Why The “Cash For Clunkers” Idea Is Stupid

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In case you haven’t heard, Congress will soon implement a “Cash For Clunkers” program. If you trade in your old car, you’ll get $3,500 towards the lease or purchase of a new one. If you have an old SUV you’ll get $4,500. Seems like a good plan doesn’t it?

Yesterday I had a short phone call with Bob Meigan, VP of TurboTax and we discussed the short-comings of this program. First of all, your car has to be a clunker. That is it shouldn’t be worth more than $3,500 since you won’t get anything extra if it is worth more.  By law, the dealer will have to scrap the car so even if its worth $5,000 he’s not going to give you a dime more than the $3,500 he’s getting from the goverment.

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So basically you need to be driving something like a  salvaged car that you’ll trade in for a brand new one. Secondly, the salvaged car needs to be getting 18 miles or less ( I think its 16 for the SUVs) according to the EPA sticker when you first bought it. 

Don’t you think that people who are driving around worthless junk with terrible gas mileage are doing it becauase they can’t afford a nicer car? Do you think a $3,500 incentive will enable them to afford a new car? The incentive is probaly worth only $70/month over a 5 year period on a car loan – I’m pretty sure you’ll need to come up with the rest.

And in order to prevent people from gaming the system and buying salvage car for a thousand dollars and using them to get a bigger discount, the plan enforces that you must have owned the car for a year. (And the promotion only runs from July to November 2009).

So probably the only people who will be able to use this program are students who were driving around clunkers and now having found jobs despite the tough economy are looking to upgrade. However, these people would’ve bought cars anyway, so there’s no real stimulus to the economy or the car companies. Just another waste of time and money.

However, if you are in the market for a new car, remember you can deduct the sales tax this year.

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