Alleviating the Foreclosure Crisis

There are said to be almost two million homes that are either in foreclosure or about to go into foreclosure.  It is estimated that more than one million homes will be foreclosed on this year alone. 

There are three main reasons for the foreclosures. One is that the interest rate on the adjustable mortgage has gone up making the payments for interest and principal too high for the homeowners to pay.  A second cause is financial hardship due to our damaged economy and high unemployment rates.  The third main reason is that the homes are now worth less than the money owed on it.  In some cases, the homeowners took out second mortgages to buy personal items figuring their homes would continue to grow in equity.  When they went down in value, not up, the debt exceeded the collateral’s worth.  Some of these homeowners elected to stop making payments since it appeared to be a losing effort.

In all three cases, everyone loses.  The homeowners ruin their credit rating, must move their family from their home and go rent something somewhere else.  The neighbors lose because each foreclosure in their area reduces their own home’s value and tears at the neighborhood.  The lenders lose because they must go months without payment and then must get the families out, fix up their homes and try to sell the homes at as little a loss as possible.

Most of the current programs to reduce this problem are themselves problematic.  The government spending money to help the homeowners is unwelcome now that we face such huge deficits.  To many, government intervention or banks forgiving part of the debt seem unfair remedies for the vast majority who do not have this problem.  Why should banks or taxpayers suffer because a few million families made financial miscalculations?  And how many people buy cars and pay loans on them that always exceed the car’s value, some might ask?

Here is an idea that could help some of  those about to be being foreclosed on because they can no longer afford their mortgage payments.

Why not rent the soon-to-be foreclosed homes to the homeowners until they can make the regular mortgage payment?  The rent would be equal to either the interest part of the mortgage or the current rental rate, whichever is less.  The mortgage would be frozen with the principal and interest waiting to be paid when the family is able or when values increase allowing the family to sell without losing a lot of money.

The family gets to stay put.  They do not ruin their credit rating, the family does not have to find a new place to rent, and no one has to be the wiser.

The neighborhood gains because it keeps the same neighbors and does not get a group of renters moving in.  The property values are unaffected because there is no foreclosure and the neighborhood maintains its feeling of community.

The bank gains because it continues to be paid for the place, does not have to foreclose and hurt the family, does not have to fix it up and sell it and does not look like the heavy forcing a helpless family to lose their beloved home.  The bank also avoids having other homes in the area lose their value which might make them more likely to foreclose.  

It’s a win-win-win.

A Simple and Fair Federal Income Tax

America is in the midst of an economic crisis. We have a federal debt in excess of $15 trillion dollars, we are running annual deficits of more than a trillion dollars, we have 13 million people out of work, 50 million people on food stamps and one in five of our children lives in poverty.  While job creation is essential, so is reducing the annual deficit by cutting unnecessary federal spending and by raising revenue.

Studies have found that the richest Americans are paying at an average rate of only 17%  for their annual federal income tax and that half of American households pay no federal or state income tax at all.

There has been much discussion about changing the tax code to make it simpler and more fair.  Conservatives want a flat tax with everyone paying the same rate.  They want to reduce the highest rate while expanding the base, meaning that more people would be paying taxes while the richest pay less than they already are.  The last time tax rates were lowered in favor of the wealthiest Americans, under the Bush/Cheney administration, the result was no new jobs,  record deficits, a Wall Street crash and the tattered economy we are now suffering.

I have a recommendation that would simplify the federal and therefore the state income tax code for individuals and couples, not including the self-employed.  My plan would be very simple, fair, and would raise at least $200 billion a year in new revenues.  This figure could be adjusted as can be the recommended tax brackets and standard deductions.

Under this plan taxes would have one purpose - collecting revenue with which to fund needed government services.  The tax code would not try to encourage or discourage behavior with deductions or credits.  It would treat all income equally be it from work (minus FICA deduction), dividends, pensions, insurance benefits, bonuses, interest, lawsuits, lotteries etc.

