Monday, March 16, 2009

Car owners tax

Mexico has a sui-generis tax system. Tax revenues account for only 8 per cent of GDP, however there is a tax tool that is rather efficient. It is levied on car owners at a decreasing rate according to the car age -from 0 to 10 years inversely- thus it taxes wealthiest set of population.

This tax is federal, but it's totally redistributed across states, this is, all political cost is shouldered by federal government while benefits are fully enjoyedl by states.

There are all kinds of pervasive incentives with the current setting. Last week at Congress a debate about ending this tax became alive. It was clearly a political move since this summer's election is just around the corner.

It is considerably appealing to remove taxes without increasing marginal rates, clearly it is impossible to do so without the issue of more debt.

The best option there is, consist on change the federal-nature of the tax into a state-nature. The latter has several advantages. First, incentives for accountable spending will subside. States would have to absorb political cost.

Second, in terms of economics, the tax would be flexible in the following sense: every state will be able to decide whether to levy the tax or not. This in turn could be decided according to particular needs. Take, for example a state with a city that has heavy car traffic. In order to incentive the use of the public transport the marginal tax rate can be positive.

In a polar example, take a state that has a relatively high poverty level, in this case the tax can not exist in the first place.

A final example may refer to states that host a car manufacturer, thus depending heavily on jobs it creates. The tax can be address to a particular subset of population and encourage, this way job creation.

However unpopular, a serious assessment of the tax can shift the current approach to one that explains to Mexicans how it can be used as an environmental tax of some sort.

A stronger foundation for levy a tax like the one discussed here is to treat it like a car-traffic tax. Let us not forget that every time we drive a car we increase the probability of an accident occurrence. Moreover, car traffic is inherently increased. If the last two arguments are not enough, it can always be assumed that the use of street soil is taxed.

It is plausible to conclude that, despite it's unpopularity -it can be argued that there is no such thing as a popular tax- a subtle change in it's nature would do a lot in it's defense. It may be true that changing the pay schedule - to several monthly payments from one per year- can be a start. Changing be federal nature of a state one would almost do the entire transformation.

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