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The tax treatment of company cars, commuting and optimal congestion taxes

  • DE BORGER, Bruno
  • WUYTS, Bart

In Europe, the preferential tax treatment of company cars implies that many employees receive a company car as part of their compensation package. In this paper, we consider a model in which wages and the decision whether or not to provide a company car are the result of direct negotiation between employer and employee. Using this framework, we theoretically and numerically study first- and second-best optimal tax policies on labour and transport markets, focusing on the role of the tax treatment of company cars. We show that higher labour taxes and a more favourable tax treatment of company cars raise the fraction employees that receives a company car; congestion and congestion tolls reduce it. More importantly, we find that earlier models that ignored the preferential tax treatment of company cars may have substantially underestimated optimal congestion tolls in Europe. The numerical illustration, calibrated using Belgian data, suggests that about one third of the optimal congestion toll is due to the current tax treatment of company cars. We further find that eliminating the preferential tax treatment of company cars is an imperfect -- but easy to implement -- substitute for currently unavailable congestion tolls: it yields about half the welfare gain attainable through optimal congestion taxes. Finally, the favourable tax treatment of company cars justifies large public transport subsidies; the numerical results are consistent with zero public transport fares.

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Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2010017.

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Length: 49 pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:ant:wpaper:2010017
Contact details of provider: Postal: Prinsstraat 13, B-2000 Antwerpen
Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/

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  1. Long, James E & Scott, Frank A, 1982. "The Income Tax and Nonwage Compensation," The Review of Economics and Statistics, MIT Press, vol. 64(2), pages 211-19, May.
  2. Parry, Ian & Bento, Antonio, 1999. "Revenue Recycling and the Welfare Effects of Road Pricing," Discussion Papers dp-99-45, Resources For the Future.
  3. Royalty, Anne Beeson, 2000. "Tax preferences for fringe benefits and workers' eligibility for employer health insurance," Journal of Public Economics, Elsevier, vol. 75(2), pages 209-227, February.
  4. DE BORGER, Bruno, . "Commuting, congestion tolls and noncompetitive labour markets: Optimal congestion pricing in a wage bargaining model," Working Papers 2006014, University of Antwerp, Faculty of Applied Economics.
  5. DE BORGER, Bruno & GLAZER, Amihai, 2010. "Subsidizing consumption to signal quality of workers," Working Papers 2010016, University of Antwerp, Faculty of Applied Economics.
  6. Kurt Van Dender, 2003. "Transport Taxes with Multiple Trip Purposes," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(2), pages 295-310, 06.
  7. Zax, Jeffrey S., 1988. "Fringe benefits, income tax exemptions, and implicit subsides," Journal of Public Economics, Elsevier, vol. 37(2), pages 171-183, November.
  8. David Bernstein, 2002. "Fringe benefits and small businesses: evidence from the federal reserve board small business survey," Applied Economics, Taylor & Francis Journals, vol. 34(16), pages 2063-2067.
  9. repec:ucp:bkecon:9781884829987 is not listed on IDEAS
  10. Hashimoto, Masanori & Zhao, Jingang, 2000. "The labor market effects of non-wage compensations," Labour Economics, Elsevier, vol. 7(1), pages 55-78, January.
  11. Clotfelter, Charles T, 1983. "Tax-Induced Distortions and the Business-Pleasure Borderline: The Case of Travel and Entertainment," American Economic Review, American Economic Association, vol. 73(5), pages 1053-65, December.
  12. Gerard de Jong & Hugh Gunn, 2001. "Recent Evidence on Car Cost and Time Elasticities of Travel Demand in Europe," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 35(2), pages 137-160, May.
  13. Jos van Ommeren & Arno van der Vlist & Peter Nijkamp, 2006. "Transport-Related Fringe Benefits: Implications For Moving And The Journey To Work," Journal of Regional Science, Wiley Blackwell, vol. 46(3), pages 493-506.
  14. Copenhagen Economics, 2010. "Company Car Taxation," Taxation Papers 22, Directorate General Taxation and Customs Union, European Commission.
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