As part of their ongoing efforts to address climate change, Democrats have supported a variety of policies over the years that promote the adoption of electric vehicles (EVs). Chief among those policies was the American Clean Energy and Security Act of 2009, which granted tax credits of up to $7,500 for new EVs. The credit is available for all automakers, but it is phased out for individual automakers after they sell 200,000 EVs. Tesla and GM both hit this threshold in 2018 and thus no longer qualify for the credit, but other automakers continue to benefit from this system.
In May, Democrats introduced a proposal to expand the tax credit to as much as $12,500, and to remove the 200,000 car threshold. This would allow Tesla and GM to get back into the tax credit game, although the credit would be lower for companies with non-unionized workers (such as Tesla) and for companies building EVs outside the US.
Though many politicians support the original tax credit and the proposed expansion because of its beneficial effect on the EV industry, one of the politically awkward realities of the policy is that most of the people buying new EVs and getting the tax credit are...well...not poor. To address this, the Senate recently approved an amendment as part of the new federal budget to limit eligibility for the tax credit based on one’s income and the price of the car.
“The US Senate has voted to approve a non-binding resolution setting a $40,000 threshold on the price of electric cars that would be eligible for a $7,500 federal tax credit,” Electrek reports. “Additionally, only buyers with an income of less than $100,000 would be able to apply for the tax credit.”
Senator Deb Fischer (R-NE), who introduced the amendment, explained her reasons for promoting the change.
“Americans making over $100,000 a year claimed nearly 80% of EV tax credits in 2016,” she said, “and EVs cost $19,000 more than gas powered vehicles. My colleagues on the other side of the aisle like to say wealthy Americans should pay their fair share in taxes, yet they want to expand a tax credit to disproportionately benefit even more people with six-figure salaries. Everyday Americans are living paycheck to paycheck because of the sharp rise in costs due to inflation, but my colleagues on the other side want to subsidize luxury vehicles only the rich can afford using money from hardworking taxpayers. My amendment would put a stop to that.”
The Senate did the right thing by passing my amendment that would prohibit wealthy Americans from claiming a tax credit when they buy an electric vehicle. pic.twitter.com/fJVBeLgJYe— Senator Deb Fischer (@SenatorFischer) August 11, 2021
In fairness to the Democrats, the expansion proposed in May does include an eligibility cap of $80,000, but that is considerably higher than the $40,000 cap approved by the Senate, and there is no provision for eligibility restrictions based on one’s income.
To Tax or Not to Tax
In many ways, Sen. Fischer’s move was a smart political play, because she pushed Democrats into a corner. If they vote against her eligibility criteria, they have to openly admit to giving tax breaks to the rich, which isn’t exactly the image they’re trying to promote. Then again, if they agree to stringent eligibility limits, the effectiveness of the tax credit could be greatly reduced, making them look bad on the climate issue. So they can promote EVs or they can soak the rich, but they can’t really do both at the same time.
But while Sen. Fischer may have the upper hand politically, her economic points deserve some scrutiny.
For one, the justification for introducing the eligibility criteria lies on the assumption that taxing the rich more is a good thing. The reasoning, presumably, is that the government will use the extra tax revenue to help society at large, whereas the rich folks would otherwise use the money to only help themselves.
"The greater part of that portion of the higher incomes which is taxed away would have been used for the accumulation of additional capital. If the treasury employs the proceeds for current expenditure, the result is a drop in the amount of capital accumulation. (...) Thus the accumulation of new capital is slowed down. The realization of technological improvement is impaired; the quota of capital invested per worker employed is reduced; a check is placed upon the rise in the marginal productivity of labor and upon the concomitant rise in real wage rates. It is obvious that the popular belief that this mode of confiscatory taxation harms only the immediate victims, the rich, is false."
Contrary to popular belief, rich people do not simply hoard their wealth. Rather, they invest most of it, and those investments create numerous jobs and opportunities for others that wouldn’t otherwise exist if the money was taxed away. Furthermore, since private investments are driven by free market prices, the resources would almost certainly be put to better use than if they were allocated by central planners. Thus, lower taxes would generally lead to better economic results, both for the rich and the poor.
Leveling the Playing Field
Taking a step back, the main problem with tax credits as such is that they create an uneven playing field. By giving tax credits for EVs but not for other vehicles, the government is giving an unfair advantage to the EV industry. Over time, this will cause resources to be misallocated, since the EV industry will be artificially propped up beyond what consumers would have demanded in a free market.
Now, one way to even the playing field would be to remove the tax credit. And if we think of the tax credit as a kind of subsidy, that sort of makes sense. In fact, Sen. Fischer made that exact comparison in her speech, remarking that “my colleagues on the other side want to subsidize luxury vehicles only the rich can afford using money from hardworking taxpayers.”
But as the economist Murry Rothbard aptly points out, this kind of rhetoric is actually a gross mischaracterization of the facts. Tax credits are not subsidies, and the rich are not being given “money from hardworking taxpayers.” As Rothbard notes:
"Many writers denounce tax exemptions and levy their fire at the tax-exempt, particularly those instrumental in obtaining the exemptions for themselves. These writers include those advocates of the free market who treat a tax exemption as a special privilege and attack it as equivalent to a subsidy and therefore inconsistent with the free market. Yet an exemption from taxation or any other burden is not equivalent to a subsidy. There is a key difference. In the latter case a man is receiving a special grant of privilege wrested from his fellowmen; in the former he is escaping a burden imposed on other men. Whereas the one is done at the expense of his fellowmen, the other is not. For in the former case, the grantee is participating in the acquisition of loot; in the latter, he escapes payment of tribute to the looters. To blame him for escaping is equivalent to blaming the slave for fleeing his master. It is clear that if a certain burden is unjust, blame should be levied, not on the man who escapes the burden, but on the man or men who impose it in the first place. If a tax is in fact unjust, and some are exempt from it, the hue and cry should not be to extend the tax to everyone, but on the contrary to extend the exemption to everyone.”
So rather than curtailing tax credits and closing so-called “loopholes”, the true free market approach is to embrace them and to level the playing field by expanding them. As Rothbard says elsewhere, “Let us hope that the tax credit will return in full force. And then we can revive the lost tactic, not of ‘closing the loopholes,’ but of ever-widening them, opening them so widely for all indeed, that everyone will be able to drive a Mack truck through them, until that wondrous day when the entire federal revenue system will be one gigantic loophole.”
Of course, many would be wary of creating a loophole the size of a Mack truck. But perhaps we can at least start with a loophole the size of a Cybertruck.