Government Seeking to Boost Car Purchases Should Abolish Subsidies

Unlike ordinary goods, buying a car means paying more tax. In addition to the 10% value-added tax generally imposed on products, a 5% individual consumption tax is added. This specially heightened consumption tax stems from the perception of automobiles as luxury goods. Cars have become an indispensable necessity in daily life, yet they are still regarded as goods owned by the wealthy. In the past, there were even regulations designed to prevent a single household from owning multiple cars, and taxes were also imposed on a progressive basis.

Now that we live in an era in which even a single household may own several cars, it is only proper to abolish the individual consumption tax. There is no reason to impose specially higher taxes on cars than on other goods. But even more absurd than this individual consumption tax is the fact that the government is providing subsidies for the purchase of certain cars. In particular, when buying some vehicles, including plug-in electric models, the government not only reduces taxes but also covers part of the purchase price with taxpayer money. Excessive taxation is a problem, but so is tax support that has lost all sense of fairness.

For those who cannot afford to buy a car, this is bound to be upsetting. The taxes they paid are being handed out as subsidies worth several million or even tens of millions of won to people buying expensive cars. Electric vehicle subsidies are provided by both the central government and local governments. At a time when government finances are being depleted and the debt ratio is soaring, it is worth asking whether the government is spending far too freely. In particular, it is a betrayal of the essence of local autonomy for local governments, which should be concerned with the lives of local residents, to imitate the central government and run programs that support car purchases.

It is said that some local governments have already spent their entire annual budget. It is astonishing that in the first half of this year, Tesla received about KRW 90 billion in electric vehicle subsidies, accounting for 43% of the total. High-priced vehicles costing tens of millions of won are objects of envy. They attract attention even when passing by on the street. There is certainly a problem with a government that uses tax money to encourage people to buy such flashy cars, but such products ought to be bought with one’s own money if they are to carry any real prestige; buying them with support from other people’s taxes is hardly dignified.

This is an age that values individuality and style, but that does not mean taxes should be used to subsidize even that kind of personal consumption. The government should stop at providing institutions and an environment that allow individuals to live freely; it should not be offering subsidies to encourage such consumption. Until now, the level of agreement our society could reach was to operate tax reduction programs for the use of efficient or low-cost vehicles such as compact cars. No matter how recklessly tax money may be spent these days, excess harms both consumers and taxpayers alike.

The government’s effort to promote the purchase of certain cars rests on the belief that such vehicles are environmentally friendly, represent the future alternative, and can become a growth engine. Whether that belief is right or wrong cannot be known at present. No one can predict the future with certainty. Investment and consumption involving such uncertainty are better left to private individuals and businesses.

The idea that the government can predict better and shape the future is dangerous. The notion that if the government says so, it will become so, reflects an excessively state-led way of thinking. In developing countries or in state-led economic structures, such government-dependent thinking may seem common sense, but the lessons of history have always pointed in the opposite direction. Government-led investment and promotion policies have often created booms that distort the market or have led to wasteful investment and overinvestment.

Today, the success or failure of a new product becomes apparent within one or two years, and if it shows promise, the scale of consumption rises rapidly. Several years have already passed since subsidies began to be paid on the grounds that these were alternatives for the future, yet environmentally friendly vehicles are still being produced and consumed in reliance on subsidies. They are, in effect, merely subsidy-dependent cars. The time has now come to rationalize automobile taxes and end subsidies.

Sung-no Choi, Director of the Center for Free Enterprise (CFE)

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Original title: 자동차 구입을 촉진하려는 정부, 보조금을 폐지해야

Author: Sung-no Choi

Date: 2020-10-14

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=23166