The Impact of Tax Rebate on Used Car Market: Evidence from Thailand

• Author: Kanis Saengchote,Tim Noparumpa
• DOI: http://doi.org/10.1111/irfi.12094
• Date: 01 March 2017
• Published date: 01 March 2017

The Impact of Tax Rebate on Used

Car Market: Evidence from Thailand

TIM NOPARUMPA AND KANIS SAENGCHOTE

Chulalongkorn Business School, Chulalongkorn University, Bangkok, Thailand

ABSTRACT

Tax incentives are one of the most important fiscal tools at the government’s

disposal that can be used to influence the economy.Often, policies are targeted

to spur investment in durable goods. In this article, we focus on the impact

that a primary-market tax incentive has on the secondary market for durable

goods –specifically,the automobile market. Using a first-car tax rebate scheme

implemented in Thailand in 2011 as a natural experiment, we find that the

policy reduces the listing prices of used cars in the tax-eligible category by

6.75% to 10.31%.

1. INTRODUCTION

Much of the research interest on tax incentives has been on evaluation of tax

credits and rebates on economic outcomes. For example, several studies examine

the Car Allowance Rebate System (CARS) in the USA and conclude that it resulted

in demand-shifting, rather than overall demand stimulation. Mian and Sufi

(2012), Copeland and Kahn (2013), and Hoekstra et al. (2014) find that the initial

sales spike was subsequently reversed and the overall impact on the automobile

industry might not have been significant. Specifically, Copeland and Kahn

(2013) argue that the majority of the sales increased were accounted for by

existing car inventories, not new production.

While the economicimpact of such policies is a much debatedissue, our focus is

different. A car is considered a durable good that is consumed over time rather

than instantaneously like consumption goods. Its durability implies that the mar-

ket for new (primary) and used (secondary) durables isinterrelated –new and used

cars are, after all, imperfect substitutes. As such, economic policies intended for

the primary market may have an impact on the secondary market as well.

1

1 New and used cars are, after all, imperfect substitutes. There are several explanations why the link-

age exists, but the two main channels are quality improvements (e.g., Fudenberg and Tirole

(1998)) and durability of newer vintages (e.g., Hendel and Lizzeri (1999)). There is also evidence

in support of this linkage. Investigating the college textbook industry, Chevalier and Goolsbee

(2009) show that as probability of resale decrease, prices of new textbooks fall. Using the US Tax

ReformActof1986thatintroducedtaxbenefits to new aircraft buyers, which effectively increase

the prices of new aircrafts, Smith(2009) documents that the prices of used aircrafts also increased

as a result. For a comprehensive review of the literature on durable goods, see Waldman (2003).

© 2016 International Review of Finance Ltd. 2016

International Review of Finance, 17:1, 2017: pp. 147–154

DOI: 10.1111/irfi.12094