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Cash for Clunkers, Price Gouging, and Tax Policy

1 min readBy: Mark Robyn

The Daily Kos has a post accusing car dealers of taking advantage of the cash for clunkers program and gouging consumers:

I returned this last week to go ahead and close a deal on a Prius and learned that they had none in stock due to demand from the Cash For Clunkers program (Good news. Glad to hear the program is working and sending people to the dealer). But when I asked pricing, I was told that due to increased demand, dealers were adding on $1,500 to $3,500 to MSRP (Bad news! Dealer is converting program dollars to profits).

Faced with an increase in demand, dealers increase prices to avoid a shortage. It’s standard supply and demand taught in any intro econ course.

We often see these types of issues in taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy due to the fact that our tax code is routinely used as a tool to encourage and discourage various behaviors. The government can subsidize and industry or activity, but it can’t mandate who benefits. Some examples: the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. allows home owners to deduct their mortgage interest paid, but evidence and theory suggest that the subsidy leads to higher home prices and benefits sellers, high income buyers, and Realtors. State sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. holidays eliminate the sales tax on certain goods for short periods of time, but evidence suggests that retailers could take advantage of the sales tax holidayA sales tax holiday is a period of time when selected goods are exempted from state (and sometimes local) sales taxes. Such holidays have become an annual event in many states, with exemptions for such targeted products as back-to-school supplies, clothing, computers, hurricane preparedness supplies, and more. frenzy by increasing prices before and during the sales tax holiday thereby capturing some of the benefit meant for consumers. Education subsidies flow at least partially to educational institutions in the form of increased tuition, reducing the benefit for students.