Vehicle ownership taxation (an indirect tax) has two key purposes. Firstly, as a general revenue generator - income is rarely hypothecated. Secondly, to regulate the number of vehicles owned and potentially the age of the vehicle stock to meet environmental objectives.
Above and beyond a basic level of purchase tax, vehicle ownership tax is levied to constrain "growth of the motor vehicle population at a predetermined annual rate" (Phang & Asher, 1997). This rate is based on the percentage of expected growth that is deemed tolerable, and scrapage rates for that year, where they too are dictated. Vehilce ownership taxation is generally applied on a national basis. The desire to control growth in car ownership stems from the need to minimise congestion and other associated negative impacts of car use. Vehicle ownership taxes are based on an assumption that everybody will travel by car unless they are prevented from doing so.
Demand impacts can be substantial and contribute positively to a number of key policy objectives. Whilst impacts are incremental, some can be significant even in the short term.
It is worth noting that as ownership taxes form part of the fixed outlay
necessary to purchase a vehicle, they may encourage drivers to drive more
to obtain value for money if that outlay is particularly high, and usage
costs are not prohibitive.