What If Cash for Clunkers Was a Tax Credit?

August 5, 2009

Critics of the “Cash for Clunkers” program are out in full force, claiming that its problems are evidence that government is inefficient and that it is further proof that government shouldn’t get involved in something as important as health care.

But suppose that instead of the government providing $4,500 in outlays per qualifying car in a program that is being administered by the Department of Transportation, the Congress instituted a $4,500 refundable income tax credit that met the exact same qualifying criteria as the current program, yet was administered by the IRS. Would the tax credit be good fiscal policy merely because it’s mostly classified as a tax cut as opposed to an “outlay?”

The economic difference between these two scenarios is zero (except for possibly differences in administrative costs). Both policies would be financed by deficits, leading to either lower spending in the future or higher taxes in the future.

Despite this fact, it’s likely that many of these same critics of the $4,500 cash for clunker outlay who are citing its problems as proof government doesn’t work would have supported such a $4,500 cash for clunker tax credit merely because it would have been classified as a “tax cut” instead of an “outlay.”

For these people, tax policy is all about semantics instead of understanding the economic effects of differing fiscal policies.

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