Friday, February 27, 2009
Another one from my favorite guest blogger, The Opinionator.
I’m an economist. I’m trained to believe in the power of economic incentives, and in particular to anticipate that taxes will change people’s behavior. Higher marginal tax rates can reduce work effort, higher tobacco taxes reduce teen smoking, and higher energy taxes would be the surest route to greater energy efficiency.
Now we have a foreclosure crisis, with families being forced out of their homes, fire sales that drive down home prices, and further defaults and foreclosures as even more homeowners find themselves “under water” – with mortgages bigger than the market value of their houses. What to do?
If we want less of something, the most efficient way to get there is generally to tax it. In this case, we want fewer foreclosures, so let’s tax them. I propose that the federal government impose a 20% tax on the proceeds of sales of foreclosed property. This will reduce sharply the payoff to foreclosure, and induce lenders to make a much more intense effort to modify mortgages to keep homeowners paying. Writing down the mortgage principal by 20% will be a no-brainer for a start.
This tax should be strictly temporary, since the possibility of losing your home is supposed to keep people honest when they sign up for their mortgage. Right now it’s important to stop the rot, as each foreclosure makes things worse for everyone, but we don’t want to make life easy for deadbeats in the future. So I propose that this tax would apply only to mortgages written through 2008 – the precise date is arbitrary, but it would certainly not apply to new loans being made today.
Simpler is better, so my preference is that this is the end of the story. However, one could justify some exceptions, such as waiving the tax if the lender has already modified the mortgage by reducing the principal 20% or more. It might also be politically attractive to waive the tax where fraud by the borrower can be proved (though I suspect that fraudulent borrowing generally involved a co-conspirator on the lending side).
In any case, let’s apply the lessons of supply-side economics about the power of incentives. Tax foreclosures, send any revenue to the local government, and everyone wins except the most myopic lenders.
Next installment: what to do about the war on drugs...