Homebuyer Tax Credit: Debt Financed Public Policy

As expected by many economists, the Homebuyer Tax Credit did little to nothing to encourage new home purchases and only shifted the purchase of new homes from May to April. Howard Gleckman over at the Tax Policy Center reports on the waste and fraud afforded by deficit financed public policy of this sort, noting that the “total amount of permanent job creation from this timing change [was] pretty close to zero. Cost to taxpayers: $12.6 billion just through last February.”

Gleckman highlights several points from the Treasury Department’s report that would otherwise be comical if not so costly:

• 1,295 prisoners received $9.1 million in credits for houses they claimed to buy while incarcerated, 241 of which were serving life sentences at the time

• 67 different people claimed the tax break for the same house

• More than 2,500 got almost $18 million for homes they bought before the credit was effective

• A total of 14,132 people received erroneous credits, totaling $17.6 million

So here is what the federal government accomplished. It succeeded in increasing home sales in April at the expense of those same home sales in May, injecting distortions into a relatively stable pattern of home sales. In addition to these immediate distortions, arbitrary rule changes increased the uncertainty facing consumers which undermines economic recovery. Maybe a few people purchased homes they otherwise wouldn’t, but that in itself is poor policy because it encourages individuals to take on more risk than they can afford. The tax credit created no permanent jobs, but it did increase the expected value of cheating on your taxes, thereby incentivizing tax fraud. All of this with a price tag of more than $12.6 billion, on which taxpayers will pay about 3% interest ($378 million) per year!

The real stench of the waste comes from the knowledge that this type of policy is systemic. The complete inefficacy of the Homebuyer tax credit will not prevent similar schemes from emerging from a democratic process through which benefits are handed out while the costs are billed to future generations.

Governments do not bear the full costs of the policies they pass in legislative sessions. Even the most myopic consumer, because he bears the costs of his actions, would consider postponing consumption if faced with a similar deal. And if he tossed prudence aside and made the purchase anyway, he would be forced to curtail consumption on other margins to pay for his preferences. For the individual, if it turns out he could not afford the costs of his decisions, he would eventually be forced to reconcile the reality of his resource constraints with his desires. At present, no such mechanisms of constraint tie the hands of our policy makers.

HT: Edward Lopez