There is one source of stimulus that the Republicans should propose to the public. Not only could it juice current economic activity, it could 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. This would free up money families presently spend on first and second mortgage payment interest.
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 IRA 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and penalties apply upon early withdrawal,” which means that Uncle Sam swoops in for 10 percent off the top for money withdrawn before age 59½ and the rest is taxed at the ordinary income level.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 not 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 free for 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-raisers do 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.
A simple invitation to free the retirement savings in exchange for a flat tax would unleash that private sector stimulus overnight. 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.