Ownership and Use Taxes as Congestion Correcting Instruments

20 Pages Posted: 5 May 2001 Last revised: 15 Aug 2022

See all articles by Ngee-Choon Chia

Ngee-Choon Chia

National University of Singapore (NUS)

Albert K.C. Tsui

National University of Singapore (NUS) - Department of Economics

John Whalley

University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for International Governance and Innovation (CIGI)

Date Written: May 2001

Abstract

In countries, such as Singapore, that have implemented vehicle congestion policies, recent years have seen a shift towards motor vehicle taxes based on car use. Ownership taxes reduce the number of cars on the road, leaving the price per trip largely unaffected. Use taxes such as fuel taxes and road use charges decrease the price of trips without necessarily penalising vehicle ownership per se. This paper presents a simple general equilibrium model involving trips from residential areas to a central business district, along with modal choice between cars and public transit. Car trips involve fixed costs but have lower variable costs per trip (including convenience costs) then bus trips. Using a calibrated numerical model, we investigate the relative merits of ownership and use taxes. We compare full internalisation of congestion externalities to optimal tax outcomes for the different tax types. In our framework, use taxes restore Pareto optimality since congestion damage rises with more trips. Ownership taxes only partially internalise congestion externalities. However, in terms of revenue-raising ability, the marginal excess burdens of ownership taxes in the neighbourhood of optimal taxes are typically lower than use taxes. This is because marginal increases in ownership taxes take away part of the surplus accruing to consumers who still choose to travel by car, and thus have less distortion at the margin.

Suggested Citation

Chia, Ngee-Choon and Tsui, Albert K.C. and Whalley, John, Ownership and Use Taxes as Congestion Correcting Instruments (May 2001). NBER Working Paper No. w8278, Available at SSRN: https://ssrn.com/abstract=268887

Ngee-Choon Chia

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

Albert K.C. Tsui (Contact Author)

National University of Singapore (NUS) - Department of Economics ( email )

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Singapore 117570, Singapore 119077
Republic of Singapore

John Whalley

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada
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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for International Governance and Innovation (CIGI) ( email )

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