Tax Breaks For Car Buyers But Not For Medical Expenses & Savings?

Here is a look at some of the recently announced additions to the ever growing stimulus package:

From the Associated Press:

WASHINGTON - The cost of President Barack Obama’s economic recovery plan now exceeds $900 billion after the Senate added money for medical research and tax breaks for car purchases.

It could go higher Wednesday if a tax break for homebuyers is made more generous, even as centrists in both parties promise to clear away spending items that won’t jump-start the economy immediately.

In an interview on CNN, Obama signaled a willingness to drop items that “may not really stimulate the economy right now.” He also signaled he’ll try to remove “buy American” provisions in the legislation to avoid a possible trade war.

In a victory for auto manufacturers and dealers, Sen. Barbara Mikulski, D-Md., won a 71-26 vote to allow most car buyers to claim an income tax deduction for sales taxes paid on new autos and interest payments on car loans. The break would cost $11 billion over the coming decade but could mean savings of $1,500 on a $25,000 car.

“Just as we need to get the housing market going, we need to get auto sales going,” said Sen. Debbie Stabenow, D-Mich.

Wednesday’s session could produce even more generous savings for homebuyers.

Sen. Johnny Isakson, R-Ga., is pressing for a tax credit of up to $15,000 for everyone who buys a home this year, at a cost of $18.5 billion. The pending measure would award a $7,500 tax credit only to first-time homebuyers.

So the first thing I thought of when I read this is the fact that you can only deduct medical expenses that exceed 7.5% of your AGI. Furthermore you have to itemize these deductions, so you only see a benefit if your expenses exceed both 7.5% of your AGI AND your standard deduction amount ($10,900 married couples, $5,450 for single people in 2008). For a household earning $50k/yr this effectively means that your medical expenses have to exceed $14,650.00 (7.5% of $50k = $3,750), for you to see any benefit from deducting them.

Considering that $14,650.00 is 29% of $50k, it stands to reason that the married couple in the example above would be near destitute prior to being able to deduct any of their medical costs.

Finally self-employed people and/or people who have private health insurance plans cannot deduct the cost of their health insurance, thereby adding a veritable extra tax on the self-employed and other individuals who don’t have insurance through their jobs.

Doesn’t correcting the situation around the deductibility of health insurance and medical expenses make more sense than giving people tax breaks for buying cars? Especially when medical expenses are one of the leading causes of people having to declare bankruptcy? Correcting the situation around deducting medical expenses would do a lot more to put cash in people’s pockets, than would tax incentives that encourage people to buy things.

Perhaps the thing that bothers me the most about this is the fact that many analysts, pundits, politicians, industry leaders, etc, are unwilling to accept the fact that after years of overspending the consumer is finally doing the smart thing and pulling back. Debt laden consumers who are dealing with higher payments on their mortgages, miniscule savings, rapidly rising healthcare costs, on top of potential job loss (if they haven’t been laid off already), don’t necessarily need to run out and buy new cars.

While it’s easy to say that Joe & Jane consumer should purchase new cars for the sake of the economy even if their current cars are running just fine, who is going to pay Joe & Jane’s bills if they lose their jobs, are hit with an economic shock, have sudden medical expenses, etc?

Perhaps instead of encouraging people to continue (or revisit) their bad habits our government should be thinking about how to incentivize savings, and re-vision the economy for a nation of savers as opposed to a nation of irresponsible spenders. Putting incentives in place to encourage people to spend like the days of old may provide short-term dividends, but it will only lead to a long-term disaster as overspending is not a sustainable situation.

Finally the numbers at play here are ridiculous: the proposed tax break would cover single individuals who earn up to $125k and married households earning up to $250k, for cars that cost up to $49,500.00. In my view it’s nonsensical to think that households that earn more than 2-5% of the population need the taxpayer to subsidize their luxury car purchases. If the government is going to go through with this idea they should cap  the car’s value at $25k, and make it available only to people earning the median income for their respective metro area.

Mind you I say this even though it goes against my own self-interest, however I just don’t think a middle income family in Peoria should be subsidizing the cost of my next BMW.

Call me crazy.

Source:

The Associated Press: “Obama economic plan now tops $900 billion” — Andrew Taylor, February 4, 2009.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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