I had an early afternoon coffee with a tax practitioner friend of mine. As we sat down, we noted the progress on the economic stimulus package. And since we are both tax lawyers, the first thing we both jumped to was--the wacky tax cut provisions in the stimulus bill. They won't stimulate the economy, they don't make sense, they are giveaways that are very costly, and they have generally been tried before and failed. The one we both honed in on as among the worst of the packages--the Senate's version of the homeowners credit.
As I've tracked the various proposals for an economic stimulus package, I have consistently (I think) noted the problem of tax cuts being treated as "better" than spending. Spending, actually, targets the stimulus exactly to the point where wanted, whereas tax cuts are at best somewhat diffuse, since the recipient of the benefit may or may not use that benefit in a way that stimulates the economy for others. At worst, tax cuts are a waste, because the money is stowed away in an offshore account of the affluent and taken out of the US economy altogether.
At the core of the economic disaster that currently entangles this country are years of ill-targeted tax cuts, ones that benefited businesses and taxpayers generally, including substantial benefit for the affluent, combined with excessive military spending and lax government oversight. The Reagan-era "free marketarianism" attitude that supported those developments claimed that markets could operate well without government interference and that power structures created by such "free market" processes were not themselves disruptive of the ability of people to achieve a forward-thinking, sustainable economy.
This has all been proven wrong by the disastrous results of maximum application of these wrong-thinking policies. Deregulation led to speculative banking that undercut the creditworthiness of the entire financial system. Tax cuts for the affluent didn't grow the economy--they just gave the affluent more money to stash away in offshore tax havens for the benefit of the affluent. Tax cuts to businesses didn't grow the economy or create jobs--businesses will rationally accelerate spending to take advantage of the current cut, or accelerate repatriation to take advantage of the current repatriation tax break, etc., but businesses are not likely to really grow unless the businesses have a viable business strategy for a product that is in customer demand and is produced for a reasonable price. Instead, the cuts will just lead to shareholders getting more and already overpaid managers and executives being paid more (and not being taxed on it very much either, since rates stop increasing well below the typical executive pay). Businesses will lobby for tax cuts no matter what the current statutory rate or actual effect tax rate is, until the statutory and effective tax rates are reduced to zero. Politicians will listen to these arguments, even if they aren't well grounded, because businessmen oil the political machine and because politicians know these influential businessmen (and their lobbyists) a lot better than they know the ordinary taxpayers in their home areas that work hard for a living and have little to show for it. After the eight years of the Bush Administration and a mostly Republican-controlled Congress with hegemonic military ambitions and crony-friendly fiscal policies, we got tax cut after tax cut, very little job creation, puny economic growth, and ultimately a year-long (and still counting) recession at the end.
We voted for change. Are we getting it? When you look at the stimulus bills passed by the House and currently before the Senate, you have to stop and scratch your head and say, what change? An awful lot of what is going on is the same old "you scratch my back and I'll scratch yours" failed political cronyism that passes tax cuts for the affluent and leaves standing failed policies on education, the environment and energy; that passes tax breaks for business and leaves standing failed structures for accountability for corporations receiving bailouts or tax breaks.
So my friend and I agreed--the home buyers tax credit is one provision that should be dumped in conference. But since there's a version of it in both the Senate and the House bill, it will probably be with us no matter what.
In the House, it's a credit of 10%, up to $7,500, for first time buyers and it's refundable, so that even buyers who are low income and don't owe any federal income tax will receive a check for the credit, if they are under the income limit ($75,000 for singles and $150,000 for couples). That a pretty expensive ($3 billion) incentive for home buyers. At least it's limited to the middle to lower class buyers, and at least its limited to a fairly small amount. But it isn't a good economic stimulus and it's helping the wrong folks. It's not a good stimulus because we'd be getting a lot more bang from the buck out of helping people whose primary residences are in or very near foreclosure. Helping them to stay in their homes will help neighborhoods stabilize, which will help other homes sell, which will help businesses nearby, which will help jobs in the area, which will encourage more people to move in. The people who will buy a house because of this credit are very very few. It will go to people who were already in the process of buying a house because they could afford it and could get credit. it won't stimulate people to buy a house who weren't already in the house-buying business. Helping some very, very small group of people buy a home that wouldn't otherwise is just not much of a stimulus. Furthermore, it is not fair to taxpayers generally. What's fair about helping people who just happen to be in a position to buy a house for the first time during this crisis? nothing. What's fair about helping people who have enough money to buy a house rather than people who have to rent to have shelter? nothing. what's fair about providing a taxpayer subsidy to some first time homebuyers but not providing a taxpayer subsidy to some first time renters? nothing. What's fair about this proposal? nothing. Furthermore, it is economically distorting and likely to be easily abused--homeowner sells his house to his brother or friend who gets the tax break and shares the benefit with homeowner in the price paid for the house or who then turns around and rents the house back to the owner, with the two sharing the tax benefit. That is the main activity that will be stimulated by the provision--flipping!
