Current cars have settled on a certain size, for historical reasons. In fact they seem to be getting a bit bigger. But there's no particular reason for a car to be bigger than a single human being, or other sizes (two humans + one suitcase perhaps). We can use the tax system to change that for the better.
This isn't a pie-in-the-sky unproven idea either. Kei cars are hugely popular in Japan, demonstrating that the market exists.
They're pretty practical - I've driven in a 6 seat Kei-car in Japan, and there are Kei vans and Kei flatbed delivery trucks (all fitting into the smaller dimensions).