Tax breaks - what are they good for?

President Bush wants to give people who buy hybrid vehicles tax breaks at $4,000 as a part of his strategy to make the United States less dependent on foreign energy sources. That's pretty well thought out, as it nearly exactly what a Toyota Prius will set you back in comparison to a similar non-hybrid car in the same size and with the same equipment.

Not many people will oppose. It's a hands-on, no-nonsense incentive that gives a clear signal to the American car buyer - we offer you a free ride to a cheap-ride car.

But is it effective?

Toyota will ship more than 100,000 Prius this year. Only in the US. That’s nearly the same number that SAAB will sell. Including all of their models - worldwide. So it's already quite successful. That also goes for Lexus with its RX 400 and Ford's Escape. That is, when it comes to hybrids, nowadays the production capacity is the bottleneck. Not the demand.

So, who will profit from $4,000. Well, all those people already in line.

The parallel is to be studied in the now lively debate in Sweden about "Home PC". Since 1998 employees in Sweden have had the opportunity to make a tax break when their employer buys a PC to be used in the home of the employee. The aim with the program is to increase the computer density in the country and make people more IT savvy. Today an employee pays a monthly rent by lowering their gross salary with the same amount. Which means the more you earn, the better the deal, as the taxes in Sweden are sky high. Since the start of the program more than 1.5 million PCs have been sold this way.

Now the responsible state agency has evaluated the program and has come out with the conclusion (in Swedish only): More than 80 per cent of those who've used the system did have a computer already in their home or were about to buy one anyway. That means only 20 per cent have used the tax break to do something they otherwise wouldn't do.

Another report I had the opportunity to study recently was a survey in the wood pellets heating industry. Small house owners who had got subsidies of SEK 15,000 or $2,000 when buying a pellets burner at around SEK 30 – 50,000 were asked if they would have bought the equipment even without the financial support. 9 out of 10 answered they would.

So, is financial aid never a way to change people’s behaviors or buying habits? Of course it is. But normally it works when the market forces don’t, or when the new promoted alternative is much less sufficient then the old one. But driving a Prius is not bad for you. Unless you really would like to drive a SUV. But the SUV is already more expensive than the Prius without the tax break so why would it matter?

I don’t like high taxes. But when they are cut, I like them to be cut effectively, bringing more good to our world than just some unexpected money to buy fancy extra equipment to the car I would have bought anyway.