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Cash for Clunkers is Like Sales Tax Holidays: Politically Popular But Just a Timing Shift

3 min readBy: Joseph Bishop-Henchman

On our blog today, my colleague Gerald Prante does a good thought experiment involving the “cash for clunkers” program, a government subsidy paid to individuals who trade in cars for new ones with better gas mileage. I guess I was the only one who wasn’t surprised that free cash handouts were popular, with the $1 billion allocated running out in a few days and the Senate is now debating an extension of the program.

I admittedly didn’t follow the congressional debate that led to this program, but I figure it’s a happy union of a number of different goals: rescuing politically powerful auto dealers, shoring up auto sales for Government Motors (GM), stimulating the economy generally, improving overall gas mileage, and having smiling politicians handing out checks to constituents. Win, win, win, right?

At least one analyst says that this program doesn’t do anything except shift around a bunch of purchases that would have happened anyway: noted recently that over 100,000 buyers put their purchases on hold waiting for the program to launch. Once consumers could start cashing in on July 24, showrooms were flooded and government servers were overwhelmed as the backlog of buyers finalized their purchases.

Secondly, on July 27, published an analysis showing that in any given month 60,000 to 70,000 “clunker-like” deals happen with no government program in place. The 200,000-plus deals the government was originally prepared to fund through the program’s Nov. 1 end date were about the “natural” clunker trade-in rate.

Clearly, cash for clunkers was underfunded from the start. Consumers quickly figured that out and rushed to take advantage before funding ran out.

This sales frenzy was inevitable. We have crammed three to four months of normal activity into just a few days.

What everyone fails to realize is that once this backlog is met, interest in the program will fade.

The disappearance of inventory is one clue that he might be right. As for “creating American jobs,” some may be interested to learn that many of the new car purchases were not made by U.S. automakers. And I didn’t even mention the anger being taxed to give cash to others to fix their previous purchase of a gas-guzzling car. On the other hand, there are probably a few people for whom $4500 was the difference between buying a new car and not. Can’t be that many, though.

The program reminds me a lot of 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. After piling taxes on, politicians pick a random product to be exempted for a brief period of time. Everyone rushes in to buy in the short window, the lobbies behind the exempt products talk about how special they are, and smiling politicians can tell constituents that they’re big 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. cutters.

Unfortunately, sales tax holidays result in high administrative costs to deal with multiple sets of tax rules, confusion (and political fights) over what’s exempt and what’s not, a bunch of government advertising for what is really just a measly 5 to 7 percent off sale, and allow politicians to claim credit for cutting taxes when they haven’t done anything of the sort. Some retailers even cut sales short before the holiday, resulting in prices that are higher on the holiday!

Alas, I probably won’t be running out this weekend to get suspenders and a $99 wedding dress.