Thursday, December 13, 2007

Unrealized FairTax opponents: The Banking Industry

Recently, Neal Boortz and James Taranto have been going head to head over the issue of the FairTax Plan. James Taranto has been arguing against the plan for various reasons, but the main reason is that it would eliminate the mortgage interest deduction. The other reasons are pretty foolish and defy logic, despite Mr. Boortz's best efforts to set the record straight.

But I'm thinking that this raises another, much deeper problem that FairTax supporters like myself face. That is, that we have not realized probably the biggest opponent to the FairTax: the banking industry. Yes, the big banks in our nation, such as Bank of America, Citibank, and all the others would seriously and venomously oppose the FairTax.

Why in the world would the banks want to oppose possibly the biggest transfer of power in our nation's history since the War for Independence? Well, it's real simple and easy to figure out if you consider the following:

1) Under our current tax system, we have this thing called the mortgage interest deduction (as well as the student loan interest deduction). This deduction allows taxpayers to deduct the amount they've paid in interest on their home loans (and student loans) as taxable income. The sheer volume of money refunded as a result for many homeowners is substantial, so it's no surprise that a tax system based on consumption would be unfavorable to those who own homes. But there's a larger problem here: the mortgage interest deduction is used by banks around the country as a means to make more money via interest only loans and other types of mortgages. They use it as a way to get people to take on more debt then they normally would and it gets people believing that a mortgage is an investment. While this is flawed logic, since no one really considers the opportunity cost of the extra money they are spending in interest versus the returns on taxes, it also means that it is a way for banks to get more money off of stupid people. The FairTax plan removes that key marketing tool.

2) Under the current tax system, forgiven debt is considered taxable income. That is, if you owe a collection agency $1200 and you cannot pay that debt off, no matter what you do, and you offer them $900 to settle it in full, the remaining $300 is considered taxable income. While this particularly absurd, it gives banks a good reason to harass people to pay their debt off in full along the same lines of the mortgage interest deduction. While I do believe that people should pay off their debts in full because they've acquired it through their own foolishness, this aspect of our wonderful tax code would be eliminated by the FairTax plan and it would mean money losses for the banks.

3) The FairTax plan would encourage the poor to save their money and not spend it. Banks do not make money when people save their money in savings accounts. They make their money by selling debt. If the poor started saving their money as a result of the FairTax plan being enacted, the banks would start to lose money because there would be less lending going on. At least that is the fear they have. Economics is tricky in that there are always unintended consequences and the banking industry is no exception.

4) Since used goods no longer have an embedded tax in their sale, car loans and mortgages will be lower and thus interest profits will be lost in the banking industry. Again, this is probably a matter of perception. I think that the banks might actually gain money as people are able to afford more used cars and homes.

Well, that's the short list of the reasons why the big banks in this country would oppose the FairTax plan. Basically, it would cut into their profits. There's a reason why when back in the 1980s when the income tax system was overhauled that the mortgage interest deduction was left intact while all other deductions were removed.

Still, the FairTax is gaining a lot of ground with the common man. The middle class and the working rich are tired of seeing their hard-earned money being taken from them and going to government. The poor are also seeing the value and the logic behind it as well. It is time for a serious change in America and the FairTax plan is the start of something great. Sure there will be unintended consequences, but I would rather try something different then stick with the current system we have.

The FairTax plan will also do something that politicians fear greatly: expose the amount of taxes the American people really pay. This is why you don't hear about a whole lot of opposition to things like property taxes, because they are usually embedded in mortgage payments, or corporate taxes, which are really just embedded federal sales taxes. Politicians want your money and they don't want you to know how much they are taking. The FairTax plan will tell each and every American just how much the cost of government really is at the federal level. And they will start to take closer notice to what they are doing with that money more so then ever before.