How to almost knock down a market inadvertently and not fail in the attempt? The case of the tax on luxury cars in Argentina

Abstract

Under the pressure of a growing capital outflow, by the end of 2013 the Argentine government implemented what was known as the tax on "luxury cars". Even when not explicitly declared, the main objective was to reduce imports of most expensive cars to reduce the trade deficit of the automotive sector, which was contributing heavily to the capital account deficit. Even when the policy could be categorized as "successful" in terms of reducing a USD 4.5 billion deficit in 2013 to one of just over USD 0.7 billion in 2014, it had a devastating and lasting impact on the internal market, that just in 2013 had achieved a record in sales. We obtain that during the first year of the implementation of the tax, the overall impact on sales of models reached by the tax was 53.7%. Despite some differences, the negative impact took place throughout the whole year. Not surprisingly, cars reached by the highest tax rate were most affected, as well as carmakers that produce more expensive varieties. However, even when the measure may have been designed to have a direct impact on a small part of the market, the negative effects extended to the whole market.