As of 2008, people’s income from stock dividends has been taxed at 15% while income from savings interest can be as high as 35%.  Actual capital gains are also now at the 15% level, down from 35%, while only a maximum of 85% of Social Security benefits are taxable and legal settlements are not taxed at all.  Under this new system all these income sources would be treated as equal.

Under this plan there would be no itemized deductions, only a standard one.  For discussion purposes it could be $15,000 for an individual or $30,000 for a couple.  There would be no deductions for children, medical care costs, charitable contributions, education costs, mortgage payments, state income tax etc.   Currently there is no itemized deduction for buying food for the family or for eating at restaurants with the kids, but people do it.  There is no itemized deduction for buying the family clothes, but people do it.  There was a deduction for interest paid on credit cards and car loans but that was dropped 30 years ago.  People still pay interest on them even though they can’t write it off.  The three martini lunch was dropped as a business deduction, but people still have them every day.

There would be only five tax brackets that would range from (after the standard deduction) 10% for net incomes up to $50,000, 15% up to $100,000, 20% up to $250,000, 25% up to one million, and 30% for income over $1 million These brackets could be adjusted to raise or lower the tax burden.

Here are some examples:

Imagine that there is a couple that earned $50,000 in net salary (after deducting FICA), $20,000 in Social Security benefit payments, $10,000 in interest and $5,000 in capital gains.  The total is $85,000.  The couple would deduct $30,000 in a standard deduction, leaving them a net income of $55,000.  The first $50,000 could be at a 10%  tax rate or, in this case, $5,000.  The remaining $5,000 of net income would be taxed at 15% or, in this case, $750.  The total tax would be $5,750 or 6.7% of their gross income.

Let’s say there is a couple who earned $200,000 in net salary and $310,000 in capital gains.  Their total would be $510,000.  Using the standard deduction, they would net $480,000.  The first $50,000 would be at 10%.  The second $50,000 would be taxed at 15%.  The next $150,000 would be taxed at 20% and the remaining $230,000 (net income over $250,000) would be taxed 25%.  So in this case, the couple would owe $5,000+$7,500+$30,000+$57,500 = $100,000 in taxes. That equals a 20.8% tax on their gross income.

As a third example has a couple making $5 million in capital gains, (including dividends also currently taxed at only 15%).  They would have a standard deduction of $30,000 and then owe $230,000 for the first $1 million and $1.2 million for the remaining $4 million for a total of $1.43 million or 28.6% in federal income tax.  

This tax code would not give an Earned Income Credit or a Making Work Pay Credit to low earners who currently not only don’t pay taxes but actually get paid taxes costing $115 billion a year.  The lowered rates for the wealthiest, under Bush/Cheney reduced tax revenues by almost $100 billion a year.  There would be no credit for student loan interest or for taking care of one’s young children.

That does not mean that those in need of relief for college loans, income supplements, special medical needs or anything else currently credited in the tax code would be ignored.  With the money saved, hundreds of billions a year, there would be money for these purposes.  More college grants and very low interest federal loans could be awarded to deserving students; low income workers could receive a reduced cost for health care benefits, help with rent payments, access to food discounts - benefits targeted at those in need of help.

But what about the loss of deductions for home mortgages and for charitable contributions? Will people still buy homes or give to charities?  Good question.

While home mortgages have other problems now, if people see buying a home as a lifetime investment in their own well being, they will continue to buy homes.  With some of the revenue raised by eliminating this deduction, more affordable mortgages can be funded to qualifying families.

With charities, it is an open question.  I have found in my own case, now that I have subjected my family taxes to the standard deduction, I still pay as much for charities and feel better about it because I am not also having to keep track of every receipt and tally them to see how much I can save for my kindness.  This way it is just out of the desire to help others without any expectation of reward.

I believe that this recommended tax code change would raise needed revenue by both expanding the base, meaning more than just half of all families will be paying some tax and by getting the rich to pay more but at a lower marginal tax rate. 

Then, if this plan is adapted and revenue is raised, it must be put to good use.  Government waste including fraud, inefficiency, ineffectiveness, duplication of effort and international overreaching must be reduced as much as possible.  Our tax dollars should go to good use.