Monday Reading – Strategic Defaults and Tax Credit Extenstions

On Strategic Default, Legislating a Double-Standard?

This is spiteful, short-sighted and targets individuals who are making business decisions that are strategic, á la Tishman and Morgan Stanley et al.

Why not just make the tax credit permanent?

Renewing the first-time home buyer’s credit will help Americans purchase a first home with their own money, instead of having to rely on government-funded or backed programs. The other sections of this legislation were inspired by conversations my staff and I had with constituents who had to purchase new homes because Hurricane Ike destroyed their prior homes. The first-time homebuyer’s tax credit could be of tremendous value to these people, yet the law denies them the credit because they are replacing destroyed homes. My bill not only reinstates that first-time homebuyer’s credit, it also corrects that oversight.

Brian sums it up:

Dr. Paul was illustrating the fact that the money isn’t the government’s; it’s the individual taxpayer’s. It’s not a re-election trick. It’s Paul’s way of trying to work within the system to slowly erode the income tax.

As soon as the proposed amendment to the H.R. 4213 – the American Jobs and Closing Tax Loopholes Act of 2010 is posted on either GovTrack or OpenCongress, I’ll note it here. Call it meddling or pitching in; it’s semantics – you’re trying to change the rules, and frankly, that’s why the National Association of Realtors – a trade organization – is there.

What if … Congress tried to KISS?

From the Washington Post:

At the outset, HR 4213, the American Jobs and Closing Tax Loopholes Act of 2010, sounds promising. Unemployment rates are hovering around 10 percent nationally, and President Obama has said that jobs are his first priority.

Unfortunately, like so many things in Washington, what you see is not what you get.

HR 4213’s scope is much larger than simply extending federal unemployment benefits. Its intent to “close tax loopholes affecting wealthy individuals and corporations” yields more damage than good, essentially dissuading commercial real estate developers from investing in new projects.

I know this – the biggest job growth created by altering the tax code is for the tax industries. Do tax accountants even need to have a lobby, or do they just let the idiots in Congress do their jobs for them?

Or – Just extend tax credit to the end of 2010, as H.R. 5188 attempts to do (it’s still in committee)

Get the politicians out of the money manipulation business. Please.

What about the home mortgage deduction?

The FairTax has positive effects on residential real estate far beyond this narrow question. Today’s homeowners, if they itemize (and 70 percent do not), pay their interest with post-Social Security/pre-income tax dollars. They then pay their principal with post-SS/post-income tax dollars. Those who do not itemize get no advantages at all. Under the FairTax, all homeowners make their entire house payment with pre-tax dollars.

With the FairTax, mortgage interest rates fall by about 25 percent (about 1.75 points) as bank overhead falls; this is a huge savings for consumers. For example, on a $150,000, thirty-year home mortgage at an interest rate of 7.00 percent, the monthly mortgage payment is $999.12 for principal and interest. On that same mortgage at a 5.25 percent interest rate, the monthly payment is $830.01. Over 30 years, the 1.75-percent decrease in interest rates in this instance results in a $60,879 cost savings to the consumer. Finally, first-time buyers save for that down payment much faster, as savings are not taxed.

Under the FairTax, home ownership is a possibility for many who have never had that option under the income tax system. Lower interest rates, the repeal of the income tax, the repeal of all payroll taxes, and the prebate mean that people have more money to spend and have an increased opportunity to become homeowners.

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  1. rfs June 14, 2010 at 21:12

    Regarding strategic defaults…does anyone really believe that prohibiting those who strategically default from obtaining expensive FHA financing in the future is any deterrent? Really? Heck no. The strategic defaulters are the cash buyers of the future…

  2. Scott June 15, 2010 at 09:41

    I have to agree: it’s a shameful double-standard, but not surprising that it’s brought to you by the same party that delivered “bankruptcy reform”. Because, yes, in the corporate-socialist United States, there is a different standard for “business” “professionals”. It’s really infuriating. Thank goodness this is likely to go nowhere.

    The “Fair Tax” is nothing of the sort – it’s a drastically regressive tax as the bottom 80% has no real way to avoid the majority of their consumption, while the top 20%, already making off with the majority of the gains and earnings in our economic system, can shield almost all of their income. Trying to tart it up with sparkly trinkets like a bigger home mortgage deduction does not eliminate this. Such a ‘bonus’ is actually making the market distortion of interest deduction (ie, borrow, and borrow a LOT) even worse – it is a classic example of politicians engaging in “money manipulation”. It certainly disproportionately benefits those who can afford to have enormous mortgages, and at the end of the day will not shift the equilibrium on the rate of homeownership – it will simply move prices upwards to reflect the subsidy. It will be a one-time windfall for existing owners.

    Indeed, if you support keeping politicians out of economic and market meddling (impossible, since any kind of tax distorts things), just stick with the modestly progressive income tax, subject all forms of income (cap gains, interest, dividends and wages) to the same set of taxes (ie, FICA/SECA), and eliminate all deductions (ie, get rid of itemization). That goes a long way towards eliminating the jobs-program that the tax code is for tax preparers.

    It’s false that a regressive tax structure is necessary and sufficient for a simplified tax structure, even though the proponents of a “fair” or “flat” tax would like you to believe so. A progressive tax structure – one that taxes based purely on the amount of economic gain, without picking winners based on types of gain (income) – is, in fact, the “Fairest” tax structure.

    It is wrong that under our current system a hedge-fund manager pays 15% (and SECA on the first $110k) on his $1M income while a regular wage earner is paying 25% plus FICA (on all his income) on his $50k income. Taxing consumption – when the $50k earner has to spend nearly all of his earnings to live – while the hedge fund manager can live on the same $50k and shield $950k of his income from taxes – is going from bad to worse.

    Of course – at the beginning of this, what were we talking about? Oh yes, government putting their thumb on the scale in favor of the big guy against the little guy. Different rules – and different taxes – depending on whether or not you are a regular person or can afford a lobbyist.

  3. Jim Duncan June 16, 2010 at 06:00

    The current tax system is beyond complicated; it’s absurd. It penalizes those who are successful and rewards those who are so successful that they can manipulate the system.

    Regarding the lower end – notsomuch. Enter the prebate:

    All valid Social Security cardholders who are U.S. residents receive a monthly prebate equivalent to the FairTax paid on essential goods and services, also known as the poverty level expenditures. The prebate is paid in advance, in equal installments each month. The size of the prebate is determined by the Department of Health & Human Services’ poverty level guideline multiplied by the tax rate. This is a well-accepted, long-used poverty-level calculation that includes food, clothing, shelter, transportation, medical care, etc. See chart in Figure 1 below.

    My accountant wants the FairTax. 🙂


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