Prior to 1986, consumer debt, like credit card interest was tax deductible. Credit card rates of about 8% -10% were the norm. I was there; I actually remember those days. It was Ronald Reagan and the Tax Reform Act of 1986 that ended deductability for auto loans and credit card debt. And, by the way set the stage for mega banks and mega bank products.
Today, banks act as if 30% rates for consumer credit cards are not just the norm, but some kind of God given right. No wonder THIS Christmas season looks bleak to retailers In fact, consumers have been treated like a moronic source of revenue that could be squeezed for ever, and still yield increasing amounts of money. Nothing is farther from the truth, just like it is NOT true that 72% of economic activity in the United States comes from consumer spending While this belief underlies traditional economic thinking, it is, in fact, dead wrong.
At most 40% of economic activity in the United States comes from classic consumer spending The other 30% is money spent by government and NGOs and the like on people’s needs – for example, the 19k spent by Blue Cross on my hip replacement would show up as “consumer spending”.
Therefore, the “cuts” to programs like smoking cessation of more then 60% and to the SANE program that provides trained nurses to victims of rape of 66% is actually a direct cut that slashes economic activity and drives the recession. When government cuts direct programming, another wards, government is creating and abetting recessionary energy and could be creating a depression.
Want to turn the recession/depression around? Here are some ideas that history seems to show would work:
1. Make credit card interest tax-deductible and limit rates on credit cards to 10% – that is still a 9.5% profit margin for banks at today’s prime rate.
2. Restore all direct service programs funded by government to pre-recession levels.
3. Cut no jobs from government except for management and assistant deputy level type jobs – these front line government employees like social workers and RMV counter staff are consumers and taxpayers and the training costs to replace them one day will make having laid them off to ‘save money’ look like the act of a moron.
4. Create incentives for big institutions like Harvard not to lay off staff because their endowments are down – the endowments will self regulate; these are paper losses and Harvard is here for the long term. Degrading living wage decent jobs to out sourced wage-slave jobs will permanently impair the local economy and, in fact, drive recession into depression. Besides, these layoffs and “Hyattized” jobs look like using the economy as an excuse for cheapness; living wage jobs drive a healthy economy, exhausted wage slaves who live in shelters and work three jobs to live drive crime, high divorce and out of wedlock pregnancy rates, school failure due to unavailable parents, and recession because such workers cannot afford even a working class lifestyle.
The value of labor by the hour in productivity
The fact is history has more to tell you and I about economics and human behavior than the experts with strings of letters after their names.
I don’t know if I agree with every point here; but overall this is on the right track. For instance, I agree that cutting government jobs is the wrong approach to take in a recession. But I would disagree that managers are always more expendable than line or direct care workers. An adequately staffed and competent managerial force is essential in government.
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p>One of the ironies of government downsizing over the past couple of decades has been that as more and more public sector managers have been laid off, the competence of government as a whole has been degraded. This in turn has led to public disillusionment and calls for further cuts — a dangerous and vicious cycle.
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That said – prt of Christy Mihos’ campaign platform is to limit credit card interest in MA to five percent above prime. It’s within the purview of the state to do so, and still doesn’t encourage careless consumer borrowing by making such intrest deductable. (If you’ve never heard of this, it’s because the Glob is too busy trying to rig the GOP primary).
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p>I was there, too, and encouraging unaffordable consumer spending will not bring back revenue to government programs.
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p>(BTW – pick up this month’s Atlantic Monthly for a couple of interesting articles on attitude towards consumer debt.)
…what does ending tax deductions on credit card interest have to do with today’s issues of usury interest rates and our fiscal crisis? In general I liked the 86 reforms that had more of Bill Bradley’s hand in it than Reagan’s. Giving a tax deduction for credit card debt encourages debt and is a disincentive to saving.
We shouldn’t encourage credit card use. In fact, why not have a government minimum for savings account interest?
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p>I like the general thrust of the diary, though. We should think about encouraging better corporate behavior.
