A new proposal from Donald Trump aims to make interest on car loans tax-deductible, but only for American-made vehicles. The plan, unveiled during a recent speech, has sparked debate among economists and tax policy experts, with some arguing it would benefit wealthier taxpayers more than middle-class buyers.
The proposal’s implications and potential economic impact have been widely debated, with supporters arguing it could boost domestic car sales, while critics view it as a limited tax break that may not benefit most Americans. According to Yahoo Finance, the plan has sparked discussions among economists and policymakers regarding its overall effectiveness.
How the Proposed Tax Deduction Would Work
The proposed deduction would allow car buyers to write off the interest on their auto loans when filing their taxes. However, unlike a universal deduction, this benefit would apply only to cars manufactured in the United States. The plan is part of Trump’s broader effort to incentivise domestic production and discourage reliance on foreign-made vehicles.
Currently, the White House has not released full details on how the deduction would be structured. The final cost and eligibility criteria remain unclear, but tax analysts suggest it could follow one of two paths:
- Itemised deduction: Available only to taxpayers who itemise, which tends to benefit wealthier households.
- Above-the-line deduction: Would apply to all taxpayers, making it more broadly accessible but also more expensive for the government.
Who Benefits From the Proposal?
The impact of the policy would largely depend on how it is structured. According to the Tax Foundation, making all auto loan interest deductible for those who itemise their taxes would cost approximately $61 billion over ten years. However, only about 10% of taxpayers itemise their returns, and they are typically in higher income brackets.
According to data from the Tax Policy Center, two-thirds of households earning over $500,000 itemise their tax returns, whereas only 11% of those with incomes between $50,000 and $100,000 do so, highlighting a disparity in who would benefit most from the proposed deduction.
If the deduction is limited to itemisers, it could primarily benefit affluent buyers purchasing expensive vehicles. If expanded as an above-the-line deduction, the cost to the government would increase to around $10 billion per year, but it would provide relief to a broader range of consumers.
The Real Cost Savings for Car Buyers
For the average car buyer, the proposed tax break could reduce the overall cost of financing a vehicle, but the savings may not be as significant as some expect.For instance, data from Experian indicates that the average new car loan in the U.S. is approximately $41,000, with an interest rate of 6.8%.
This translates to around $2,568 in interest payments during the first year. For a taxpayer in the 24% tax bracket, deducting this interest could lead to savings of roughly $616 in the first year and $1,794 over the full loan term.
While this deduction could provide some relief, experts caution that it does not address broader affordability concerns in the auto market, such as rising car prices and higher interest rates on loans.
Economic Concerns and Potential Trade-Offs
Tax policy analysts have raised several concerns about the proposal. Some argue that the deduction distorts the market, incentivising consumers to buy American-made vehicles even if they might not be the best financial or practical choice.
Alan Cole, a senior economist at the Tax Foundation, criticised the plan, calling it a “C-, D+” idea. He argued that from an economic perspective, it would be “worse than just doing the normal thing and cutting income taxes.”
Another issue is that Trump’s trade policies could offset any benefits of the deduction. Tariffs on automobile imports, steel, and auto parts could raise the overall price of cars, potentially negating the financial benefits of the tax break.
