Monthly Archives: July 2009

Cash for Clunkers: If your car is worth less than $4,500 and gets under 18 MPG, read on. If you just want to read about another ineffective government program, read on.

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As you may have heard, Congress recently passed the “cash for clunkers” program. The program covers new vehicle purchases between July 1, 2009 and November 1, 2009. The basic idea is: you trade in your old, gas-guzzling car for a more fuel efficient car and get an allowance of $3,500 or $4,500 depending on how much more fuel efficient the new car is.

How does it work, you ask. Well…

The government issues electronic vouchers to auto dealers that sign up for the program. Dealers can use these vouchers to reduce the purchase price of a new vehicle by $3,500 or $4,500 for customers who trade in an old, gas-guzzler. When customers buy cars, the dealers will submit these vouchers to the Feds and receive payment within 10 days.

Rules for New Passenger Autos

A new passenger auto must have an MSRP of no more than $45,000 and have a Combined Fuel Economy (CFE) rating of at least 22 mpg. The old clunker must have a CFE of 18 MPG or lower. Leased cars can qualify, but the lease has to be for at least 5 years…good luck finding a 5 year lease.

The dealer gets the $3,500 allowance if the new auto’s CFE is at least 4 MPG higher than the trade-in’s CFE. If the new auto’s CFE is at least 10 MPG higher, the dealer gets the $4,500 allowance.

Rules for New Trucks and Vans

There are three sets of rules for various size trucks and vans.


Category 1
SUVs and Small to Medium Sized Pickups and Vans

Category 2
Larger Pickups and Vans

Category 3
Trucks between 8,500 and 10,000 pounds

New Vehicle CFE Requirement

At least 18 MPG

At least 15 MPG


$3,500 Allowance

At least 2 MPG increase over old vehicle

At least 1 MPG increase over old vehicle

Allowed for model year 2001 or earlier trucks traded in for a Category 2 or 3 truck


At least 5 MPG increase over old vehicle

At least 2 MPG increase over old vehicle


The trade-in vehicle:

  • must be in drivable condition
  • must have been insured and registered to the same owner for at least one year prior to the trade-in
    • this prevents people from buying clunkers at junk yards and immediately trading them in for the allowance.
  • must have been manufactured less than 25 years before the trade-in date
It is pointless to trade in a car whose value is higher than the cash-for-clunker’s allowance amount because the dealer has to destroy the car and won’t offer any trade in allowance over the cash-for-clunkers voucher.

This posting contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

High Taxes are No Laffer-ing Matter (Time for a Rant)

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The above graph is the Laffer Curve, named after economist Arthur Laffer. This graph demonstrates that when tax rates are increased past a certain rate, tax revenues will actually decline.  This is because as tax rates increase, people become more and more upset with more and more of their income being taken by government and spent inefficiently.  As they become more and more upset, they take more and more action to decrease their tax liabilities.  The important aspects of the Laffer Curve are:

  • At the 0% tax rate extreme, tax revenues are obviously $0
  • At the 100% tax rate extreme, tax revenues are also $0
    • Why bother working when the government takes 100% of your income?
    • Businesses close operations and move offshore to lower taxing countries (Ireland, Hong Kong, etc.)
      • "Taxes don’t redistribute income, they redistribute people"–George Gilder
    • People may work enough for basic sustenance, but they will likely report no income to the IRS
  • The revenue maximizing rate is represented by the green dot at the peak of the curve
    • The exact revenue maximizing rate is subject to strong debate
  • When the tax rate increases above the maximum point, tax revenues will actually start to decrease
    • By having more and more of their money taken away from them, people will take action:  They will
      • become much more aggressive in their legitimate tax planning
      • become involved in tax evasion (getting paid under the table)
      • cut back on work (why bother working when most of your income is taken by the government)
      • start asking, “Who is John Galt?”
  • The horizontal line running through the two blue dots shows that an equal amount of revenue can be raised at two different tax rates–a low rate and a high rate
  • Between the high rate and the low rate, Congress should set taxes at the low rate because the higher rate will constrain economic growth

People who favor tax increases (interesting how it’s always tax increases on OTHER people) somehow believe that an X% increase in tax rates will lead to an X% increase in tax revenues.  This is economically similar to a business raising its prices 10% and expecting revenues to also increase 10%.  By increasing its prices, the business is lowering demand for its product, and people buy less (either forgoing the product all together or buying from a competitor). 

People have choices in life—they can work or they can enjoy leisure time.  It requires a certain wage for people to forgo leisure time and work.  So, let’s say that you’ve worked 40 hours this week.  To entice you to work an extra hour, your boss offers you $20.  You say “no way, I’ve worked enough this week”.  You turn down working the extra hour because your leisure time is worth more than $20.  Your boss then offers you $30.  You agree because the $30 wage is worth more than an hour of your leisure time.  Now let’s say the government imposes a 35% income tax.  The $30 wage that enticed you to work that extra hour is now worth only $19.50 ($30 wage less tax of 35%).  Since this after-tax wage is worth less than an hour of your leisure time, you choose leisure over work.  Just a quick example of how a high tax on income can shift productive activity to leisure.  By the way, this harms economic growth :( 

Let’s take a look at CURRENT business and personal tax rates:

Top federal tax rate:                    35%

Michigan personal tax rate:       4.35%

Michigan Business Tax Rates:

    Business Income Tax:            4.95%

    Gross Receipts Portion*:           0.8%

Total Tax Rate                         45.10%

These figures don’t include self-employment taxes of 12.4% on the first $106,800 of self employment income plus 2.9% of all self-employment income. 

* The gross receipts portion is based on gross receipts, not profit.  As a percent of net income, it is greater than 0.8%.

Renters Can Claim the Michigan Homestead Property Tax Credit, Too.

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The State of Michigan offers a refundable Homestead Property Tax Credit of up to $1,200 per year for property taxes you pay on your homestead (principal residence). 

Many people who rent their homes or apartments often do not claim the credit since they are paying rent, and not property taxes.  However, a portion of the rent paid actually is used to pay property taxes on the home. 

The State of Michigan assumes that 20% of rent paid is for property taxes.  Therefore, if you pay $900 rent per month ($10,800 per year), 20% of the rent paid is considered payment of property taxes eligible for the property tax credit.  In this example, the 20% of rent that is deemed payment of property taxes amounts to $2,160.

Two more complexities:

  1. you have to reduce the property taxes you paid by 3.5% of your household income.  So, let’s say you make $40,000 per year.  The $2,160 property taxes you paid is reduced by $1,400 ($40,000 * 3.5%) and this leaves $760 of property taxes eligible for the credit. 
  2. to compute the credit,  you multiply the $760 by 60% and the amount of your refundable credit is $456.

To recap:

  1. Compute your deemed property taxes by multiplying your rent by 20%
  2. Reduce your property taxes paid by 3.5% of your household income
  3. Reduce the product computed in Step 2 by 60%
  4. Deposit your refund check

This posting contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

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