Wednesday, September 30, 2009
If you traded in a clunker worth $3500, you get $4500 off for an apparent
"savings" of $1000.
However, you have to pay taxes on the $4500 come April 15th (something that
no auto dealer will tell you).
If you are in the 30% tax bracket, you will pay $1350 on that $4500.
So, rather than save $1000, you actually pay an extra $350 to the feds. In
addition, you traded in a car that was most likely paid for. Now you have 4
or 5 years of payments on a car that you did not need, that was costing you
less to run than the payments that you will now be making.
But wait, it gets even better: you also got ripped off by the dealer.
For example, every dealer in LA was selling the Ford Focus with all the
goodies including A/C, auto transmission, power windows, etc for $12,500 the
month before the "cash for clunkers" program started.
When "cash for clunkers" came along, they stopped discounting them and
instead sold them at the list price of $15,500. So, you paid $3000 more than
you would have the month before. (Honda, Toyota, and Kia played the same
list price game that Ford and Chevy did).
So let's do the final tally here:
You traded in a car worth: $3500 You got a discount of:
Net so far +$1000 But you have to pay:
$1350 in taxes on the $4500
Net so far:
-$350 And you paid:
$3000 more than the car was selling for the month before
We could also add in the additional taxes (sales tax, state tax, etc.) on
the extra $3000 that you paid for the car, along with the 5 years of
interest on the car loan but let's just stop here.
So who actually made out on the deal? The feds collected taxes on the car
along with taxes on the $4500 they "gave"
you. The car dealers made an extra $3000 or more on every car they sold
along with the kickbacks from the manufacturers and the loan companies. The
manufacturers got to dump lots of cars they could not give away the month
before. And the poor stupid consumer got saddled with even more debt that
they cannot afford.
Congress convinced Joe consumer that he was getting
$4500 in "free" money from the "government" when in fact Joe was giving away
his $3500 car and paying an additional $3350 for the privilege.