20,000 – 25,000 pays VAT and a 10% “luxury” tax for a vehicle which is hardly a luxury item.

At the same time, companies have essentially no limits on what they can purchase and declare as a company car. Thus, a company which buys a new BMW 7-series (starting around EUR 65,000) can, after paying VAT and the luxury tax, fully deduct the depreciation cost as a corporate expense. Given that VAT is often returned—at least in theory—this is something of a double insult to families and private consumers.

I therefore propose that if the government wants to gain tax revenue and equalise the presently unfair situation, it adopt a simple and transparent tax code:

a.       VAT applies to all vehicles, public or private, regardless of the vehicle cost, at a low rate of 8% for new vehicles and 5% for used vehicles.

b.      Companies and individuals (private citizens) can purchase a vehicle of up to EUR 15,000 without a further tax surcharge. Companies can book this as a maximum depreciation per vehicle, with special categories for commercial vehicles which are used for specific enterprise functions (e.g. commercial deliveries).

c.       Families with children can purchase a vehicle of up to EUR 25,000 without a further tax surcharge.

d.      If needed for the purposes of tax revenue, any vehicle purchased above these limits be assessed with a tax surcharge at the same rate, whether the purchaser is a private citizen or company. This should be based on vehicle value rather than emissions rates or engine size.

e.       Unless they fulfill a specific function, companies cannot claim depreciation for vehicles above EUR 15,000 per unit. Thus, a lawyer who purchases a new Mercedes C-Class can claim a maximum EUR 15,000 depreciation, whereas a logistics firm which purchases a EUR 125,000 Volvo Freightliner would claim 100% depreciation.

This system would have the following benefits:

·         It provides the freedom of choice to both individuals and companies to purchase a vehicle according to personal disposable income rather than to temporary incentives which distort the market and favour new imports (worsening the current account balance).

·         It provides an incentive for purchasing older vehicles (which have already been imported), leaving the current account balance neutral and making better use of an under-utilised resource. Fears that this will favour vehicles with higher emissions rates are counterbalanced by the fact that fuel efficiency of older vehicles is lower, and every consumer understands the need to minimise fuel costs with unleaded gasoline costing  over EUR 1.50 per litre.

·         It is likely to focus the market on smaller-value vehicles, which by their nature have lower carbon emissions and better fuel consumption.

·         It would end an egregious tax loophole, whereby well-off companies and self-employed professionals buy a prestigious, expensive car, and then deduct 100% of the depreciation as a company expense, further weakening public revenue.

·         It would balance the treatment of individuals (private citizens) and self-employed professionals and companies in the tax code.

In my eyes, there is absolutely no justification for a BMW or a Jeep Cherokee to be treated as a 100% tax-deductible vehicle, when it is so clearly a corporate perk. If PASOK is really interested in social equity, it should pass such as law immediately, rather than passing another inefficient scrappage scheme.

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