Sunday, June 3, 2012

Car Equity Ownership

If interest free economy is to be materialized, I see potential change in car ownership system in country like Malaysia where the cost of imported vehicles are double the real market price due to tax and permits cost.

Perhaps government could introduce, car rental system where tax and permits are reduced to a point where in total the lessee will pay only the total cost of the car after a term of 5 years.

Simple example will be a Honda Accord will cost USD 46K and with financing for 5 years monthly payment of USD 1,073 per month will be required. Thus involving interest of USD18K ignoring time value of money.

Imagine a system where the government tries to inculcate equity ownership. This may be an option.
Honda Accord will actually cost USD 22K outside of Malaysia. If the government introduces the car equity ownership, there should be a place or a centralized car ownership system properly legislated and protected where individuals with money will buy the car, and subsequently rent it to interested parties for USD767 per month that will bring the total rental payment of USD 46K, equivalent to current selling price of the car without interest.

It sounded beneficial to the people while being disadvantageous to the government. Lets analyze it a bit further for simplicity ignoring time value of money and subsequent ripple effect.

Government will lose out about USD16K++
1) Loss of USD 21K over permits and internal tax.
2) Loss of 30% on USD18K income tax over the interest earned by the bank.
3) Gain of USD3K on distributorship earnings
3) Gain of USD7K on income tax of lessor’s profit of USD24K

Lessee will gain about USD18K from savings on interest. Increasing the lessee's disposable income for further economic spending, which will subsequently generate income tax revenue for the government.

Lessor makes USD17K net after paying 30% tax on USD24K profit that will further be translated into economic spending or further investments that will generate income tax revenue for the government.

Banker will lose their net after tax interest income of USD13K

Looking at this simplified calculation Government lose out USD16K, Bank lose USD13K while the people profit USD35K. Look at it from the country point of view and you will realize that overall it is more beneficial.

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