The Driving Dutchman - An Application of the Prevalent Theories of Distributional Justice

Table of Content

1. Introduction

2. Luxury Tax

3. Effect on the Distribution in Germany

4. The Main Theories of Distributional Justice
4.1 John Rawls
4.1.1 A Theory of Justice
4.1.2 Rawls and Cars
4.2 Utilitarianism
4.2.1 The Utilitarian Theory
4.2.2 Utilitarianism and Cars
4.3 Libertarianism
4.3.1 Anarchy, State, and Utopia
4.3.2 Nozick and Cars

5. Further Comments

6. Conclusion

7. Bibliography

1. Introduction

In January 1998, the commission of the European Union (EU) sentenced the German car manufacturer Volkswagen to pay € 102 million, since the company had violated the European regulations of competition.^[1] It had ordered its non-German subsidiaries not to sell vehicles to German clients. These were interested in purchasing cars abroad for the reason that the list price was cheaper in the bordering countries.

A second aspect in acquiring a vehicle abroad is the different tax systems in the member states of the European Union. Additionally to the differences in the Value-added taxes (VAT), there are also variations when it comes to supplementary taxes levied on luxury items. Some countries insisting on such a luxury tax are Denmark or the Netherlands. When importing a product from a country with luxury taxes into a country without luxury taxes, the taxes can be claimed back. Only the taxes of the importing country have to be paid.

These two features cause the acquisition of a car from a foreign EU-country to be an interesting alternative for many people residing in a land with high prime costs in the automotive industry. One of these countries where a car purchase requires a high initial outlay is Germany. Because of the geographical situation, many Germans, when considering buying a vehicle, drive to Denmark or the Netherlands. The Netherlands, for example, have a special 45% luxury tax (Belasting van personenauto's en motorrijwielen, BPM^[2] ) on automobiles. In order for manufacturers and importers to survive, they make a special effort to price their vehicles competitively. As a result of this most tax-free prices in Holland are lower than anywhere else. The savings can be up to 20-25%.^[3]

This option is very likely to change the distribution of welfare within Germany. This effect raises the question: How do the most prevalent theories view this opportunity and the resulting change in distribution?

In order to answer this question, this paper will proceed as follows. First, the concept of a luxury tax will be explained and evaluated. Second, the most likely effect of the above-mentioned opportunity on the distribution of welfare will be outlined. Third, the theories of John Rawls, the Utilitarians, and the Libertarians will be introduced and applied to the case. Before providing some concluding thoughts, an overview and some further thoughts will be provided.

2. Luxury Tax

A luxury tax is a premium buyers have to pay when purchasing a good that is considered to be a luxury item. When defining luxury product groups, the value and the exclusiveness of a good will serve as a basis. Therefore, it is very likely that products like cars, jewelry and houses will be subject to such a tax.

There are several reasons for a country to introduce a luxury tax. Among them are the functions of the tax as governmental revenue, as a regulation of scarce resources, and as a regulator of distributional justice. These functions will now be considered in turn.

Since centuries, taxes are the easiest means of governmental revenue. The costs that arise from having a government have to be paid for. Therefore, the citizens of the country are obliged to pay a part of their earnings to the tax office. The reasoning behind this is that the user of the government services (the citizens) should also pay for it. Most governments became very creative in designing different taxes in order to generate income.

Every society is confronted with the scarcity of resources. Minerals, jewels, coal, water, ground, and clean air are, among others, not without limits to our availability. The distribution of such goods has therefore to be regulated. One way to do so is to increase their price, so that less people are interested in the purchase. This can be done by levying a price on the scare resources.

The last reason for a luxury tax introduced here, is the motive of distributional justice. In order to make the least favorite better off, the government has to step in. But to be able to pay out financial resources, the inflow of the money has to be secured. Luxury taxes could have been invented by Robin Hood, because they are considered to be just, since they take from the rich, in order to give to the poor.

In general, luxury taxes force the vendor of a product considered to be a luxury item to pay a premium above the catalogue price. This premium is on top of regular taxes like the VAT. It is most likely that the motivation to generate distributional justice is the prevalent reason for the introduction of such a tax.

3. Effect on the Distribution in Germany

Let us assume that there are three people in Germany: Person A, person B, and person C. In a world without the opportunity of buying the big, expensive, nice, zebra-colored car (short: BENZ) for a lesser price in the Netherlands, only person A could afford to drive this vehicle. Person B would be just a couple of hundred Euros short, while person C would never be able to come up with the money for such a car. Let us further assume that all three people want the car and that the emission is proportional with the size of the car.

Now assume that the Netherlands open the border for exports. Person B makes a weekend trip to Maastricht and purchases the car over there. Now person A and person B own the large car, while person C is still not able to pay for it. As a result, more people drive bigger cars. One could now think that the situation of person A and person C did not change. Person A still has his car and person C still has no car. But the shift has various consequences.

Firstly, since bigger cars emit more toxic gases than small cars, the environmental pollution increases. This leads to higher social costs by increasing the contamination of the air, the water, and therefore also the food. Consequently, the governmental expenses increase, because filters and other protection methods have to be installed. Furthermore, person C has to deal with the social cost and is not compensated for it by any means. Person B is obviously better off, as he was able to acquire the desired car. Person A is also worse off, since he too has to deal with the higher pollution.

Secondly, there might also be personal costs involved. Considering the change in the three persons’ positions, we can figure that person B is definitely better off, since he was able to buy the desired car. Although his possessions did not change, person C might actually feel something like jealousy and is consequently worse off. Person A might also feel discriminated. In the original position, he was the only one driving such a car. Now, he is deprived of his privilege. Furthermore did person A pay the expensive price in Germany and will now feel fooled.

Summarizing, person A and person C will probably dislike the new opportunity, because they are likely to carry the consequences, while person B will be in favor of it, since he will be able to acquire his favorite car.

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^[1] See http://home1.tiscalinet.de/schulseiten/_private/vwl/referate_vwl.htm

^[2] http://www.belastingdienst.nl/9229237/t/bpm1.htm

^[3] See http://www.europeanhonda.demon.nl/honda_s2000_prices.htm