Welfare Effects of Distortionary Company Car Taxation

Abstract

In Europe, for many employees, the employer-provided car is the single most important fringe benefit. Company cars are provided by employers as fringe benefits to their employees at a much lower (implicit) price than employees pay in the car market, mainly because of favourable taxation of company cars. We analyse the welfare effects of favourable taxation of company cars for the Netherlands by estimating to what extent the household's demand for car changes when employees receive a company car. We find that favourable taxation of company cars generates a substantial welfare loss of about 900 euro per year per company car. This loss is largely due to a shift towards more expensive cars (about 700 euro per year), whereas the welfare loss due to increased car travel turns out to be smaller (about 200 euro per year). For the whole of Europe, the deadweight loss is estimated to be about 20 billion per year.

Keywords: Fringe benefits, taxation, company car, welfare

JEL Classification: D12, D61, J33, R41, R48