The Good and Bad of Tax Credits for Clunkers, Homes, Etc

I was worried the government's Cash for Clunkers program was paying people to move the next six months of car purchases into a few weeks and gutting the auto market for the next half year. But here's some good news for Cash for Clunkers, auto dealers, and the economy: I might have been wrong! This bit of evidence the stimulus did not steal from future sales as I anticipated:



From the WSJ's Real Clear Economics:

At a seasonally adjusted annual rate, there were 10.46 million light vehicles sold in October, according to Autodata, up from 9.22 million. That tally fell short of August's 14.09 million and July's 11.24 million -- the two months when the clunkers program was in effect -- but it was higher than any other month in the past year.

If the car stimulus did not steal from future auto sales, Justin Lahart says, perhaps the expiration of the housing credit won't crush the housing market in 2010. However it appears that Lahart's musings are for naught. The housing credit is on the verge of being extended until April, despite all its warts. From the NYT:

The Senate and House are poised to agree on a compromise measure to extend unemployment benefits that also would expand a popular $8,000 tax credit for homebuyers, despite a recent government report on extensive mistakes and suspected fraud in the program.

The trouble with these credit incentives -- whether for clunker trade-ins, home purchases or new hirings -- is that in addition to incentivizing X action, you also incentivize the illusion of X action. So you've got car buyers taking C4C money for trade-ins they already made this summer, or tax credits for homes they've already bought. This isn't to demonize the practice of building tax credits to incentivize economic activity. But the policy discussion over every tax credit must include a serious look at the probability of Americans gaming that tax credit. That's one reason why, in the fight to stimulate the job market, I support a payroll tax cut or extension of jobless benefits over a tax credit for firms who newly hire.