Tax Breaks Will Not Create an Ownership Society

The Bush administration has had mixed success in getting its ‘ownership society’ policies enacted into law. However, there is one area in which the administration has been very successful: getting tax breaks enacted into law. Many of these tax breaks are aimed at encouraging taxpayers to take steps towards ‘ownership’ – such as saving for education, health care, and retirement and borrowing to purchase a home. These ‘ownership society’ tax breaks are politically correct, but they are not realistic given the current state of our society or economy.

These ‘ownership’ tax incentives are aimed primarily at poor and middle-class Americans (most of the tax breaks have phase-outs that preclude higher income earners from taking advantage of the tax benefits). However, tax breaks are not really beneficial for poorer Americans. The fact is that most poor and middle-class Americans already pay no, or only nominal, federal income taxes. In most cases these groups receive income tax refunds. In addition, these groups are heavily debt laden. Why would a tax break spur these groups to increase their savings when these groups are not even been able to pay off their current debts? These tax incentives are particularly questionable when you consider that a majority of the debt carried by poorer American consists of credit card debt, which can incur an interest rate in excess of 20%. These tax break incentives look even less appealing for these groups when you consider that real wages have not been keeping up with inflation. Why would these groups start or increase saving when their earnings are decreasing and their living expenses are increasing? In this environment, for poorer Americans, investing in groceries might be more appropriate than investing in the stock market.

Even if these incentives were successful, these poorer groups would not be able to effectively invest and manage their own money. As a result, most of the savings would flow into government-backed securities and mutual funds that hold significant portions of government-backed securities. Most financial advisers would agree that investing a large portion of a portfolio in these vehicles is not advisable given the recent devaluation of the dollar, the current historically low interest rates, the increasing budget and trade deficits, and increasing foreign competition. Therefore, incentives encouraging poorer Americans to save could result in these groups suffering significant financial losses.

Taking out debt to finance home ownership may be just as detrimental. Many believe that we are currently experiencing a housing bubble. So even if incentives were effective to increase home ownership, they would only encourage poorer Americans to buy in at the market high. Moreover, poor and middle-class Americans, who are typically less credit worthy, are more likely to pay higher mortgage interest and fees and be sold adjustable rate mortgages rather than fixed rate mortgages. Mortgage rates are expected to increase and, as a result, mortgage payments on adjustable rate mortgages will increase. Consequently, these incentives will only serve to increase in the number of poorer Americans who face home foreclosures.

These tax breaks may have been feasible in different social and economic times. They are not feasible today. This does not mean that the Bush administration should abandon the ‘ownership society’ ideology. Instead, the Bush administration might pursue other non-tax incentives, such as passing usury laws to cap credit card interest rates or passing laws that would help poorer Americans buy homes at below market rates.

Related Posts: