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 familiespresently spend on first and second mortgage payments while adding simultaneously to the retirement security of those families by securing from any future financial crisisthe 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and penalties apply upon early withdrawal,” which means that Uncle Sam swoops in for 10 percent off the top for money withdrawn before age 59-and-a-half and the rest is taxed at the ordinary income level.
Thus, if $100,000 in savings is pulled out prematurely, $10,000 goes to the feds and the balance gets hit by a combined state-and-federal tax rate that will more often than note be more than 40 percent. Poof. Half the retirement nest egg is gone.The $100,000 becomes $45,000 to $55,000.
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 freefor 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.
More ambitious still would be a second initiative vis-a-vis retirement accumulations, one which offered conversion to ordinary assets upon payment of a one-time flat tax of, say, 20 percent.
Individuals reluctant to pay penalties have previously been offered various conversion plans that would have changed some retirement funds into the preferred vehicle of the ROTH-IRA, but that was a complicated opportunity, not widely available, and the prevailing tax rates were judged by most to be too high a price to pay.
A simple invitation to free the retirement savings in exchange for a flat tax would unleash that private sector stimulus overnight. (How to keep the government from blowing its windfall is another problem and not the concern of this column.)
The nanny-staters will fret that Americans will “blow the nest-egg,” even as ruinous foreclosures mount and the lack of capital anchors the country in near 9 percent unemployment (and some suspect higher when serious analysis is undertaken.)
The country needs a stimulus. Most Americans want to keep their homes as their greatest retirement asset. Time for Chairman David Camp of the House Ways and Means Committee and the Senate’s Gang of Six to think like taxpayers, not like tax spenders, and do something for the home-buying, retirement-saving Americans who have played by the rules and built an incredible economy.
Examiner Columnist Hugh Hewitt is a law professor at Chapman University Law School and a nationally syndicated radio talk show host who blogs daily at HughHewitt.com.
