Tax Credit Will Backfire

When the government uses tax policy to influence decision making, it almost always ends up creating more problems than existed before its meddling.

The exception, in my opinion, is an equal reduction in tax rates across income groups. This returns things to the way they should have been in the first place. Thus, it is the elimination of a market distorting policy.

Tax credits, however, are different. Most of them, the $8000 first time home buyer credit included, are simply a government giveaway and represent a massive transfer of wealth from those who save, to those who over consume.

Many tax credits are designed to give the very poor a boost. I guess I have no moral problem with this, (except that I would rather give them the money myself), but it does create huge incentive problems.

Many working poor will make sure that their income does not rise above the "sweet spot" to qualify for the Earned Income Tax Credit. They actually stand to make more money in the short run (in the form of government subsidy), than they would if they took on a second job or sought to increase their skill level and find a higher paying one.

The First Time Homebuyer Credit is no different. It gives people a short-term incentive to overpay for a house they may not really be able to afford. It allows them to bypass the 20% down rule.

Here is what going to happen: the mortgage industry, real estate speculators, realtors, and to some extent the banks will be enriched by this tax credit.

New homeowners, who were not really ready to buy, will be stuck with homes that will fall in value another 30-40%. Then, if the economy doesn't turn around they will lose their jobs. Then, we will have another wave of defaults.

Perhaps it will work out for some. I am sure many genuine savers have also been able to take advantage of the credit.

Unfortunately, the lasting effects to our economy will be negative.