Rethink Taxes on Motor Vehicles in Singapore

The focus should be on usage and not ownership.

The focus should be on usage and not ownership.

LTA’s evaluation of a change in ERP system this week peaked my interest. They are looking move from a single charge entry fee to one that is distance based. There are many sides to the coin here when it comes to a specific set of roads that undergo such charges but I thought it would be interesting to extrapolate this idea and look at how we should better target taxes to solve congestion issues.

Singapore’s taxes on motor vehicles is considered one of the most successful in the world. Putting aside the chagrin of taxpayers, economists agree that the system in Singapore seems to work. It is well known that the income elasticity of demand for vehicle ownership is well over the top. This means that a positive change in income is highly likely to heavily encourage the person to buy a vehicle. Privately owned vehicles fall into many product categories. It can range from a necessity to a luxury good. It can be crucial for getting work done or may be purely a symbol of social status. As such, categories transcend consumer types. This makes proper taxation and controls extremely difficult to target. A poorly targeted tax system will result in tremendous inefficiencies. This is the reason why controlling the quantity of motor vehicles has been a huge problem for Singapore, if not, anywhere in the world.

 

What matters is controlling the usage of motor vehicles. Notice I chose the word ‘usage’ not ‘ownership’.

 

Economic theory suggests that road expansions never work. The wider the roads, the more cars you get. You can widen the road infinitely and be amazed at how more and more cars will get on it. This eliminates that argument that congestion is more problematic in Singapore because of our relatively very narrow two to three lane roads. This affects anyone, size does not matter. What matters is controlling the usage of motor vehicles. Notice I chose the word ‘usage’ not ‘ownership’.

 

 

Car Ownership

The cost of car ownership opens up a huge jumble of taxes. There is the actual price of the car and the cost of a Certificate of Entitlement (COE). The later almost always ensures that this first set of costs will rise past S$100,000. The COE is a quota ceiling. A predetermined number of cars are allowed into the roads in each time period. At this fixed quota, prospective buyers can bid. Obviously, bidding prices can rise up to astronomical sums as we have seen for many years.

 

This is where the COE is flawed. It works in absolute terms but fails to align the incentives of the consumers to that of the government.

 

This quota system is one of the most direct ways of controlling car ownership from the perspective of lawmakers. They get the data of how many cars there are in Singapore and then decide on how much to add in each time period. However, this system makes it difficult for car buyers to understand why they are paying such a hefty amount. Sure, you can tell people that prices are high because quantities are limited. But, they will be inclined to believe that quotas are set artificially high to generate tremendous tax revenues. This is where the COE is flawed. It works in absolute terms but fails to align the incentives of the consumers to that of the government. Public policy is not about getting things done, it is the art of making others see the way you do. Accomplishing this makes sure that people will do what you want them to… willingly.

There are plenty of other taxes, road tax, parking, ERP, fuel, the list goes on. All these simply serve to show one thing, our system of taxation is making it difficult for consumers to understand why prices are so high. We have failed to align their interests with ours. Such inefficiencies must be removed.

 

 

Car Usage

What is the actual problem? Is it ownership or usage? This is a basic question that we might have glazed over in the early years of policy formulation. The problem is usage not ownership. The only problem that ownership may cause is that of parking. It does not matter how many cars we have in Singapore if not all of them are in use. A car parked in a garage puts no burden on the road. We must focus on the correct issue here – controlling the number of cars on the road.

 

The economic value placed in most consumer products focuses on ownership and not usage. We must use this behaviour to our advantage.

 

With this in mind, the artificially high prices of car ownership makes no sense. Why are we putting so much effort and feeling so much pain from a system that does not target our problems? Focus on the issue. Limit car usage – lower the amount of cars on the road, not the amount of cars in Singapore. Making it difficult or extremely pricey for an individual to own a car limits his perceived freedom to consume.

This is a very important point that cannot be ignored. People want to feel that they are free to own what they like. Owning something is half the battle won. Just look at consumer behaviour over many different types of goods. The economic value placed in most consumer products (homes, clothes, electronics, etc) focuses on ownership and not usage. Many have huge wardrobes of clothes but barely 20% of that gets used. Geeks have tons of gadgets and in reality, only one or two are used daily. The same goes for more durable goods.

In short, people want to own things. Asset ownership creates and captures a sense of accomplishment, adding value to an individual’s life. We should not attempt to curb such humanistic desires. Let people own cars but discourage them from using it.

 

 

How

Lower or scrap the COE. As shown above, the COE is not the right way of solving this issue. It is indirect and it causes a disconnect between the people and the government. By lowering or removing COE, you reduce the sunk cost. In economics, the sunk theory means that people will be more likely to use a product if they have already paid a lot for it. This is to maximize the value of the very expensive good they paid for. By dropping the price substantiatively, you reduce this sunk cost and thus the incentive to drive at every opportunity available falls.

 

Lower or scrap the COE. Create distance based taxes.

 

To control car usage, create distance based taxes. This is basically the same way public transport usage is being charged. The longer you travel the pricier it gets. This should not occur only in ERP zones, this should occur anywhere in the country (with the removal of the insensitive COE of course).

We have the infrastructure to track vehicles using satellites and GPS. We have the capability to calculate the distance that each vehicle transverses. Change that cash card in the ERP in-vehicle-unit (IVU) to one that is similar to an ezlink card used on buses and trains in public transit. Own any number of vehicles you want. Buy them at their actual prices without ridiculously high COE taxes. But, the further you drive, the more you pay.

This system can be expanded to have different rates for different roads. Pricing can be dynamic, congested zones can be dynamically managed all through a flexible price mechanism. People won’t be stopped from buying what they want but they will be discouraged from using things over extensively and inefficiently. This system lets people own cars but keeps them on their toes about driving too much and thus eating up precious road space.

 

 

Benefits

This change in focus sidesteps a few thorny issues. It is no secret that most Singaporeans feel that they should be able to own a home and a vehicle. At least one per household. Most children are told that if they study hard, they will be able to own a house and a car when they transit into the workforce. Allowing ownership but reducing usage will play into this.

Secondly, some people simply own cars as a social symbol. In a lengthy report on car ownership, I spoke to a number of young Singaporean graduates. They felt they needed to own a car to be on par with those who are of the same social circle. There is nothing elitist about it. Singapore churns out a tremendous proportion of graduates each year, this social circle is a very big one. These people are not too bothered about using their cars everyday. They just want to own one. They just want to be part of the social norm. Again, allowing ownership but reducing usage is a better solution.

 

Make it extremely easy for people to compare the cost of private transport to that of public transport.

 

Thirdly, the system I proposed mirrors the public transport system very closely for a huge reason. Make it extremely easy for people to compare the cost of private transport to that of public transport. No one should need to a calculator to see if it is more worth it to drive or to ride. When both systems are distance based and the mode of execution is uncannily similar, people will automatically draw comparisons without being told to. They will attempt to save cost and this represents a very powerful way to encourage people to use public transport in place of driving.

 

 

Transparency and Efficiency

The role of taxes is to account for inefficiencies in the market. Unfortunately, taxes are innately inefficient. What must be done is to make the system as transparent as possible, one that any individual is able to understand and grasp without afterthought. This is why we need to focus on car usage islandwide instead of a more short sighted solution of controlling car ownership.

It is time Singapore targeted the right problem and worked with its people. Understand the desire of the populace to own cars while ensuring roads remain efficient.

This is not a pipe dream. This can be done.

 

 

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