It is also possible to spend $100,000 on a luxury car. Most people don’t, and it’s not just because they can’t afford it. Among Americans with assets of $100,000 or more, only a minority choose to spend $100,000 on a luxury car.
You can also spend $35,000 on a luxury car like a Toyota Camry. Some may argue that the Camry is not a luxury car. In fact, it is. Automakers have basically perfected the art of making high-quality cars. Today, the difference in quality between a car like a Camry and a $100,000 car is so small that it’s hardly worth commenting on.
What would motivate me to buy a $100,000 car? Maybe if the government paid 95% of the price of my new car. In that case, I might prefer spending $5000 (out of pocket) on a luxury Mercedes than $1750 on a new Camry.
If price distortion caused our economy to switch from producing $35,000 cars to producing $100,000 cars, that would be extremely wasteful. But other sectors have done something very similar, thanks to subsidies.
Why spend $100,000 on a medical procedure instead of $35,000 on a nearly as good procedure?Subsidy. Paying only a fraction of your out-of-pocket cost can make top-quality treatment even more appealing. This is one reason why America spends 17% of its GDP on health care.
This article from Bloomberg caught my attention.
President Trump’s economic advisers will double state and local tax credits, a popular but expensive tax cut that could bring big savings to many residents of New York, New Jersey and California. We are considering this.
Economist Stephen Moore, a member of President-elect Donald Trump’s economic advisory transition team, told Bloomberg on Thursday that the team is discussing expanding the tax credit from $10,000 to $20,000. He said he was there.
In my view, the decision to cap the SALT deduction at $10,000 was one of the most successful economic policy initiatives of the past decade. This had two important advantages.
1. This deduction has greatly simplified tax preparation for many taxpayers (including me). Now you can avoid a lot of time-consuming paperwork and just take the standard deduction.
2. The SALT cap stripped state government-level spending of a major subsidy. For people in the 40% federal tax bracket, the SALT deduction means the federal government effectively paid 40% of their state income tax bill, at least in states with income taxes. In the post-change period, many states began lowering their state income tax rates, which is exactly what I expected. If the cap were raised to $20,000, states would have a strong incentive to waste even more money.
PS. Of course, the past decade has been one of almost unrelenting policy mistakes, so claiming “the single most successful economic policy of the past decade” is a very low bar.
