Used cars and the invisible hand

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Permalink Reply by Bill Rollyson on March 17, 2009 at 10:32pm

Hi Jim. Good find!

This is actually a good example to use when detractors claim the FairTax would hurt new home/car sales. Since used items are not taxed, initially sales of used items will increase which drives up the price until it approaches the price of new houses/cars.

It could also go in the other direction. New prices could drop as embedded costs are removed driving them down closer to used prices. It is likely to be a combination. That happens very quickly. At the point the relationship between those prices is restored, people revert to the same decisions as before. Prices adjust based on demand. Now since the current situation is an economic downtown, as used prices rise and they find they can't afford either, people may just stop buying. The FairTax is likely to bring an economic boom though.

Another way to consider that relationship is to assume you just drove a new car off the lot with a base price of $20,000 and an after FairTax price of $26,000. If after one week you decided you no longer wanted it and wanted to sell it with 100 miles on it, would you offer it for $18,000? You'd certainly sell it fast, but more than likely you'd ask $24,000 or more. The tax you paid would be included in the asking price, even though it isn't being taxed again. The possible buyer has a choice between a new car for $26,000 after tax or a used one with 100 miles on it $24,000.

It's also interesting to compare this to the current system. For example, an employee in a 15% marginal tax rate today would need to earn $26,000 before taxes to have $20,000 to buy that same car after paying the income and payroll tax...and $28,777 if they were self-employed. That would apply whether the car was new or used, because it is bought with after-tax, nondeductible dollars. (Assuming no business use).

In a 25% marginal bracket, it would be $29,696 (employed) and $31,350 if self-employed. The FairTax looks even better when factoring in any possible pretax price reduction and the difference in interest treatment if financed. I'm using marginal rates for both the FairTax and the income tax. Suddenly buyers will have a lot more money in their pockets to make payments, even with the sales tax added.

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Permalink Reply by Tony on March 18, 2009 at 7:35am

40 miles?

My wife wouldn't be able to drive me to work and then go home afterwards without charging.
Why waste the money on developing and manufacturing it?
I'm 99.9% sure government is responsible for demanding it.

Hey GM.....meet Chapter 11. Chapter 11....meet GM
You guys should have met a LONG time ago.

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Permalink Reply by Dustin on March 18, 2009 at 10:54pm

I don't believe that the attitude of 'the government is responsible for it' is productive. It implies that the government is something other than 'of the people for the people'. However, I've said that before too, I just catch myself more often these days, LOL.

Our local government (Washington) is planning on using Stimulus money to change the law regarding the use of rest stops along the high way, install 'alternative fueling' stations for alternatives fuel driven cars and charging stations for electric cars. The charging stations though will be more spread out that an electric car can currently drive.

It's important that people write to their political representatives and let them know how they feel about such agenda driven waste.

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