And the Senate version? Much worse. It's a lot bigger (double, in fact, at 10% up to $15,000). It's not refundable, so those who earn less than enough to pay $15,000 in taxes won't get the full benefit--even if broken into two years of credits, it requires payment of $7500 in taxes a year, which means you'd still have to make about $90,000 to get the full benefit. And it doesn't have any income limit. Result? This credit is just another "redistribution upwards" provision for the affluent, who are the main groups actually buying homes today. And it doesn't even go to just first-time homebuyers. In that light, the cost is ridiculous--$39 billion to provide a taxpayer giveaway to anybody who happens to buy a house, with the main benefit going to the affluent who were buying anyway. Yeah, it'll maybe also mean slightly more commissions for all those real estate brokers, who will now get bigger commissions than otherwise, but why should that group be singled out for job help. (Aside: Real estate is so loaded with tax breaks as is that it's the entitlement mosh pit of the tax code--developers can use section 1031 exchanges to make money their whole lives long without paying taxes, then pass it all on at death with a step up in basis; between sections 1031, 121, 163(h), the taxpayer-friendly treatment of nonrecourse debt in partnerships and elsewhere, and the other real-estate friendly provisions in the code, real estate is the profession to be in if you want to be subsidized by other taxpayers providing you with government services that you don't have to pay much for.) With double the amount at stake and no "first timer" requirement, it will lead to even more of the "sell your house to your wife or friend" rip-offs. It's the TARP bailout reembodied in a rip-off entitlement for the affluent who are buying homes now, that won't do a damn thing (pardon my English) to help those who are struggling to stay in homes when they tried to be prudent but are suffering from job losses, savings deterioration, and lack of state aid.
The homeowners' credit is, in other words, a "homeowners shuffle" that will be an incentive for people that don't need one that won't do much at all to help the economy other than to prop up a failing industry (real estate development) that has already been a long-term recipient of tax subsidies (which is one reason it is a failing industry). But it will likely win GOP senators favor with their favorite constituents, the affluent.
Conferees--get your act together. Eliminate this provision altogether, if you want a stimulus bill that stimulates instead of just helping the affluent. If you don't eliminate it altogether, at least stick with the House version, which is not quite as ludicrous as the Senate version.
Aside: There's lots more wrong with the stimulus package tax provisions. Most of them should be eliminated, except for the make work pay credit for people at or below the median US income. Here are various documents that may help you get a hold on the stimulus proposals.
- Senate Finance: Summary of finance Provisions as Amended on the Floor through 2/7, plus Expectted Elements of the Collins-Nelson Amendment
- Senate Finance: Near 100 Percent of Finance Effects Will Come In First Two Years
- Senate Finance: Floor Statement of Senator Max Baucus (D-Mont.) Regarding American Recovery and Reinvestment Act (Feb. 9, 2009) (arguing for passage of the Collins-Nelson substitute which trims the COBRA subsidy, health information technology funding, the general credit carry-back, Recovery Zone bonds, lowers the income limit for the Make Work Pay credit, and the child tax credit, and "expand[s] the Homeownership Tax Credit beyond first-time homeowners and double[s] the amount of the credit")
- Senate Finance: Text of Committee provisions (this is the 1/30/09 text that has been superseded in part through amendments)
- Donmoyer, Senate's Tax Credit Favors Higher-Income Homebuyers, Bloomberg.com, Feb. 7, 2009
- Calculated Risk, The Homebuyer Tax Credit, Feb. 7, 2009