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

von: Maria Kimme

Table of Content

1. Introduction   page 3

2. Luxury Tax  page 4

3. Effect on the Distribution in Germany  page 5

4. The Main Theories of Distributional Justice  page 6

4.1 John Rawls   page 6

4.1.1 A Theory of Justice  page 6
4.1.2 Rawls and Cars  page 7

4.2 Utilitarianism  page 8

4.2.1 The Utilitarian Theory page 8
4.2.2 Utilitarianism and Cars   page 9

4.3 Libertarianism   page 10

4.3.1 Anarchy, State, and Utopia  page 10
4.3.2 Nozick and Cars  page 11

5. Further Comments   page 12

6. Conclusion  page 13

7. Bibliography   page 14

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 Valueadded 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, BPM²) 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

[...]

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