I mentioned this is a comment on Jeff Kessler's blog yesterday. And I thought, hmmm, this topic could stimulate some interesting disscussion.
If Mr. Bush or his advisors had asked me, I would have said that instead of this crazy idea of sending everyone in the country a check for a few hundred dollars ... instead of that .... how about
1. Reinstate the personal interest deduction
2. Place a national cap on credit card interest rates
Up until Regan's tax reform of 1986, interest paid on credit cards was deductible. When I first wrote the comment yesterday, I was thinking that we lost the personal interest deduction in the 1970s under Carter; not the 1980s under Regan. But here it is, right on the U S Treasury web site. Ronald Regan's Tax Reform of 1986.
The official line was that removing the personal interest deduction would stimulate savings. Hello? Has the U. S. individual saving rate improved since 1986? And WTF anyway? Mr. Bush is telling us that spending is what this country needs right now.
And think about this: The non-deductability of credit card interest was a factor for many people in deciding to re-finance their homes or take out HELOCs. And in the process they burdened a long term asset (their home) with debt for short term items (After all, credit cards are often used to pay for food, clothing, gasoline ... all stuff that is rapidly consumed in the short term.)
What did happen in 1978 was a Supreme Court ruling: Minneapolis v. First of Omaha Service Corp., that stated national banks actually could export interest rates across state lines. That's why big banks opened offices in states such as Delaware and South Dakota, which have no ceiling on interest rates. Now you know why your VISA bill has a Delaware address. Here's more.
Interesting article from 2002 I came across while researching.....
Just my 2 cents worth..... put it on my AMEX. :-)
Cheryl,
Amen to both of your proposals! (All of the credit card companies were my clients in a previous life as national sales manager for OPEX Business Machines.)
Mike in Tucson
Yup, I can vote on both those proposals, when can we make it happen?
Take care!
RJH
so dont get credit cards from deleware is what im hearing! lol Great Article
CJ,
I respectfully disagree in spite of a 100% approval rating for your ideas.
Allowing a credit card interest deduction and capping interest rates seem to be at odds with one another. Having your cake and eating it, too. If you're going to allow a deduction, why does it matter if card companies charge 50%? You can deduct it.
However, deductions aren't all they're hyped up to be. If you're in the 25% bracket you send the credit card company $10,000 in interest and realize a 25% savings off your AGI. Not a real deal. Why not save 100% and just pay cash?
Of course, that's a joke so why not at least make it less advantageous to keep running up debt. As Jo Soss so aptly put it, there seems to be a paying problem. The paying problem comes from too much debt.
As far as a cap goes..... That's a slippery slope. If you're going to cap credit card interest rates, why not cap real estate commission rates? Mortgage interest rates? Gasoline prices? It's called price control and it didn't work for Nixon and it won't work now.
The competitive open free market can keep responsible people in the clear. That's why people who pay their debt get the 0% credit cards and car loans and the preferential mortgage rate. People who save can put a down payment on a house and create a lower monthly payment for themselves and know how to save for when the water heater breaks or they need a new roof.
Everybody should be able to buy a house and it's understandable that it's not easy to put hundreds of thousands of dollars together to buy one with cash (although some people do it) and home ownership is a social policy we, as a country, have agreed to promote. So the mortgage interest deduction is a good thing.
Not everybody needs a credit card to live.
CJ,
I'm with you. I think the tax "rebate" checks are a croc. The idea is to encourage spending so that large corps. can send money to China to pay for slave labor and accrue more profit to bolster the financial markets but that's different from credit card interest deductions and caps.
Interesting ideas and discussion, Cheryl. I have to wonder how many people will get a few hundred on their rebate check, and end up spending a thousand or more, driving themselves further into debt. Jo's comment is right -- there's "a problem with paying."
I agree with that sentiment...look at how many lottery winners or structure-settlement recipients wind up not only broke, but in much deeper debt than they ever could have managed without the extra 'income'. as for these rebate checks...I wonder how many iphones and xbox 360's will find new homes thanks to this 'free' money. If people put it towards paying down short or long term debt they already have, it will have a negative impact overall as opposed to a negligible positive one.
Giving someone who can't manage debt more money simply puts them at risk to incur more debt. The plain and simple truth is that we have a SPENDING crisis in this country. It is not a mortgage crisis, a lending crisis, a housing crisis or a credit crisis. Most people don't want to know the truth, they don't want to hear the ugly facts about the kind of long term debt they are aquiring, or how the great 125% ltv HELOC they just opened made them an indentured servant to their house for the next 15 years. They just want to spend, spend, spend!
