Monday, June 22, 2015

Making Debt Payments Tax Deductible for IRA's & 401k's

The left and the right will rarely agree on anything in that their ideologies are simply and fundamentally diametrically opposed to one another.  The result is two parties that are trying to install their own version of "utopia" and we get a dysfunctional hybrid mix of both (eg. Obamacare).  Naturally, the people are not served best they could be, but every great once in a while there is an issue all people from all political stripes can agree upon as it would benefit everybody in the nation.

And I have happened upon one of these rare ideas.

Make any principal payments of debt (specifically on mortgages and student loans) qualify as legitimate contributions to people's IRA and 401k accounts.

The arguments for this are so simple and so compelling that I will be putting together a petition in that I truly believe all congressional members and President Obama would sign this into law.  However, my optimism no doubt will be rebuked by some naysayer in Washington or some mortgage banking industry lobbyist.  However, hear me out and tell me precisely how this could possibly fail, and if you agree, I would appreciate spreading the word as this will genuinely help the country.

First, it will provide an incentive to improve nearly everybody's personal finances.  As it stands right now Americans are woefully prepared for retirement and have horrible personal finances.  Paying down debts earlier and faster will only help to shore up their finances making it easier to squirrel away money for retirement at a sooner point of time in the future than if they just kept "borrow borrow borrow."

Second, if you look at nearly all the various asset classes that do qualify as a tax deductible investments for IRA's or 401k's, they provide very LOW AND POOR rates of return.  I am ignoring capital gains on this, as once again there are no such things as capital gains.  However, if you look at what type of interest rates bonds and savings accounts are paying today (0% when you adjust for inflation) and what kind of rate of return dividends are paying on stocks (2%, again, 0% when you adjust for inflation) you'll see these asset classes are so overvalued that there is no real rate of return (except for dem der "magical" capital gains).  However, there is a MUCH better rate of return when it comes to paying off your mortgage or student loans.  Both roughly average around 4%, twice the average of what nearly every other security is paying out there.

Third, it's risk free.  When you invest in a stock you could be investing in the next Enron.  When you invest in a bond, you could be investing in the next Greek oops, I mean US, oops I mean, Argentinian swindle.  However, since it is YOU who are the one that is at risk of not paying back the loan, there is no risk in you paying off your own debt early.  That rate of return is guaranteed not by the "full backing and faith of the US government," but rather the irrefutable laws of mathematics.

Finally, it's moral.  Businesses get to deduct R&D and construction expenses as a cost of doing business.  But today we ask young kids to load up on tens of thousands of dollars in debt just so they have the right to maybe apply to maybe be considered to maybe be contemplated to maybe be called into an interview to maybe...maybe, that is, get offered a job.  However, while young college students are merely doing what businesses do (building up a product - their skills - to sell to an employer/client) they do not get to deduct these crippling expenses from their taxes, while businesses do.  If there was any morality in the country (not to mention a desire to win the youth vote while not alienating conservative voters at the same time), allowing principal payments on tuition to be tax deductible would be on every upcoming presidential candidate's platform.

In short, all I am pointing out is that another asset class (paying down one's debt) should be added to:

mutual funds
ETF's, and

as a qualified tax-deductible contribution for people's IRA's and 401k's.

Admittedly, no asset would be purchased and thus "stored" in these retirement accounts for later, however, I contend providing the same tax treatment to such principal reduction payments will go a lot further in improving people's personal finances and helping them adequately prepare for retirement.

Please sign the petition here and please also forward this to others as we need 100,000 signatures and I truly believe this is such a no-brainer it will actually get implemented.


Anonymous said...

I'd put every purchase I make on my heloc so every purchase would be tax deductible.

Captain Capitalism said...

It would not include HELOCS. only 1st mortgages.

munch said...

People who work for income and accumulate capital (thereby making productivity enhancing investments possible) get taxed on their earnings and get taxed on their interest/dividends/capital gain. People who borrow and spend on speculation in housing or an overpriced degree get their investment deducted from their income? People who borrow to buy a lavish home get to deduct their housing expense while people who line in an apartment they can afford pay tax on each dollar they earn to pay rent? I don't think we need to encourage more mal-investment in housing speculation and entrenched education establishment.

Glen Filthie said...

It won't work, Captain.

Maybe I'm missing something here or you are having a brain fart of biblical proportions.

As rational adults you and I understand that when we take on debt we are literally playing with fire. We think long and hard about it, we save for emergencies, and we have financial back up plans A through J carefully prepared and ready to rip.

The problem is most leftists are children that want things and aren't mature enough to see the benefits of saving and careful investment. That in itself defies logic and it is my contention that if they are able to defy the incentives of basic common sense - how is this going to help them? Were it managed improperly I could see it producing even more borrowing by stupid people.

