As is business as usual these days in Washington, today the Senate continued to rush into adding new levels of waste into the now $900 trillion stimulus package which is expected to be passed before Valentines Day. While there are numerous parts of this bill which will most likely be covered on this blog at some point or another, today I want to focus on the most recent ‘celebrated’ parts of this bill: A $15,000 tax credit for people who buy a home in the next year.
Really quickly though I just want to point out how ridiculous it is to rush into this new bill. It’s further proof that nothing changes between the two ‘drastically different’ political parties which currently monopolize the American political spectrum. Not even 3 months ago, leaders on both sides of the aisle were complaining about how quickly the TARP was rushed into existence and now the exact same sense of impending doom is being used to get the ’stimulus’ package passed before anyone has had a chance to really think about it. But I digress…
Back to the point of this post: The $15,000 tax credit for new home buyers. First off let me start by saying that I am not currently a homeowner but have been planning on purchasing a home in the next year or so, once prices hit rock bottom. Even though this new part of the bill will personally benefit me, I still can’t see how the stupidity of this idea has gone unseen by the members of congress. Here’s why:
The ‘housing bubble’ formed for a variety of reasons, one of which was the irresponsibility of home buyers. With widespread access to easy credit, many individuals and families purchased their share of the American dream over-leveraged and underfunded. Along with corporate irresponsibility, this combination led to a flood of new demand for housing, shooting prices skyward and causing home builders to pump out more and more supply. As reality set in, unqualified mortgage holders began to default causing banks to tighten credit and cutting the demand for housing almost overnight. Before long house prices were falling like a brick and the bubble had burst.
The people who should have the nation’s sympathy are not the people who lost their houses to foreclosure (they knowingly took on the risk of home ownership; if they had bought a house which they could actually afford they would not have had a problem) but the millions of people retired or retiring shortly who have had a large part of their savings significantly reduced due to the greed and irresponsibility of others. Many retirees rely on home equity loans and reverse mortgages to support themselves and have now lost much of that borrowing power due to no fault of their own.
So what does this have to do with the stimulus plan or the FairTax for that matter? One word: Incentive. Low interest rates set forth by the Federal Reserve along with liberal lending standards imposed by banks lead to an incentive for people who otherwise would not be able to afford a home to take the plunge into home ownership. By doing this, demand for housing increased, but more importantly was increased artificially. Nothing really changed about the finances of the people who used sub-prime mortgages to buy a house. Their income didn’t go up. The price of houses didn’t come down. They didn’t all discover a dead rich uncle at the same time and fall into a giant inheritance. Incentives to over-leverage themselves were simply put into place by actions of the federal government and corporations who thought they could outsmart the market.
Like artificial breasts, artificial demand does not last forever; on the contrary, it creates bubbles which compound the problems created by it. Markets have a way of adjusting to an equilibrium or homeostasis and when artificial supply or demand is injected, at some point the market has to correct itself and trend the opposite way of the injection.
Do you see where I’m going with this…..
A $15,000 tax credit for new home buyers is yet another way to create artificial demand. Currently, home prices are falling and will only stop when there are enough buyers in the market who can afford and want to purchase the available supply of homes. A $15,000 tax credit is like injecting a steroid into the market. Sure, in the short run the demand for homes will rise, but what will happen after the tax credit goes away? Demand will start to fall again to it’s natural state, and all of the homes purchased when the credit was in effect (whose prices were inflated by the extra demand added by the tax credit) will start to devalue again. The only solution would be to make the tax credit permanent which would cost the government close to $30 billion per year, all to keep the price of homes artificially high.
The point is, when the government plays with the laws of supply and demand everybody loses in the long run. And what do you suppose is the tool the government uses more than anything to modify supply and demand? You guessed it, the current personal and corporate income tax system.
Under a FairTax financed government, this interference would not be possible. All products and services would be treated equally and it would not be up to the government to determine which industry’s win or lose or which citizens benefit or suffer based on the tax code.
I realize that was a somewhat long stretch to link the stimulus plan to the FairTax, but the underlying notion of government interfering in markets is one of the weakest notions of the current tax system and conversely one of the strongest of the FairTax. When markets perform efficiently everyone benefits. When the government distorts markets, THEY decide who benefits. Which sounds better to you?
In Liberty,
Steve
FreeFairTaxBook.org
