When I review tax programs, whether they are for local, state, or federal governments, there are two critical criteria:
– Effectiveness – does the tax program raise the revenue in a manner that is cost-effective and have the lowest level of harm and distortion to the overall economy?
– Incentives – if the tax program is designed to promote a certain type of activity or “deter” a different type of activity, do the incentives actually drive the behavior that the law is intended to achieve?
I thought about the “incentives” element of the program as my parents rushed out to take advantage of the “cash for clunkers” program which provides a credit (on the spot, to the dealer) for turning in cars that basically get less than 18 mpg and purchasing a new car off the dealer lot. This program has their own website (where they unhelpfully refer to the program as “Cars” or “Car Allowance Rebate System” rather than the far more effective “cash for clunkers”). My father’s car barely made the cut because it was right around 18 mpg and they have been clarifying the program and making him sign form after form (to prove that he has owned it for several years, that he had it scrapped, etc…) but generally this program was a “shining star” of an incentive because 1) the government wanted him to go out and buy a new car off a dealer’s lot right now 2) they wanted to make sure that his old 18 mpg car was taken off the road 3) they wanted to make sure that he actually owned the car and didn’t just swap it with someone else to get the $4500 in trade in when the car was only worth maybe $1000. All of these criteria were met, in this case.
While the FDIC isn’t a tax program, the agency that guarantees deposits at insured banks (with your tax dollars) also provides incentives. I was involved in the early 1990’s when the Resolution Trust Corporation was created by our Federal government in order to take control of insolvent banks (basically banks that made dud loans, generally for property) and pay back depositors. I was on one of the teams that would go into banks right at the time they were being shut down and secure the cash and assets as a lowly auditor. We weren’t exactly the CIA – we sat in cars outside the bank and everyone knew it was coming and the staff were generally very polite – but that was where I frequently heard the phrase
Heads – I win, Tails – the FDIC loses
By this phrase they exactly summed up the banking game at the time – make a lot of big and risky loans with “guaranteed” customer deposits, and if it goes well and the loans are repaid, you make a bunch of money. If the loans go sour, oh well, you just walk away and leave the FDIC holding the bag.
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, 2009, 393 pp.