The recently announced cash for clunkers program by the Government seems more populist than making practical financial sense. I would leave it to others to debate the environmental effect of the program, but the Government receives more back for giving you $2,000 in return for an old car worth less than that. The program encourages people to spend (important word) $20,000 to $40,000 on what is more than likely an imported car. Like the 50% tax allowance for capital purchases (including cars) introduced during 2009, you would question why the Government concentrates spending on encouraging large ticket purchases of imports.

On a $30,000 cost of an imported car, the import tax duty levied is $1,500 (5%). Then we add a 10% GST tax to that total - $3,150. And then we add the 4% State tax on that total - $1,386. So the total tax generated is $6,036. Doesn't sound too generous, and we end up supporting manufacturing jobs and profits of overseas companies. Then of course you will need to insure it, which in turn attracts GST and State stamp duty on the premium. And anybody driving around an old bomb probably hasn't got $36,000 lying around. So you need to get a personal loan that costs between 8% to 12% (and more). A car loan for $36,000 for 5 years with a 40% residual equates to a monthly payment of $624.

So for the very tempting $2,000 gift, you get to make payments of $51,800 over 5 years, pay insurance ($600 pa?), pay a few more running costs, and you get to contribute $6,000 back to Government, Given that the demographic of a family driving the old rust bucket is probably a family of four, with Dad working a part-time job, paying for rising health care, education and costs of living that are only rising 3% per year (sure they are), you can see this is an offer that is well targeted. Targeted at what I don't know.