Vehicle ownership and usage charges

We present a simple model to study the welfare effects of a shift from ownership to usage taxes for cars. We consider a model in which a single representative consumer derives utility from consuming two goods—consumption of motor vehicle kilometers, and an aggregate consumption good treated as numeraire. We characterize the optimal consumption of car kilometers by a representative car user and find that a shift from ownership towards usage taxes is not necessarily welfare-improving: while a revenue-neutral shift makes the representative car user worse off; a utility-neutral shift leads to a significant loss of revenue to the government. An empirical analysis based on Singapore data is also consistent with our theoretical results.