Taxing Status - there is such a thing as a free lunch

Well, very nearly free.

This is a post about a revolutionary and quite brilliant way for government to raise large amounts of money with little or no real cost to taxpayers. I should say, at the outset, that I didn't come up with it. My understanding is that the idea was proposed originally by Keynes in the 1930's. But, I'm no historian.

Before we get to the exciting stuff we have to introduce a fairly simple concept in economics. The concept is called 'positional goods'. A positional good is a thing that confers status on its owner. The value that the owner gets from owning the good comes primarily from the fact that it is better than someone else's (ie gives them a higher 'position'). Many goods are like this.

Take cars for example. People buy BMW's, not because they make great cars but because they make better cars than Ford or Volkswagen. Or more precisely, because people think they make better cards than Ford or Volkswagen. Owning a new BMW confers a status that you don't get from driving a 2 year old VW Polo (like I do).

So, what would happen if we put a tax on expensive cars (like BMW's)?

Well, we would raise some tax revenue for the government.That;s a good thing.

We would make BMW's more expensive and that's a bad thing ..... but wait a minute no, in fact we wouldn't. A £50,000 BMW would still cost £50,000. Remember the price of a BMW is based on what the buyers can afford.

Ah but the BMW wouldn't have quite as many features and that is a bad thing. Well, not really. This is where this whole 'positional goods' thing comes in. The buyer doesn't really care about the lost features.The buyer only cares that someone else can't afford a car with as many features as this one.

So, in this scenario the government gets lots of extra money (good thing). The BMW owner loses some features in their car (but no one really cares that much).

I propose that this is implemented in the UK in the form of an annual tax based on the list price of a car. In the UK this is called Road Tax (or vehicle excise duty).

Define a baseline level of car price at which you can buy a safe, reliable car. Say £10,000. Apply a fixed annual tax of £100 per year for all cars with a value up to £10,000.

Charge an additional 1% of value for the next £10,000.

An additional 2% for the next £30,000.

Ad additional 3% for the remaining amount.

The tax would have to allow for depreciation (a one year old car is worth more than a 2 year old one).

This would mean that the owner of new car with a list price of £100,000. would pay £2,300 in tax in the first year. In the second year we might say that the car is now worth only £80,000. Accordingly the year 2 tax would be only £1,7000.

I have nothing against the designers and manufacturers of high status cars. But I fail to see why we should pay them large sums of money to help us convey our status to our fellow man when we can use the money for something useful instead without diluting the status message.

Comments please.