There once was a time in this business when people actually needed money to buy a house. In fact, it was only a few generations ago that amoratized mortgages were not even used for home financing, and simple interest ballon purchases were the order of the day. I am getting more and more frustrated with young, first time buyers who are just beside themselves that they have to come up with the money for an apprasial...and think putting money down on a house is just 'dumb' and 'what do you mean I can't get 100% financing? Who they hell has 3,000 dollars laying around for a down payment?' Giving someone with this attitude extra money to spend is simply a recipie to extend them more credit.
The answer to all these problems is not tax breaks or refunds or government regulations on the lending industry. The answer is very simple: simply hold people responsible for their debts. I don't mean debters prison or anything drastic like that, but tougher bankruptcy laws, requiring a down payment on mortgages again (I can hear the hissing now) and maybe replacing some 'culturaly important' circiculum in high schools like creative sculpting or video game design (yes, that is in some high school course books now) with MANDATORY three or four years of of accounting, finance and money-management classes. This is the most basic skill one can aquire in a capitalist society. Understand the fundamentals of how money works, the effect of compounding interest and how to future-value money are just a few of the concepts that anyone graduting high school should be required to know. Debt and bad credit knows no racial or cultural boundries, and can affect any one at any financial level in life. How many 'sucessful' people do you know that make six figures plus a year that live check-to-check?
I am only 35, but I have nice home with no mortgage, enjoy a stimulating career in real estate, and have identified tremendous wealth building opportunties in Michigan, right now, in this 'bad' market. I am not rich, I do not make millions a year, but with careful planning even a moderate income can produce a mortage-free lifestyle that allows you to buy other large ticket items, like cars, for cash. When we all learn to live this way, all the credit and lending laws in the world will make no difference at all, since the power will reside again with the individuals and not the corporations
Cheryl - {Bob here} Excellent ideas! The presidents plan is like putting a bandaid on a broken arm. Cheryl for president!
Cheryl, your ideas are basically sound. Reinstating the deduction for credit card interest would have to be paired with the restoration of a ceiling on credit card rates.
Removing the deductibility of credit card interest did absolutely nothing to stimulate savings. What a crock. The American people fell for Reaganomics and "trickle-down" theory. And they've been paying for it ever since.
Right now, Bank of America has a "default" credit card rate of 29.5%, which is absurdly punitive. It's larceny to charge a rate like that. Using the "rule of 72", it means that a person's debt would double every two years. You can't compare that kind of thievery to a "cap" on mortgage rates or gas prices. There are other companies that manage to operate in the credit card business without charging the BOA rape rate.
One commenter above suggests making it "less advantageous to keep running up debt". Okay, why not make certain that the credit card companies participate in that goal, instead of exacerbating the situation.
It's a swell idea to reward the virtuous folks who always pay their debts, who never lose their job (or trust fund) and who never encounter a financial crisis. The problem is, America is running out of people who have zero debt and pockets full of money. Some people get ill, lose their jobs, have a medical emergency or catastrophe not covered by insurance. Punishing them will do nothing to make the U.S. economy healthy again.
You know, I was proud of Jason for stopping short of advocating the return of debtors' prisons. In early nineteenth-century England, they used to hang people for stealing a piece of bread. I'll bet that taught them a lesson!!
I'm with Ken. The ideas sound nice, but would backfire hard and fast.
The interest deductibility isn't bad, but it is a band-aid on the sucking chest wound that is our tax system. Enough about that...
Capping interest rates is a different thing. That is seriously taking on the idea of a free market economy . Aside from the precedent, it would not help with spending. As we can see any time that price controls are instituted, shortages soon follow. We already are facing a shortage of liquidity for lenders. Would that get any better if people started spending the poo out of those things?
You did notice, only people earning under a certain amount will get those checks.
I think this is one of the dumbest things they've come up with yet - Between the cost of the checks and the cost to administer and send them, it would have made a lot more sense to to give some kind of tax credit.
Maybe a bonus for holding down more than one job! Or maybe a credit for a small business that creates a new job.
But then, I don't understand the reasoning behind this give-away. We were discussing this at dinner tonight - my husband says most of the recipients will throw a party (or buy drugs) . I say they'll use it for a down payment on something else they can't afford - or just go shopping and blow the whole thing. Which, I guess, is what Washington is counting on.
Cherly,
I totally agree that people turned to HELOC's when the c redit card deductible provision went away but I'm not so sure restoring it would be a good idea. Wouldn't it just encourage people to use credit cards more?
Hi Cheryl,
I completely forgot about credit card interest being a write off. I miss it. That was pretty fun stuff. I wonder if we can make this a feature post & send it to all the people in office to show how much Active Rain support they have on your ideas. Sounds fun :)