| Abstract: |
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. |