Here comes the “Nano Tax”

“First car for the second world family, second car for the first world family”

The Tata Nano is likely to change the lives of an immense number of families in the developing world, with the possibility that the Indian car market will increase by 65%, according to Standard and Poor’s Indian arm, CRISIL (source India Times). And much has been written about Ratan Tata’s dream of migrating Indian families from two wheels to four.

But how about the developed world? I believe that it will be disruptive here too – by fundamentally altering the tax applied to private vehicles.

Car ownership patterns

The Tata Nano promises to bring a fundamental change to car ownership in the developing world. It is cheap enough to appeal to a new group of car owners for whom no other car is affordable. However, I believe that the Nano is also cheap enough to be affordable as a second, or third, or even fourth car, for developed world families. And it comes with the benefits of new car warranties, rather than the potential cost of breakdowns that accompany used cars that can be found at the same price.

The basic model, the Nano BSII, sells in Delhi, India for about 115,000 Rupees (about 2,400 US dollars), and for between 5% and 10% more in most other Indian cities (source Tatamotors.com). Expectations are that the “Nano Europa” prices in the developed world (meaning mainly Europe, rather than North America) will be a little more than double this – so a westerner will be able to buy one for about 6,000 US dollars (about 4,500 Euros). And the Nano is very economical to run, with the extremely good fuel economy that one might expect from a car that only weighs the same as a Formula One Grand Prix car (including driver).

How many developed world households will replace public transport usage by an additional car at this price? How many parents will be able to provide their eighteen-year-old child (17 in UK, Ireland, Poland) with a Nano so that the child no longer needs to ride the bus to school/college/university, or catch a lift with the parent?

A surge in vehicle ownership

And what will be the effect of all of these additional cars?

Well there have been several comments on the web about the potential gridlock that the anticipated traffic volume surge will create. And also many comments about the environmental effect of the additional exhaust gases, for example:

But there has been previous little commentary on how governments will react, particularly regarding fiscal matters.

Welcome the “Nano Tax”

I believe that the time is ripe for an “additional car tax” or “Nano Tax” as it could be called. I think that governments might seize the opportunity to portray green credentials and formulate a new approach to vehicle taxation. And the additional income will be most welcome as a contribution towards paying down the public debt mountains that the recession has given western economies.

For governments this is almost a “must win, can’t lose” story:

  • too many additional cars on the road, outpacing road building programmes, will lead to congestion for everybody – so people will support measures that reduce the number of “other drivers”
  • governments need to meet the requirements of the Kyoto Protocol – and the notable absentees from the list of signatories, USA and Australia, are not the most attractive markets for Nanos and other ultra-cheap but very small cars, due to their low population densities and requirements to travel long distances
  • a tax on additional vehicles does not penalise the poorer families that can only afford one car – in fact left-wing governments could portray this as a redistributive tax if the tax for the primary car was reduced

Forms that the Nano Tax may take

A substantial amount of mathematical modelling would be required to predict the impact of the Nano and how vehicle tax changes might alter the impact. Would a 30% increase in tax be required to avoid a 10% increase in the number of vehicles on the average European highway? I don’t know. My gut tells me that Europe’s citizens will be quite inelastic to changes in the tax charge when offered such a radical reduction in the cost of vehicle ownership. Thus I expect that a major increase in vehicle tax will be required to halt the increase in vehicle ownership, and that governments will need to reduce the tax on the primary vehicle in order that the overall vehicle tax revenue doesn’t increase so much that the governments are accused of profiteering.

And so where will the increase in tax fall hardest? The upper working class and the lower middle class. These groups, already comprising a large number of two-car families, and dependent upon two cars, will not have the disposable income to handle a radical change in second-car tax policy. The lower working class will probably benefit, if the tax on the first car is reduced, due to the low rate of second vehicle ownership. And the upper middle class and upper class have enough disposable income to absorb the additional tax.

So if you are in these social classes, enjoy your second car while you can. In 2011 or 2012 you might find it becoming a luxury that you have to live without.

2 comments

  1. TheVoice says:

    @RickWilliams – Yes, I suspect that Tata might be missing a trick here. We need to expect some increase in price due to – stricter emissions test requirements, stricter crash test requirements, higher transportation costs, and higher local costs/wages for sales/marketing (and maybe CKD/SKD assembly?). But a near-doubling in price takes the Nano out of its own market segment and into the bottom of the segment occupied by the cheaper Dacias, the Kia Picanto, etc.

  2. The Indian price for the Nano is indeed radical, but the suggested Nano Europa pricing is far less radical. I am not sure that the Nano will have as much impact in Europe as it does in India and the rest of the third world.

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