I read in the paper on Sunday where an article suggested that instead of all the silly bailout, we ought to pass legislation to let homeowners deduct $2 for every $1 of interest that they pay. It’s a creative way to help the troubled housing and financial markets and one that I’d like to discuss today.
The plan is simple. Currently, those who are eligible can take the interest portion of their mortgage payments as tax deductions. So if you paid $10,000 in mortgage interests for the year, you will get a $10,000 deduction on your taxes. The proposal is simply that instead of $10,000, you get $20,000 in return. The benefits would be:
- Lowers the borrowing costs for home ownership (the columnist’s rough calculation estimates that a 6% mortgage effectively becomes 3%)
- Lower taxes for every kind of mortgages (long or short term, fixed or adjustable)
- Puts money directly in mostly middle class people’s hands, where it could be spent (instead of banks getting the money and using it for anything but lending it out)
- Might convince renter’s to buy a home because this favors the home side of the owning vs renting argument considerably
- Possibly reduce foreclosures as there’s an added incentive for financially strapped owners to do more to pay their mortgages and keep their home
- Sounds like it’s unaffordable but it should only cost $80 billion a year, compared with 10 times the amount we’ve already spent bailing out other firms like AIG
What I Think of This Plan
Reading this article really caught my attention because this is much more creative than what we are seeing from the government so far. I think that congress should setup a suggestion box for people to submit ideas as to how we can help our current crisis. Sure, most of us are never going to produce something sophisticated enough, but many of us can write something comparable to a 3-page proposal that our Treasure Secretary did, not to mention that some suggestions might spark other ingenious ideas.
Going back to the plan though, it’s great because:
- I completely agree with the fact that it will help promote home buying. I need to do a more serious calculation before I commit, but at first glance I will be buying a house if this bill passes.
- This will artificially make me feel more wealthy, and I will spend more (unfortunate psychological flaw of mine and shared by most other people in the world but it’s good for our economy)
- I will directly benefit from this. On a personal level, it will end up giving me so much money through the years.
For our country as a whole however, I do see a few issues:
- While $80 billion is much less than the money that we’ve spent with other plans, it is $80 billion that is totally not recoverable. How much we can recover from the bail out money for the financial institutions are debatable, but we will get some of this back.
- The $80 billion is a “per year” expenses, which quickly adds up.
- This plan promotes excessive lending. If I could borrow money at effectively 3% a year, I’m going to borrow as much as I can and leave my savings/investments alone because I can make my money work for me at more than 3% per year.
- Excessive borrowing is never good. (For examples, look around you, they are everywhere)
What Do You Think?
Do you think this is a good idea? If you do, how should we promote it to the right people who can get this through? Let us know what you think.