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Senators, May I Have Your Undivided Attention For Five Minutes, Please?

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To make the tax reform bill “work,” it is being tweaked.  Every “tweak” costs part of the $1.5 trillion in “static scoring” red ink allowed under your rules.  So you need more revenue.

I have written elsewhere about some sources, but there is also opposition to the bill from realtors, home builders, many millions of home owners with mortgages that won’t qualify for the HMI in the future (and homeowners generally once they figure out that reducing HMI reduces the value of every home in America because, like it or not, housing is one big market, even with its many regional sub-markets.).  So here is a suggestion to raise revenue needed in the final stages of the bill’s rewrite, raised in a way that appeals to all of these constituencies and pretty much: Allow a one time withdrawal of an individual’s retirement savings of up to 25% of those retirement savings, to be taxed not at ordinary income taxation rates that would otherwise apply to withdrawals, but at a 10% tax rate on the amount withdrawn, provided the withdrawal is used only for the reduction of residential mortgage debt or the purchase of residential real estate.

There are different calculations on how much total Americans have stashed away in retirement assets —this report says it totals more than $26.5 trillion.  Thus a 25% limit on withdrawal per person would impact not more $6 to $7 trillion socked away in accounts protected from taxation, and would raise in the 10% tax surcharge on withdrawals under this one-time provision more than a half trillion for use in offsetting the costs of other tax tweaks if used to its full impact.  Many people (most?) would want to withdraw retirement funds at a 10% rate and the requirement that the withdrawals be used to reduce mortgage debt or buy residential real estate –diversification from stocks/bonds/annuities– would be an enormous boost to the residential real estate sector both immediately and longer term.  It would also serve to offset arguments that reduction of the HMI is in fact a double-cross on buyers of homes who not only expected the benefit of HMI for the life of their loan (it survived the tax reform act of 1986 because it has a huge constituency and because it home ownership considered a social good worthy of preferential tax treatment –or was) but also that a cut to HMI’s value inevitably devalues houses everywhere.  And that 10% tax on one-time withdrawals would raise significant revenue.

Look, play around with the specifics, but this approach is a political winner and a tax reform enabler.  Those who argue –as has been argued to me– that we can’t trust Americans to manage their own retirement funds (1) don’t have a lot of faith in freedom and (2) don’t realize the biggest retirement asset of most Americans is their home, and that the mortgage on it drains resources every month. Allow them to reduce or eliminate the mortgage and with that revenue they will, wait for it, save for retirement at least in part.  Lifting all or part of that mortgage debt in the course of tax reform that lifts restrictions on the use of people’s own monies is so simple as to confound tax committee specialists who never met an idea they liked if it didn’t originate from Hill staff and K Street lobbyists.

Senators, you need the revenue to make adjustments tot he tax bill.  Home owners need some sort of make good on the devaluation you are imposing on them by fiddling with HMI.  The realtors and home builders would love it. And with caps and curbs on the use of the funds, it won’t endanger Americans’ retirement planning.  It would, in fact, make it much easier for tens of thousands who intend to stay in their homes as long as they can.

So give it from thought.  Not every good idea emerges from a life-long staffer on a committee or a K Street lobbyist, and it doesn’t have to have been studied to death by the CBO.  Common sense is common sense. It is always a good thing to let Americans use their own money, especially if it is to mitigate the loss of a long-valued deduction and to raise revenues necessary to get tax reform across the finish line.




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