Increase citizen wealth-fare by providing Tax-incentive Plans & Accounts
In the opening comments of this plan we mentioned that mortgages used to finance real estate, were extremely lucrative for bankers, and simultaneously extremely costly to borrowers. Loans extended over long periods of time have the ability to disguise the true cost of ownership while making payments appear to be affordable. Here homebuyers confuse having possession of the house with actual ownership of the house. Despite making, in most cases, significant payments towards their homes, most are building very little equity for long lengths of time leaving them vulnerable to the aforementioned changing labor dynamics. This is an ineffective way to stabilize citizens.
If governments are going to restore economic vitality, we need methods to allow more of workers’ income to accrue faster towards personal wealth. This would restore confidence; stabilize the American family and the broader economy. A “citizen friendly” tax legislation focused on the home is drastically needed to expeditiously resolve America’s burgeoning debt issue. In the next section of the plan we will focus on the contrasting consequences of these two approaches. The following table illustrates the contrasting economic consequences between incomes being directly attributed towards wealth verse being applied towards interest.
Table 1 below represents an amortization schedule of a $250,000 mortgage loan. @ 7.5% for 30 years. Row A highlights the financial consequences for the borrower and the lender under these terms.
In year 1, the borrower would remit 12 payments (principle and interest only) of $1,748.04 (Table 1 column I) for a cumulative total of $ 20,976.48 (Table 1 column II).
As a consequence of these payments under these terms, only $2,304.63 (Table 1 column III) would go to purchasing the home, the rest, $18,671.85 (Table 1 column IV), would go to the bank as interest. Put another way, the home-buying citizen would only retain 11% of the wealth that he/she created from labor. Not a very efficient way to provide shelter.
When we compare this with the results in Table 2 , which reflects a likely scenario under a low-interest (1%) government or employer sponsored IMA account, here in year 1, 12 comparable payments of $ 1773.70 (Table 2 Column I) comes to total annual payments of $21,284.40 (Table 2 Column II). Yet under these terms, $18,870.74 (Table 2 column III) would go to home principle and $2,413.66 (Table 2 column IV) to the plan sponsor. Here the worker would retain 89% of their work-created wealth. The biggest benefits of this type of arrangement is demonstrated by comparing Table 1- year1 to that of Table 2-year 1, and Table 1 year 15 to Table 2 year 13. A condensed comparison here underscores the difference this would make.
| Payment Cycle | Column I Payment Amountt | Column II Cumulative Payments | Column III Cumulative Principle | Column IV Cumulative Interest | Column V Principle Balance | Column VI Wealth Retention Rate |
|---|---|---|---|---|---|---|
| Year 1 | $1,748.04 | $ 20,976.48 | $ 2,304.63 | $ 18,671.85 | $ 247,695.37 | 11% |
| Year 15 | $1,748.04 | $ 314,647.20 | $ 61,434.47 | $253,212.73 | $ 188,565.53 | 20% |
| Year 30 | $1,748.04 | $ 629,294.40 | $ 250,000.00 | $379,289.54 | $ – 0.00 | 40% |
| Payment Cycle | Column I Payment Amountt | Column II Cumulative Payments | Column III Cumulative Principle | Column IV Cumulative Interest | Column V Principle Balance | Column VI Wealth Retention Rate |
|---|---|---|---|---|---|---|
| Year 1 | $1,773.70 | $ 21,284.40 | $ 18,870.74 | $ 2,413.66 | $ 231,129.26 | 89% |
| Year 13 | $1,773.70 | $ 273,149.80 | $ 250,000.00 | $ 16,054.41 | $ – 0.00 | 92% |
Besides the obvious benefit of having a stabilized citizen in 13 years or less (fully capable of addressing their other living needs like health care, education, etc.), is the added benefit of confident consumers knowing that their homes are secure and will retain their value. This will provide for a more balance stable economy from which to grow.
There are countless additional benefits to both government and citizens under this type of arrangement. One notable one is the reduced strain on governments to sustain citizens, while quickly replenishing Federal coffers reducing the need to borrow. Another is the increased property base from which to fund necessary civil projects. With more home owners, this burden would be spread across a wider number enabling local governments spread the cost among more citizens reducing the burden on a narrower class.
Here is a short list of benefits from such legislation to be elaborated on further in subsequent reports.
- One- time only provision of the IMA would create a sense of urgency compelling potential homebuyers to act adding volume to the real-estate markets and soaking up excess inventory.
- By allowing homes to be purchased in a tax free low or no interest environment would allow individuals making as little as $26,000 able to afford a home (a basic human right). This tax-advantage aspect would allow homeowners to achieve home ownership at a much faster rate (7-13 years verse current 30 years). The accelerated wealth creation would stabilize communities and transform their social fabric (generally homeowners make for more responsible citizens).
- Added volume would stabilize real-estate prices easing concerns and boosting consumer confidence. This coupled with the jobs created would give citizens confidence to spend and employers to hire and retain employees stemming the rapidly deteriorating job market.
- With the largest economic concern resolved, citizens would be more empowered to focus on education funding, health care, and retirement greatly reducing the need for government assistance. This will reduce the demands of government budgets which contribute heavily to this cause. Once citizens own their homes, local property tax bases will be much broader and far more stable allowing for more reliable budget planning from state and local leaders.
Comparison of funding a $250,000 home through an IMA accounts vs. Conventional 30 year Mortgage @ 7.5%
As a natural consequence of actions taken above, the following objectives would also be achieved.
- Housing more affordable to all income levels
- Provide all Americans with measured tax breaks
- Free government and banks of toxic debts instruments
- Thaw the financial/Credit markets
- Greatly reduce Government deficits in less than 2 years
- Greatly reduce the length and risk of deepening recession
This concludes the summary outline of The Equitelligence Economic Recovery plan which amends a previously published report. That report called for joint participation of numerous entity types to participate in a collective participating fund. That idea was designed around limiting the government financial participation to a minimum. Since then the Administrations financial commitment has ballooned making that aspect less critical but some components of that plan may also offer options.
