Why Stop At A $10,000 Tax Credit For The Volt?

Yesterday, on Slate's The Big Money Matthew DeBord questioned why the U.S. should provide but a mere $7,500 tax credit on the upcoming Chevy Volt plug-in hybrid, expected to get up to 230 miles per gallon, but to retail for as much as $40,000. Some analyses indicate that the Volt will only be profitable if sold for $30,000 or less. So DeBord asks -- why not a $10,000 credit? Indeed! Why not a $20,000 credit to make it super profitable for GM. Or why not a $40,000 credit, and just give them away for free? Then every American will want one! Let me take a shot at explaining the problem here.

After suggesting a $10,000 rebate, DeBord says:

For the Volt to be successful--and successful in this brave new realm will be measured not in small percentages of actual market share, but in big multiples of correct-demographic mindshare--it needs to sell and sell a lot. And of course the government does own a majority stake in GM. Soooo ... would it be ... sensible?

In a sense, DeBord is actually right. If the government wants to ensure that a product is successful, providing a tax credit that might not get it over the hump is probably not particularly sensible. But to that, I say, why stop at $10,000? If it's success the government wants, then it could expand the credit even more.

Of course, the problem here is far more fundamental: it shouldn't even be providing a $7,500 credit. I've complained in the past about the government providing an incentive for investment in an unproven technology. Essentially, this means that the government is making a bet on the future, without any particularly keen foresight.

Bear in mind, electric cars aren't the only option for the future of autos. Hydrogen fuel cells, modified algae and several other possibilities are also out there. Generally, the market determines which technology succeeds. And the winner is the one that can be produced more profitably and more effectively than the rest. But by the government picking winners, it prevents this market discovery and, ultimately, an inferior technology could dominate.

DeBord's logic also kind of makes sense where asserting that Americans would benefit if GM profits, since taxpayers own the carmaker. But this assertion falls prey to the same problem as the idea of expanding the credit: in nationalizing GM, the government chose a winner, while the market dictated the firm a loser. So the question here is really: do two wrongs make a right? Should the government throw more money at Volt tax credits in the hopes of rescuing a sinking ship that it shouldn't have saved in the first place? I remain unconvinced.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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