A friend shared their hope for a new electric vehicle incentive with me -- a government rebate for buying a new electric vehicle. Financial incentives fascinate me. Many folks assume the original government program intended to reduce carbon emissions from transportation, but I have doubts.

I find the incentive an odd method to reduce carbon. First, an electric automobile is an oddly specific solution to the problem. If I wanted folks to eat less beef, I wouldn't subsidize chicken. Yes, chicken nuggets can substitute hamburgers, but they're not the only substitute. Perhaps some folks prefer a tofu burger, a portobello mushroom, or an extra helping of french fries. Subsidizing chicken only encourages a subset of beef-lovers to eat differently.

Wouldn't the issue of transportation work similarly? Given an incentive to use any less carbon-intensive transportation, maybe some drivers would have chosen to walk, ride a bike (which is incredibly energy efficient), or taken public transportation. And, of course, some would buy an EV.

Loss aversion tells us that most folks would rather avoid losing something than gain the same amount. Instead of subsidizing electric vehicles, wouldn't adding a carbon emissions tax have a more significant effect? The government levies fines and taxes for the abuse of other natural resources. Why not tax the dumping of waste into our shared atmosphere? The US government does it for CFCs and other ozone-depleting chemicals.

Unfortunately, taxes often disproportionately harm folks with less money. Someone with a part-time job at a Jimmy John's will suffer more from higher fuel prices than the kind of person who buys a new Tesla (even at a discount). And a sandwich-wright probably won't take advantage of any EV credits that involve new vehicles.

These same forces act in investing as well. Every time the stock market dips as it did in February and March this year (2020), I hear from friends who sold their stock. The loss of value, even one on paper, drives them crazy. The real potential for gains (like dividends) isn't nearly enough to keep their funds invested.

Like in transportation, the folks with lower net worth are hurt more by the incentives surrounding investing. The middle-class investor can't take as much advantage of the tax breaks that someone with tens of millions of dollars does. Instead, they often end up paying more taxes (if they have any gains).

The typical middle-class person also (maybe) feels they don't understand how the stock market works, often because of a belief in stock picking and market timing. Why did one stock go up and another one go down today? It doesn't matter to the long-term index-fund investor. The index investor indirectly buys a little of every publicly traded stock and lets the aggregate investment grow.

I'm glad that I don't have to write laws or regulations for a living because incentives are challenging to make egalitarian. And if you look at how the tax burden divides by income in the US, you'll see that it isn't egalitarian. The complexity and bias are among the many reasons I encourage my middle-class friends to hire an accountant to do their taxes; you're paying for specific tax and financial advice, not just filling out forms. A good accountant can help you handle your money like a rich person.

These structural problems also explain why I disagree with my friends who want a new EV credit. This kind of incentive probably isn't very effective at reducing carbon, and it's unfair to taxpayers who aren't in the Tesla class. Folks who want a Tesla can buy a Tesla without a credit; I promise that I won't scoff at a used car.

John

WindAddict

Teslas and Incentives and Investments