Monday, May 9, 2011
Republicans know that the economy needs help, but that tax cuts are a non-starter with the president and that more deficit spending is equally off the table. There is one source of stimulus that the GOP should propose to the public that could not only juice current economic activity but also bring the housing crisis to a quick and merciful end.
If Congress were to allow Americans to use their retirement savings to pay-down or pay-off home mortgage debt without triggering withdrawal taxes or penalties on the use of those savings, millions of Americans would almost certainly do so, as it would free up money families presently spend on first and second mortgage payments while adding simultaneously to the retirement security of those families by securing from any future financial crisis the home in which they intend to live out their lives.
Retirement "accumulations" in the U.S. total somewhere north of $15 trillion, of which around $7 trillion exists in employee-sponsored plans, including 401(k) and individual retirement account plans where assets accumulate tax free, and where taxes are imposed upon withdrawal.
We should all know the mantra: "Taxes and penalties apply upon early withdrawal," which means that Uncle Sam swoops in for 10% off the top for money withdrawn before age 59-and-a-half and the rest is taxed at the ordinary income level. But Congress could waive those penalties and the tax depending on the use to which the funds are put, and could oblige states as well to not tax early withdrawals made for the purpose of paying off mortgage debt.
Americans taking advantage of such an opportunity would find that the hundreds or thousands of dollars spent each month on paying the mortgage would be free for other productive uses (including saving and investment) and overnight the sagging housing market would firm as thousands of houses headed for foreclosure would make a U-turn back into a family's future.
Some in Congress want to end the mortgage interest deduction -- a truly terrible idea. But if these tax-raisersdo end the most important deduction to the middle class,that rescission ought at least to be coupled with the right to use your own money to erase the mortgage that the government had through the tax code enticed the buyer to secure.