Listening to Obama’s critics hyperventilate over the “cash for clunkers” program, it is clear that they have forgotten about George Bush’s own “cash for guzzlers” program put in place in 2003 under his own fiscal stimulus plan. As part of his 2003 tax cuts, Bush expanded an existing tax loophole that allowed small businesses to write off $25,000 of the cost of a 6,000-pound vehicle (the provision was intended to encourage farmers and construction companies to invest in light trucks). The maximum deduction was expanded to $100,000 and by 2003, 38 passenger SUVs qualified for the write-off.
This had the effect of making some of the largest and most luxurious passenger SUVs fully deductible and worth considerably more than $4,500 per vehicle to the taxpayer – in fact, the tax benefit to a purchaser often was tens of thousands of dollars. Many real estate agents, accountants, lawyers, and doctors were now economically compelled to buy a more expensive (and less fuel-efficient) car than they otherwise would. In short, the program created an economic incentive for America’s small businesses to contribute to our dependence on foreign oil and drive gas prices up. As Jim Walczak pointed out at the time, a business owner wanting to buy a Lincoln Town Car would receive a $7,660 deduction, just one-fourth what he might save by buying a Lincoln Navigator.
And according to Taxpayers for Common Sense, the SUV tax loophole cost the federal government $1 billion for every 100,000 vehicles that businesses buy – that’s $10,000 per vehicle compared to Obama’s $4,500 per vehicle for those scoring at home.
To summarize:
- Bush’s tax break (remember: effectively $10,000 per car in cash) went to doctors, lawyers, real estate agents, and independent contractors, etc. – whether the vehicle was a pickup truck carrying lumber or a BMW X5, carrying your accountant. Obama’s cash payment ($4,500 in size) goes to anybody with an old car who raises his or her hand.
- Bush’s tax break is a clear economic incentive to buy the largest and least-efficient SUVs, as only they qualify for the deduction. Obama’s cash payment prompts people across all tax brackets to go buy a fuel-efficient car.
The Obama critic will defend the Bush plan on the grounds that a tax break is a more efficient form of stimulus than the redistributive cash payments of the “cash for clunkers” program. But is that a strong argument? Let’s be honest: both programs amount to a fiscal stimulus and contribute to the growing deficit. Each one distorts the prevailing incentives in the free market. And each benefits a targeted group and is inherently redistributive.
But clearly Bush’s plan is more narrowly targeted, and more expensive per vehicle. It’s fair to be skeptical about how much the economy will benefit from Obama’s $4,500 per-car fiscal kick in the shins. But is a $10,000 per-vehicle fiscal kick in the shins – targeted at an even narrower class of taxpayer really any better? By not expanding this loophole, Bush could have reduced his deficits. Or if he insisted on cutting taxes, he could have chosen a more broad-based stimulus (like Obama’s – or preferably even broader than Obama’s). Or maybe one that promoted less dependency on foreign oil.
The lens of history enables us to see that Bush’s program came into practice just as he was converting his inherited budget surpluses into deficits. We also now see that this loophole was in place just as the insurgency in Iraq was having its best days. I wonder how many of our men and women in uniform who were desperate for up-armored vehicles in an oil-rich war zone knew that we couldn’t afford it because we wanted new gas-guzzling Hummers for ourselves at home.
-MN
