Taxation of car-ownership, car use and public transport: Insight derived from a discrete choice numerical optimisation model

In this paper we study the taxation of car ownership, car use and public transport in the presence of externalities within the framework of a discrete/continuous choice model. We first derive optimal taxes in a simplified setting, emphasizing the specific role of fixed car ownership taxes and the relevance of public transport demand by non-car owners for the optimal tax structure. A numerical optimisation model is then constructed to study welfare-optimal public transport fares and two-part tariffs on ownership and use of gasoline and diesel cars in Belgium. Results are as follows. First, the current differences in tax treatment between diesel and gasoline car ownership and car use cannot be justified on the basis of external cost and budgetary considerations. Efficient pricing requires substantial increases in the relative user tax on diesel cars as compared to gasoline cars; optimal fixed taxes are substantially below current levels and only marginally differ between car fuel types, implying a very large decrease in the tax on diesel cars. Second, large differences in fixed car taxes do result (i) if for political or technical reasons variable car taxes cannot be optimally adjusted, and (ii) if optimal taxes are implemented but the government uses kilometre taxes as the main variable tax instrument. Third, the results of a series of marginal tax reform exercises suggest that a shift form gasoline towards diesel taxation is welfare improving, both for fixed and variable taxes. Somewhat surprisingly, a shift from fixed towards variable taxes is not necessarily welfare-improving: it is for diesel, but not for gasoline cars.