Carmen Lam 5A (20), Monica Lam 5A (21)
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
Describing the issue:
At present, private cars account for over 60 % of the vehicle fleet in Hong Kong.
The number of vehicles in Hong Kong has grown continuously over the years. It is
expected that the continuous growth in the number of private cars has adversely
affected the traffic conditions. In order to ease traffic congestion and slows down the
number of private cars, Financial Secretary John Tsang proposes to increase the rate
of each tax band for the First Registration Tax for private cars by about 15% in his
latest budget. The First Registration Tax for other types of vehicles and the existing
concession for electric vehicles and environment-friendly petrol private cars will
remain unchanged. The proposed measure is intended to relieve traffic congestion
instead of raising tax revenue. In the future, the rising cost of new cars can boost the
price in second-hand market. Middle-class car buyers will be greatly affected in this
in policy but high-class car buyers are not that influenced.
Explanation:
1. Indirect tax and regressive tax
First registration tax on private cars is a kind of indirect tax. Indirect tax is a tax
levied on expenditure on goods (private cars) and services. Tax incidence can be
shifted to a third party i.e. car sellers shift to car buyers. As an indirect tax, people
who buy the private cars will pay the tax so the tax base will be larger. Besides, this
tax can serve government policy that is to solve the congestion problem by slowing
down the pace at which car ownership grows. It is also a kind of regressive tax. All tax
payers, no matter rich or poor, have to pay the same amount of tax when they
purchase the same car. According to the above table extracted from the budget, if
person A (relatively poorer) buys a private car of HK$300,000 while person B
(relatively richer) also buys a car of same price as person A, both of them have to pay
the tax of HK$(150,000*0.4 + 150,000*0.75) =172,500. Hence the tax violates the
equality principle.
2. Income gap
There is a change in income gap between the middle-income car buyers and
high-income car buyers. As consumers of private cars are mainly the high and
middle-income groups, it will not affect the low-income group. High-income group
consume private cars with relatively higher values. With a higher tax rates on
luxurious cars than cars of lower levels, the income gap can be narrowed. But the
same tax payment of buying the same cars take up a larger percentage of income of
middle-income group and a smaller percentage of income of high-income group, in
this case, the income gap is widened.
3. Elastic and inelastic demand
According to the news, James Kong of the Hong Kong Automobile Association
claimed that the high income group won’t mind paying some more tax; it is probably
the price-sensitive middle-class buyers who will be affected most. Therefore we will
focus on the effect on middle-class. High-income group has an inelastic demand for
private cars as they have high financial affordability, while middle-class has a rather
elastic demand because of availability of substitute e.g. second–hand vehicles,
electric vehicles and environment-friendly petrol private cars as the tax does not
imply to these vehicles. Besides private car is not a necessity; its demand tends to be
elastic when price increases as people can choose not to buy it.
S2
P
Gain=
S1
T
P2
Loss=
P1
D
0
Q
Q1
Q2
Sales of private cars
When demand is elastic, percentage fall in quantity demanded is larger than
percentage rise in price (tax inclusive), loss in total revenue is larger than gain in total
revenue. As a result, total revenue of car companies falls.
4.
Demand and supply
P
S
P2
P1
D2
D1
0
Q
Q1
Q2
Sales of electric cars and second–hand cars
Demand for electric cars and second-hand cars increases, Demand curve shifts to the
right, price increases (P1P2), quantity increases (Q1Q2).
5.
GDP
GDP is also affected by the policy. GDP = C+I+G+X-M
Consumption expenditure (C) and investment expenditure (I) are mainly affected.
Concluding from above, the demand for private cars will decrease, C drops. Demand
for electric cars and second-hand cars will increase. The increased demand of electric
car will only be accounted in C but not second-hand cars as it is already counted in
GDP when produced in the past. Therefore, C increases. In addition, some of these
cars may be imported cars; these values are not counted in GDP as they are not
produced by the resident producing units of Hong Kong. Furthermore, the decrease
in consumption of private cars leads to a reduction in current production of services
in the sales of cars, for example the commission of car agent, hence I drops. Since
some middle-class will not use cars anymore and turn to public transports, therefore,
the decrease in C and I due to drop in private cars is larger than the increase in C due
to increase in substitutes, GDP drops.
C&I
( in private cars)
>
(
C
in substitutes)

GDP