Car registration taxes across EU countries, MNEs’ profitability, and the role of market concentration

Abstract

Despite the European Commission’s concrete steps to integrate the national car markets and reduce car price dispersion, significant car price differences exist. Moreover, international differences in taxation of sales and registration of motor vehicles do not give rise to considerable cross-border shopping. This paper discusses the effects of one-off car registration taxes (CRT) and market concentration level on the profitability of multinational enterprises (MNEs) operating in the European Union car industry. Our simple theoretical framework shows that firm’s profits depend on the demand function and therefore on taxes applied to prices. We overcome empirically the challenges of making informative theoretical predictions on the pass-through rate under imperfect competition. We find that car registration taxes, - both as ad valorem taxes and as specific taxes, - have a significant negative effect on MNEs’ profitability. Our findings show a statistically significant positive effect of market concentration on profitability. Finally, our results suggest that the degree of competitiveness in the car market moderates the effect of car registration taxes on firm profitability only in EU countries where the CRT is formulated as an ad valorem tax, with the negative effect of the ad valorem CRT becoming higher as the car market becomes less competitive.

Keywords: car registration tax (CRT), market concentration, tax incidence, profitability, multinational enterprises, EU car industry

JEL Classification: H22, L11, L12, L13, L62