Registration Taxes on Cars Inducing International Price Discrimination: An Optimal Tariff Approach

Pre-tax car prices are particularly low in EU countries with high registration taxes but no car production, meaning that the tax is equivalent to an import tariff and induces international price discrimination. The paper develops a theorectical model to analyse the European Commission's policy of facilitating arbitrage and thereby reducing car price differences. The effects on prices, quantities and welfare depend crucially on whether the tax is exogenous or whether it is set optimally by the importing country. The optimal tax rate depends positively on the car manufacturers' scope to price discriminate. Thus when arbitrage costs fall, tax rates are reduced.