Another Tax Credit, at Taxpayers’ Expense

Rodney JohnsonThis year, tax day arrives soon after Tesla Motors unveiled the affordable Model 3.

Well, maybe affordable isn’t the right word. With a base price of $35,000, it’s more expensive than the entry level Mercedes, but it’s also less than half the cost of the vaunted Tesla Model S, which starts at $76,000.

The reason I bring up Tesla near tax day is because every U.S. Tesla buyer can claim a $7,500 tax credit, which will cut the cost of the new Model 3 by more than 20%.

That’s a deal, but it might not be around by the time the Model 3 is ready for delivery.

Congress created this tax credit in 2009 under the Plug-In Electric Drive Vehicle Credit Act as an incentive to get Americans to buy electric cars. The credit applies to the first 200,000 buyers of an electric car from each car manufacturer. Once an automaker reaches that milestone, the credit phases out.

Tesla has more than 100,000 cars on the road, and just reported that it sold 14,820 cars in the first quarter. By its own estimates, the company will reach 200,000 units sold in early 2018, just after the Model 3 goes on sale. While every buyer of an expensive Model S over the past several years got the tax break, most buyers of the modest Model 3 will be out of luck… unless something changes.

And I’m betting it will.

Almost since the federal tax code was written, Congress has used it as both a carrot and a stick. The goal is to prod Americans to make different choices with their cash, depending on what our elected officials deem good or bad.

In the eyes of Congress, clearly renters freeload on the economy while homeowners are pillars of their communities.

But not all homeowners fit this category, just those that have outstanding mortgages. If this weren’t the case, then either everyone would get some sort of tax break for maintaining a household, or the mortgage interest deduction would not exist.

Child bearing is in the same category. It must be a “better” decision to have kids, which is why the government provides a child tax credit… as well as a child care credit… and an education credit.

If you rent and have no children, then you might think that Congress is out to get you. Unless of course you bought a Tesla, in which case the tax credit will provide some solace. You can also take heart if you’re single, since Congress, which wants people to have children, penalizes those who are married. Go figure.

There are tons of other examples, including everything from solar panels to charitable deductions. And I’ve not even touched on investing do’s and don’ts (buy depleting assets, but don’t sell anything that appreciates, and stay away from dividends!), and how we drive business decisions from health care to R&D.

But all of this comes down to the same point. Instead of simply assessing the taxes required to fund the government for a given level of service, our Congress goes the extra mile.

They tell us not only what to pay, but also try to sway our financial decisions along the way. They want us to use more credit, spend more money on specific items, and have more kids. If we don’t do their bidding, then we’re forced to subsidize others that do.

This affects some more than others. If you’re married, rent your home, invest in corporate bonds, have no children at home, are in the top 20% of earners by income, and haven’t bought a plug-in vehicle since 2009, then the rest of the nation owes you a big, fat “Thank you!”

While I agree that many, but not all, of the financial decisions that the government tries to promote are good for the nation, the idea of taking money from some people and giving it to others on the basis of spending seems very un-American.

Where’s the freedom to make our own decisions, particularly with our hard-earned money? Why does a person who can buy an $80,000 electric vehicle deserve to be financially supported by the rest of us?

If electric cars are a good idea, shouldn’t they stand on their own?

The same goes for a person or couple who can buy a $500,000 house, or even a $50,000 house. No matter how noble or questionable the financial outlay, taking money from some citizens to support others on the basis of spending feels like paternalism, not freedom.

As we go through this election year, it would be great to hear our candidates talk about revising the tax code, making it simpler to understand and follow by stripping out the thousands of regulations regarding what counts as income, what can be deducted, and what qualifies for credit.

But I’m not holding my breath. I don’t think our next administration will do anything to ease our tax compliance burden, but they will do something.

Most likely, they will extend the tax credit on plug-in vehicles, specifically for Tesla.

Government officials will call it a smashing success, noting that 200,000 of their vehicles are already on the road. Nowhere will they mention that this very small group of buyers received a financial payoff at the expense of all the other American taxpayers, who either didn’t want or couldn’t afford such a vehicle.

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About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.