Thread: Debt relief for rich Americans

Debt relief for rich Americans

Congress cut the tax penalties homeowners could face from renegotiated mortgages or foreclosures, but the wealthy will benefit the most.

Just before Christmas, Congress and President Bush handed a $1.15 billion gift to the American public. And most of that gift will go to the wealthy.

Here's the deal: On Dec. 20, the president signed the Mortgage Forgiveness Debt Relief Act of 2007. It got some news coverage, mostly in the vein of "this will help contain the slump in real-estate markets across the country." But the devil is in the details.

For most people, debt relief in a mortgage renegotiation or foreclosure won't be counted as taxable income. This is a laudable goal in an environment where home prices and sales are falling because of overbuilding, too much speculation and a ridiculous orgy of offering mortgages with terms a lot of people can't afford.

However, the law makes as much as $2 million in debt relief tax-free. That's way too much.

Under prior law, if your mortgage lender forgave part or all of your debt, that relief was considered taxable income. You had borrowed money and no longer had to pay it back.

Under the new law, debt forgiveness on your primary residence, up to the $2 million ceiling, escapes taxation for 2007, 2008 and 2009. The original House bill had sought permanent relief. But the Senate limited the exclusion to those three years.

At a White House signing ceremony, President Bush applauded the new law, saying it would help reduce market turbulence.

Why it's wrong
Too bad everybody was so busy playing to the media to think about what they were doing. My problem with the law isn't the objective. Debt relief is appropriate for middle-class taxpayers whose interest rates exploded while their home values cratered. But because of the $2 million ceiling, that's not where the big money is going.

Personally, I know few people making less than $250,000 a year who qualify for a $2 million mortgage. If you have a $2 million mortgage, you're more likely than not to be in the 35% bracket. That's a $700,000 reduction in your taxes -- paid for by the rest of us. It's more than what the average schoolteacher makes in a dozen years.

If you're smart enough to get a $2 million loan, you should be smart enough to pay it back, or eat the tax when your debt is forgiven. I'd cap the relief at $500,000 (sorry, California) and exclude those with adjusted gross incomes of more than $200,000.

How not to reduce real-estate speculation
The reality of the new law is that it will encourage more people to take out loans they can't afford. That's not what the law was supposed to do.

There's another provision in the law that bothers me: The law extends, through 2010, the deductibility of private mortgage insurance. Though I like anything that can be deducted, I must be missing something here.

Video: Higher taxes from the mortgage mess?

My understanding of the housing crisis is that we want to temper, rather than encourage, real-estate speculation. Private mortgage insurance is for those who borrow more than 80% of the value of their homes. By making the premiums deductible, the government, with our money, is financing higher leverage and increasing the risk. Isn't that what we're trying not to do?

What else is in the new law

Surviving spouses get a real-estate break. If a surviving spouse sells a personal residence within two years of being widowed, the survivor qualifies for a $500,000-gain tax exclusion. Normally, a single taxpayer would be limited to a gain exclusion of $250,000. This provision applies only to sales after Dec. 31, 2007. It's projected to cost $67 million over the next 10 years.

Some state and local government payments to volunteer firefighters and emergency medical responders are excluded from income. That's projected to reduce tax revenue by $267 million over the next 10 years.

In an attempt to partly offset these tax breaks, Congress imposed and increased late-filing penalties for partnerships and S corporations, entities that function much like partnerships. Congress also increased estimated tax payments by some large corporate taxpayers by 1.5%. The partnership penalty jumps from $50 per partner per month for up to five months to $85 per partner per month for up to 12 months. The new S corporation penalty is also $85 per shareholder per month for up to 12 months.

Sorry, I really don't care what color crayon they're using, that's not gonna cover the cost of our latest federal giveaways.

Published Jan. 14, 2008

http://articles.moneycentral.msn.com/Ta ... icans.aspx

Thanks for posting this one Airborne.

This is an aspect of tax/welfare policy the average citizen doesn't hear enough about. It is the corporate elite that, through layers of accountants, tax attorneys, lobbyists, etc. that exert a disproportionate influence over the fiscal policies enacted into law.

In fact, many CEO's generate an apparent 'profit' on the balance sheet simply by landing state / local tax breaks and, often times, are not only NOT as productive or innovative as before, but sometimes, even less so. This sort of corporate lobbying or influence upon state/local and even Fed. governments has become sort of a 'well, if you can't compete and generate a profit by following the law, ....just go change the law!'. Of course, the real downside to all this, is that local people are force to subsidize their own impoverishment and the precious tax dollars that could have been used in productive ways that very badly needed, just got derailed to help boost the balance sheet of a corporation.

I highly recommend giving a recent article by a David Cay Johnston (a NYT writer) a serious read. He hammers this topic hard and quite well.
The examples of Walmart (it's particular Modus Operandi of it's growth strategy and governmental lobbying effort at the local level) is illustrative, and so too, is the explanation of Boosh and his management of the Texas Rangers MLB franchise. It's all about tweaking policy, greater control and influence, and getting the law to favor you/your cause, and has scarily LITTLE to do with becoming 'more efficient', 'more innovative', etc.

Another excellent read is from Michael Parenti - "Democracy for the Few".

It is my personal view, that I can understand and condone welfare to individuals far more than I can for large corporations that already have the weight of most legal issues and influence already one their side.