As an aside - as a rightwinger I don't see any of my ideologies imbued in Obutthole Care. I view it as a commie abortion and hope it gets turfed along with the trash in the Oval Office in the next election...

sth_txs said...

Of course, if Americans were not so stupid, and that includes conservatards, they would want to abolish the federal income then we could dispense with the asinine favor/spoils system.

Anonymous said...

Anonymous (first comment) alludes to a potential pitfall: it encourages people to increase their debt to make their future earnings (when applied to principal) tax-deductible.

Want an extra 500 square feet of house that you don't need? Great! Just take on more debt and allow that to become tax-deductible.

We already have inane laws that encourage debt (home mortgage interest deduction, expensing interest in business/corporate taxes); we don't need another one.

Whenever the government enacts an artificial penalty or incentive for people in the marketplace to take action, you alter the landscape of the marketplace. Ignoring that fact is like trying to ignore the first law of thermodynamics.

Anonymous said...

Then you need to shift the taxation to the year the money was spent (when the loan started). Thus, borrowers would need to borrow an additional amount to pay taxes since the money they are spending was not yet earned. you don't think they will let you off this easily do you?

Anonymous said...

No, come on.

We're already incentivizing people too much to pick up expensive degrees and to bid on fancy homes. We need to spend LESS money on those things, not MORE.

Karl said...

Captain, is this a test for your lieutenants?

I'm against this for several reasons. (Maybe I'm missing something.)
1. A tax incentive attached to debt will result in more debt.
2. This reduces revenue to the govt. Who picks up the slack? Renters?
3. This adds to the tax code. As your lieutenant, I've taken an oath to only reduce the tax code, or replace it (and the IRS) with a single fair income or consumption tax.
4. We've seen the ultra-left suggest they can confiscate 401k's if the 'need arises.' It isn't a stretch to think they'd consider seizing my house too if I linked my house to a tax benefit.

Did I pass the test?

Captain Capitalism said...

There's times where I wish I could invoke the campaign slogan my buddy recommended I use should I ever run for president:

"Shut the fuck up, I know what I'm doing. Vote Clarey 2016"

We can nitpick details. We can flaunt our ability to use austrian economics to highlight the risks and unintended consequences. And we can complain all day on the internet about how things aught to be.

But in the end that's all most conservatives and libertarians do. Complain and hold out for theoretical "perfect" when "good enough" or at least a starting point is right there and a bleeping petition only needs be signed.'

Anonymous said...

I don't quite understand how the general government will be persuaded to grant tax deductions for money they will NEVER be able to tax.

Or, do I get taxed when I sell my house like I do when I withdraw from my IRA? How do we figure the basis for that tax?

grey enlightenment said...

Maybe offer generous subsidies for STEM majors since those degrees tend to create more economic value than the liberal arts, but your plan needs more preconditions. otherwise there is too much moral hazard. The question is: why do we need to make it easier for homeowners to buy more home than they can afford, for students to major in useless subjects?

Anonymous said...

Hershblogger: maybe the $$ proceeds from your house sale would go directly into your 401k? Hey, I just thought of a way around the annual contribution limits!

Anonymous said...

I am proud to support this idea.

I'd also really like to see a repeal of whatever law that makes it impossible to discharge student debt in bankruptcy. If you can discharge all other kinds of stupidity like gambling and buying expensive houses and cars, why not student loans?

One Fat Oz Guy said...

I'd have to disagree also. Australia has arguably a pretty good system as far as University debt goes - HECS/HELP. So you rack up $30k in debt, but you only have to start paying it back once you earn more than a certain amount. Able that, the more you earn, the higher the repayment rate taken out of your salary (no lump sums at the end of the financial year).
The best feature of this debt? It goes up only by official CPI (2-3%) and the interest is only charged on your loan balance on June 30 of a year.
So if you pay off your last $5k owing on June 29 you pay zero interest for the whole year.
Although, good luck finding an interest rate better than CPI.
What we do see, however, are lifetime students who never complete anything as once you've completed a degree you're no longer eligible for more loans at the CPI rate.
We also get arts graduates who never pay back anything because they don't earn enough, which is why the current conservative govt is trying to change the system to 'sell' the debt to banks and let the banks start debt collection proceedings.
Student debt doesn't discharge on bankruptcy, but it does on death, so we don't have to worry about the tax man taking inheritance to pay for a long forgotten debt plus a lifetime of interest.

Anonymous said...

It's another class of investments that are tax deductible. It also provides some relief to people who made mistakes with debt, but are honest and hardworking enough to own up to their mistakes.

It does incentivise debt, however, it also incentivizes getting out of debt, so that's probably a wash.

Jeb Bush said...

I really like this idea!

Anonymous said...

Brother I think you've lost your mind. All that will happen is that housing prices and tuition will be driven up and current homeowners and big education will capture the subsidy, leaving debtors in the position they already are in.