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Supply-Side Economics | The CERF Blog

www.clucerf.org1/10/12

As early as the 1950s, Mundell proposed an economic policy program of tight monetary policy to stabilize the value of the currency and low tax rates to stimulate economic activity. During the late … The Reagan Scenario included a sharp drop in inflation, a recession in 1982 due to tight monetary policy, passage of the Kemp Roth tax cuts and an economic boom starting in 1983. … Inflation and interest rates are much lower and tax rates are lower as well. While a high …

The hidden dangers of low interest rates | David Cay Johnston

blogs.reuters.com1/10/12

Low rates also come at a cost, cutting income to older Americans and to pension funds. This forces retirees to eat into principal, may put more pressure on welfare programs for the elderly, and … If rates return to, say, 6.64 percent, the level they were in 2000, one year's interest costs would equal the individual income taxes for all of 2011 plus the first few weeks of 2012. Last week , rates took a step in that direction. The yield on the 10-year bond, a benchmark for other …

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President Obama’s recent claim to homeowners, that refinancing their mortgage loans at a lower rate, equates to a tax cut, doesn’t ring true for many tax experts.

Obama said at a recent press conference that the housing plan his administration had launched, had “already contributed to a spike in the number of homeowners who are refinancing their mortgages, which is the equivalent of another tax cut. The main message we want to send today is that there are 7 to 9 million people across the country who right now could be taking advantage of lower mortgage rates and that is money in their pocket”.

What Obama failed to mention however is that unlike the housing boom that led to the current financial crisis, this time, only borrowers with strong credit ratings and stable jobs will be able to save money if they refinance.

Obama’s announcement caused many tax analysts, including Gil Charney, who is an analyst for The Tax Institute at H&R Block to shout “foul”;

“While there could be overall savings by refinancing and lower monthly payments, there also could be reduced tax benefits as less interest is paid. Also refinancing could extend the period before the mortgage is fully paid off, so this might not be desirable for someone who wants to be mortgage-free. Therefore, someone about to make a financial decision should take their complete financial picture into account, not just their tax situation”.

In fairness to Obama, some analysts like Mark Steber, who is vice president of tax resources at Jackson Hewitt Tax Service did express a more supportive viewpoint, “While generally there is no tax advantage to refinancing at a lower rate, an individual can save on the total out of pocket costs each year over the life of the loan. Though a tax bill will actually increase after refinancing, the increase in taxes may be less than half of the total difference in interest paid, so the taxpayer may save more money than their taxes increase, therefore resulting in net savings”.

Although the Federal Reserve finalized new regulations that will limit various credit-card rate increases last December, the rules won’t come into effect until July 2010, and there is now mounting pressure to implement the regulations at a much earlier date.

Not surprisingly, the banking industry says that both the White House and Congress should wait for the Fed’s new rules to take effect before taking any additional action, and Edward Yingling, who is president of the American Bankers Association, said last Sunday, “The banking industry understands the concerns about credit cards, but the administration should fully recognize the impact of the Federal Reserve Board regulation, which is one of the strongest consumer protection regulations ever adopted. As we go forward we need to be careful about piling on rules that very much may have the impact of restraining the availability of credit”.

Democratic lawmakers have already begun advancing legislation that would limit certain credit card fees and other practices and Larry Summers, who is scheduled to meet with the heads of several of the largest U.S. credit card issuers at the White House on Thursday, recently said on NBC’s ‘Meet the Press’, “The president is going to be very focused, in a very near term, on a whole set of issues having to do with credit-card abuses”, and then added, “their abuses include charging consumers extraordinarily high rates that they wouldn’t have paid if they knew what they were getting themselves into”.

Summers’s comments were also underlined by White House spokeswoman Jen Psaki who said, “Addressing abuse in the credit card industry and standing up for consumers is a priority for the president and his economic team, and we look forward to working with Congress on these issues”.

Whereas banks claim that market conditions and changes in borrowers’ credit scores necessitated the increases, consumer advocates want new legislation that would not only limit rate increases on existing balances, but would also require credit card companies to provide more information on their rates, and they are particularly critical of banks that raised interest rates whilst receiving federal bailout funds.

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