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p>Another possibility is to provide certain types of government “matching funds” for savings (something like the government will kick in $10 for every $100 saved, or something like that). This sort of thing can target lower-income individuals, and not have the problem of forcing banks to provide more interest income for wealthy savings-holders (which a blanket savings account minimum rate would do).
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p>Anyway, your broader point about needing to encourage savings in an important one. Unfortunately, the consumer spending/lack of savings trends over the past 20 years were unsustainable, so we need new ways to help structure the economy going forward.
The credit card industry is certainly one of the worst around — lacking transparency, preying on its customers, and manipulating small-print language and fees in ways that would make used car dealers blush. I’d support some sort of cap on interest rates, as well as MUCH more transparency — a proposal that is often discussed but rarely acted upon.
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p>That said, I’m not really sure how bringing back the tax deduction for consumer debt would at all help the situation. Not only does it encourage more unsustainable spending generally (which FrankSkeffington notes above), but it will ultimately lead to MORE use of credit cards and, thus more money essentially being transferred from the government (in the form of reduced tax revenues) to the credit card companies (in the form of interest charged on the consumer debt).
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p>I do agree with most of your points about the oddity in much of academic economics to not count government jobs as “real” jobs — as well as the need to preserve most of these jobs — but the point about credit card interest deductibility is a bit strange and in fact acts directly against your pleas in the remainder of the post.
What I would like to see discussed are:
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p>1. The current tax and regulatory policies – and their impact on financial behavior.
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p>2. What constitutes economic activity that generates GNP.
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p>3. Failure to regulate predatory consumer debt processes, whether via credit cards & 30% rates, failure by banks to pay fair interest on savings, or giving loans to people who cannot afford them at rates that once constituted usury.
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p>4. What economic drivers could be created by changing the tax codes.
It seems to me that allowing a deduction for credit card interest is a really bad idea.
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p>First of all, the deduction would decrease the progressivity of the income tax. If I make a million dollars a year and pay $100 in interest, I get a deduction of $35. If I make $20,000 a year, I probably don’t pay income tax at all and so I get no benefit.
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p>Second, if the point is to give people an incentive to borrow and spend (which would, I think, be the obvious economic effect), in order to stimulate the economy, why not simply have the government borrow and spend? The American consumer already has a very high level of debt per capita, and I don’t see that the government should be giving people incentives to go even further into debt.
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p>Your post brought the mortgage interest deduction to mind. Given what you wrote, you probably won’t agree with this, and my own pocketbook is about to run screaming, but it seems to me that we should not allow the deduction, at least if we don’t tax the implicit rental value of owner-occupied housing as income. Why should the government subsidize mortgage borrowing, particularly in light of what we’ve learned in the last couple of years, which is that too many of us have already borrowed too much for our homes?
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p>TedF
which I personally make good use of.
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p>I’d do it differently. I don’t mind subsidizing bedroom, kitchen, and bathroom ownership. I do mind subsidizing garage, finished basement, bonus room, and home office ownership. I mind it because the subsidy isn’t based on fairness or efficient use of space. I mind it because it just doesn’t make sense to subsidize things that are far closer to “wants” than “needs”.
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p>So, here’s my proposal: single tax-filer gets 1000 square feet of home deductible. Each additional person (spouse or dependent) gets another 100 square feet. The fraction is what’s deductible. Family of four living in 2000 square foot home: 1300/2000 = 65% deductible. Family of four living in 4000 square foot home: 1300/4000 = 32.5% deductible.
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p>This would certainly only be for new transactions; it’s too big a change in policy IMO to apply it to pre-existing mortgages.
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p>So, what happens: well, small homes become slightly more valuable and large homes becomes lightly less valuable. It provides economic pressure to build smaller better homes instead of larger, lower-quality-per-square-foot homes. It results in more compact development, meaning less sprawl, more walkable or cyclable neighborhoods, etc. It also means lower energy use in homes, and less use of building materials and other resources. It’s wicked smaht growth.