Why taxes matter for cars and games
By J.Raza On January 9th, 2012A few weeks ago I saw this video where it discussed high prices for the average car in Brazil
In short, the video’s statement is that the high cost of cars in Brazil is not really due to high taxes, but to profit margins from car dealers. This conclusion comes from the fact that although car taxes are high, they’re not a significant part of it’s end price. At a first glance, this seems legit, since we’re comparing the proportional price of taxes over the car’s total end cost. With that said, I will now discuss in this post why I believe that analysis is incorrect and attempt to prove that taxes can have a huge impact in a product’s end sale value.
You see the percentage of taxes over a products end price is misleading. Saying that 10% of taxes on a $10.000 car will not change it’s end price significantly enough to impact it’s sales is an insufficient analysis of this problem. What’s necessary is in evaluating the buying capacity of the market, and the segments in which it divides itself. Here’s a simple example, from a hypothetical country Foo :

Foo’s citizens can be described in the above market segments, where each has a corresponding buying capacity for a car. This means if a car costs $3.000 then all users can buy it. But if it costs $8.000, then only users B and A can afford to buy it. The key component here is the margin in which a user can buy something, since all off them have one.
If you don’t believe so, think the last time you went to a store to buy something. You said to yourself you would only spend at most $80. However the product’s cost was $100. After pondering for a while you still decide to buy the product. Now you could think you over spent your initial budget, but that’s irrelevant. What really happened is that you spent within your buying capacity. It’s not that you will buy a product if and only if it costs less than $80 — you will buy it if it’s within a bound.
Since users can then afford to spend their money over the same object — a car — what the market then attempts to do is two things :
- First it tries to create products for each user segment. There will be specific car brands for each user segment.
- Second, and here’s a key factor here, the market will try to sell these car brands at the top price for each user segment.
To understand the second bullet, think of it this way. Suppose car brand #4 is geared towards the low income individuals — namely users D. The market will then try to sell car brand #4 the closest possible to $5.000, since it knows that users D can afford it. In short, the market will diversify itself to reach out to all potential user segments, and maximize it’s profit margin as much as possible within each user segment.

It’s under this point of view that taxes become a crucial factor in a car’s end price. A reasonable thing to do is to keep car taxes in a way that the end cost of a car’s brand will still be under it’s original user segment buying capacity. Here’s an example — suppose car brand #4 costs $4.000. With a 10% tax rate it’s cost will bump it to $4.400. Under that price car brand #4 will still be withing users D buying capacity. However if the tax rate is 30%, the end price will be $5.200. What happens then is that car brand #4, which was targeted for users D, can now only be bought by users C and above.
This is specially problematic since this “car brand bumping to the next user segment” effect spans the entire chain, as it can be seen in the diagram below.

However, as previously stated, we cannot forget the fact that the market will attempt to maximize it’s profits by making the products they sell to be as close as possible to a users buying capacity. So the net effect isn’t simply that car brands bump up in user segments — their prices bump to the maximum value of that user segment as well.

So what ends up happening is that under 10% tax rate, car brand #4 will on average be sold for $5.000. However under 30% tax rate, it will not be sold for $5.200 – it’s average price will be $7.500, over half as much as before.

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It’s important to highlight this since the high tax net effect doesn’t affect only cars — it affects all products, games included. Over the last few years, with specialized distribution models such as Steam, and with the advent of new user bases such as the casual market, games prices per user segment have become dramatically important. Via this, an entire matrix of users buying capacity per product has been established in the gaming industry. There’s bundles of games per discounts, daily games per $0,99, DLC averaging from $5 to $30, and so on. All sorts of combinations, trying to cater to each specific consumer market.
There’s a large set of consumer products under the $10 range. Gamers view a one dollar game sale in a completely different way than they do if it costs five. Proportionally, four dollars won’t have a significant impact in someone’s life, but it’s irrelevant — this discrepancy exists and users react to it.
It’s under this scenario that high tax rates are especially problematic. If taxes bump games prices up, than the entire portfolio of user products per market segment gets whipped out. A $10 tax rate on any external game, even though it’s quite small, simply abolishes the low cost game market.
Thus we need to understand that tax rates impact not only the end product’s price, but the whole net effect of what it does in the market as a whole. Simply put, high tax rates makes cars incredibly more expensive and cripples the low to mid-tier game development community.















