In 1971 there were two cars imported into Ireland: Fully Built Up and Completely Knocked Down. This classification was driven by the collective bargaining system from World War II to the accession to the European Union in 1973, which in principle was intended to promote Irish jobs. During this period, most of the cars sold in Ireland had to be imported as flat packs. They were initially partially built abroad, usually in the UK. To enter Ireland, they then had to be dismantled and reassembled before being sold to Irish customers.
With mass production being the norm across Europe, this idiosyncratic approach to protecting the Irish market has increased the cost of cars tremendously. In the 1960s, cars were unreliable by today’s standards, but when they were disassembled and reassembled for entry into Ireland, more mistakes inevitably crept in. This form of import restriction also limited the choice of available models and reduced competition.
The result was bad business for consumers with high prices, limited choice and an unreliable product. The reason for this regime was that it created jobs here in the automotive industry. There have also been additional jobs in other countries, most notably the UK, disassembling cars into kit form for shipping to Ireland. But overall it was a pretty inefficient system.
Accession to the EU in 1973 required the gradual abolition of this regime, which led to job losses in automobile assembly. This has been challenging in the short term, but over time the mechanical skills of those employed in the industry have been put to much better use – and probably better paid – elsewhere in the economy.
Car buyers have a better deal in terms of choice and reliability. Irish buyers looked beyond Vauxhalls and Austins to buy continental models like Renault and Volkswagen. While some had hoped that Ireland’s accession would lead to cheap cars in Ireland, they had to be disappointed. New cars, which were still a luxury good in the 1970s, were subject to a high tax rate.
Road infrastructure
A traditional justification for high taxes on cars is that they help pay for the necessary road infrastructure. Another factor behind the high new car tax rates was that we did not have a domestic auto industry after joining the EU. Elsewhere in Europe the pattern is such that purchase taxes on cars are high in non-car manufacturing countries like Denmark, Norway and Finland, while they are low in Germany, France, the UK and Sweden, traditionally large automakers.
Studies of the European car market show that consumers in countries with high purchase taxes on vehicles do not pay surprisingly high prices for cars. However, pre-tax prices in these countries are generally lower than those in jurisdictions that have low taxes on cars.
For example, an EU study has shown that in Denmark the tax on a new Volkswagen Golf accounts for 60 percent of the sales price, while in Germany it is around 16 percent. However, the pre-tax car price in Denmark was only 80 percent of the German price. While the higher retail price was painful for Danish consumers, it was overall good business for Denmark to get its cars at a cheaper price than Germany (which benefited the Danish Treasury). The same study found that the pre-tax Irish price was 90 percent of the German price. In fact, some of the car tax in Ireland is borne by the car manufacturers and dealerships and not all of them are passed on to consumers.
Greenhouse gas emissions
Another reason to levy taxes on new cars today is to avoid greenhouse gas emissions. The country with the most expensive cars in Europe is Norway, mainly because of the very high tax rate on fossil fuel vehicles. Norway is also the country with the highest prevalence of electric cars.
To meet our climate change goals, we need to quickly convert our vehicle fleet from fossil fuels to electric vehicles by encouraging new car buyers to switch with either a carrot or a stick. As a paper by the state economic service has shown, it could cost the state 10 billion euros by 2030 if we try to achieve this through subsidies. The Norwegian strategy of imposing higher taxes on fossil fuel cars is probably the only viable approach to driving change.
In Ireland, most people on budget buy used cars, which is almost half of the number of cars registered for the first time in Ireland last year. As there is a very limited supply of used right-hand drive electric cars, this factor can slow down the electrification of our vehicle fleet.
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