Economic News Analysis
Karen Chan (1)
Cynthia Cheung (7)
F.5A
South China Morning Post
Thursday February 24 2011
New-car tax goes up 15pc to ease jams; trade split on impact on sales
Anita Lam and Cheung Chi-fai
People who buy new cars will pay a higher price for adding to the burden on the city's road
network. John Tsang's budget proposes a 15 per cent increase in the first-registration tax - the
first increase in eight years.
The increase means someone buying a HK$300,000 car will pay tax of HK$172,500, a rise of
HK$22,500. A HK$500,000 vehicle will incur an additional HK$50,000 in tax.
The government said the move was necessary to slow the pace at which car ownership grows. A
record 41,000 new cars were registered last year, up 41 per cent from the 29,000 that took to the
streets in 2009 and outstripping the construction of new roads to absorb the extra vehicles.
The city's road network expanded by only 25 kilometres, or 1.2 per cent.
By the end of last year nearly 450,000 private cars were registered.
The Motor Traders Association said the new tax scheme could indeed help curb the growth in the
vehicle fleet - but at the cost of stifling a recent revival in the vehicle trade.
'They could have offered incentives, instead of penalties, to help car owners replace or scrap their
old polluting autos, as that could not just help curb car growth but also enhance safety and cut
emissions,' the association's chairman, Chong Got, said.
But James Kong Yat-hung of the Hong Kong Automobile Association expected little impact on
sales - especially at the higher end.
'If you are paying HK$600,000 for a Mercedes, you probably won't mind paying some HK$30,000
more,' Kong said. 'It is probably the price-sensitive middle-class buyers who will be affected
most.'
The tax does not apply to second-hand vehicles. But the rising cost of new cars is expected to
boost prices in the second-hand market by 3 to 8 per cent as buyers shift to more affordable
options.
The impact of growing car numbers can be seen in slower driving speeds. Traffic was most
sluggish in Hong Kong Island - where the average speed fell from 21.3km/h in 2009 to 19.8km/h
last year.
An official said the government studied other remedies for the rapid growth in car numbers, such
as introducing electronic road pricing in the business districts of Central and Causeway Bay. But
without the Central- Wan Chai Bypass - due for completion in 2017 - as an alternative for drivers
the policy would not win broad support.
Before yesterday's increase, buyers paid a tax of 35 per cent on the first HK$150,000 of the price
of a new car; 65 per cent on the next HK$150,000; 85 per cent on the next HK$200,000 and 100
per cent on any amount above that. Now the rates are 40 per cent; 75 per cent 100 per cent and
115 per cent, respectively.
A bigger price tag
First tax increase in eight years aimed at slowing growth of car ownership
A buyer of a HK$300,000 car would have to pay this much in tax, in HK dollars: $172,500
Description
This news article is about an increase in the first registration tax on new cars, which is one of the
measures proposed by Financial Secretary John Tsang Chun-wah in the recent financial budget.
The new measure calls for a tax rise in 15 percent. It has been proposed as a solution to minimize
the problems posed by traffic congestion, which has been a major issue in Hong Kong, especially
on Hong Kong Island. The implementation of this new tax scheme is expected to discourage
people from buying new cars, resulting in a decrease in the number of vehicles on the road. As a
result, the middle-class group is more likely to stop buying new cars than those who belong to the
high-income group.
Financial Budget
John Tsang Chun-wah has proposed a financial budget in this fiscal year. The government achieves
certain economic goals by adjusting government revenue (e.g. taxation) and adjusting government
expenditure (e.g. payment transfer) in the budget. A budget is a financial statement showing the
estimated revenue and estimated expenditure of the government in a fiscal year.
First-registration tax is a regressive tax
According to the news, John Tsang’s budget proposes a 15 percent increase in the first-registration
tax. This means that people who buy new cars will pay a higher price for adding to the burden on
the city’s road network. The nature of the first-registration tax is regressive as the same amount of
tax① takes up a smaller percentage of the income of high-income groups. A regressive tax means
when income increases, tax payment takes up the smaller percentage of income (i.e. when income
increases, tax rate falls②).
②
① Tax Payment ($)
Tax rate (%)
%1
$
%2
0
I1
I2
Regressive Tax
Income
0
Income
I1
I2
Regressive Tax
First-registration tax unit sales tax and the aim is to decrease the number of cars.
The first-registration tax has a 15 percent increase
and the aim of it is to discourage people from
buying new cars and reduce the number of cars on
the road so as to lessen the road network’s burden.
Unit sales tax is imposed when same amount of
tax is imposed on each unit of the good regardless
of its price. Increase in per unit tax on first
registered cars will lead to a decrease in supply of
cars. Hence, equilibrium price increases and
S2
P
S1
P2
T
CB
P1
PB
D
Q
0
Q2
equilibrium quantity falls.
Q1
New Cars
Demand for new cars decreases while demand for second-hand cars increases.
As the first-registration tax does not apply to
second-hand vehicles according to the news, it is
expected that the rising cost of new cars boost
prices in second-hand cars market by 3 to 8 per
cent. This is because second-hand cars are
substitutes of new cars and buyers might shift to
more affordable options.
Demand for second-hand cars will increase, hence,
price and quantity of second-hand cars increases.
P
S
P2
P1
D1
0
Q1
Q2
Second-hand cars
D2
Q
The elasticity demand for new registered cars depends on the proportion of
expenditure in total expenditure.
As mentioned by James Kong Yat-hung of the
Hong Kong Automobile Association, people
paying HK$600000 for a Mercedes would not
mind paying more, while those price-sensitive
middle-class buyers would mind. This means
that the high-income group buying expensive
cars has an inelastic demand for new registered
expensive cars, as the taxed car price takes up a
P
P2
small proportion of their total expenditure. As
the demand is inelastic, percentage fall in
quantity demanded is larger than the
GAIN
1
P1
LOSS
D
percentage rise in price. Hence, gain in total
0
Q1
Q2
revenue is larger than loss in total revenue of
Expensive cars consumed1by high-income group
expensive cars. Total revenue of expensive cars
would rise. Therefore, high-income group will
still consume new expensive cars even if the prices increase.
The middle-class, however, will have an
elastic demand for buying new registered cars,
as the tax take up a larger proportion of their
total expenditure. As the demand is elastic,
percentage fall in quantity demanded is
smaller than the percentage rise in price.
Hence, gain in total revenue is smaller than
loss in total revenue of cars consumed by
middle-class. Total revenue of cars consumed
by middle-class would fall. Therefore,
middle-class may not consume new cars
because of the increase in price.
Q
P
P2
1
GAIN
P1
LOSS
0
D
Q2
Q1
1 cars consumed by the middle-class
Q