Bible Money Matters » economy

What Is An Economic Bubble Anyway?

John Frainee — Mon, 30 Aug 2010 12:31:11 +0000

It seems nearly every financial publication released today has the term “bubble” in it somewhere. Many of us know it’s a bad thing, but what does it really mean and how do they happen? Do they truly have an effect on the average consumer? Hopefully we can clear up the confusion of what an economic bubble is and determine if we can know when one is occurring.

What Is An Economic Bubble?

Economic bubbles happen when trade of a specific item (like a stock, asset, product, or service) is artificially inflated beyond normal standards of trade. On a graph, this looks much like a bubble! The price/trade of an item might be skyrocketing higher and higher with time, but then inevitably comes crashing down in the end.

Mania, Fear, And Hysteria

Many times, economic bubbles can result from mania surrounding a product or service. Values of an item are pushed beyond normality, and everyone tries to buy the product at one time so that they might make a profit. The stock market is prime real estate for such bubbles, as it can be difficult to accurately determine the value of a stock. Because it is difficult to know whether a stock is valued too high or low, many financial advisors suggest a diversification plan when it comes to investing, and not purchasing single stocks.

A classic example of economic mania (resulting in an economic bubble) is the Dutch Tulip Mania event. Tulip bulb prices between 1636 and 1637 shot up and crashed down within months. It’s said that prices were artificially inflated because everyone was buying bulbs hoping to turn around and sell them to make a profit. This is an unsustainable business model, because eventually the buying of the product outweighs the selling and the whole system comes crashing down.

A Lesson To Be Learned?

There are two schools of thought within economics when it comes to economic bubbles. Some people say that bubbles are predictable with study. Entire books have been written on how to “time” the stock market or financial future. However, mainstream economics believes that economic bubbles are both inevitable and unpredictable.

I lean towards the mainstream, and believe that bubbles can go unnoticed for a period of time before they inevitably burst and nearly everyone is surprised. The free market is a good thing and eventually equalizes the markets, but it’s more of jerky roller coaster ride than smooth sailing. Not only is Wall Street affected, but Main Street as well.

The lesson to be learned? Diversify not only your investments, but also diversify your income streams. The recent recession left a countless number of people unemployed. Many only had one job before the recession hit, and now they are left with collecting unemployment.

It’s All Psychological!

Contentment. It’s key when you’re wanting to handle your finances in a successful manner that leads to wealth. Too many get caught up in a mode of desperation and take part in the hype, mania, and overvaluing of products and services. It helps to have a calm spirit. Don’t allow the media to influence your path. When everyone is saying “buy now, buy now,” it’s probably not the best time to buy. Likewise, when everyone is selling, it may be unwise to sell.

Slow and steady! That’s the ticket. Having a long term game plan is crucial to your success. Build a financial foundation, and slowly build wealth, one dollar at a time. Then, when the economic bubbles pop, you can sit back and relax – you’ve built a strong house that can weather the storm! Don’t you agree?

This article was written by John Frainee. John Frainee is a personal finance writer at TheChristianDollar.com. His goal is to provide biblical financial principles that encourage people to live healthier lives. Beyond personal finance, John enjoys spending time with his wife and two crazy cats, playing a competitive game of Monopoly, and reading just about anything he can get his hands on. You can also find him on Twitter and Facebook.

Mortgage Forgiveness For Underwater Homeowners: Will Obama Forgive Billions Of Dollars In Mortgage Principal?

Peter Anderson — Mon, 09 Aug 2010 14:11:09 +0000

I was reading up on what’s new in the mortgage markets and the economy over the weekend, and one piece of reporting caught my eye because it seemed like it couldn’t possibly be true. It was talking about how the Obama administration is considering making a move later this month where Fannie Mae and Freddie Mac would be told to forgive a portion of the mortgage debt of millions of underwater homeowners. From Reuters:

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie.

So a week from tomorrow we could see if the administration makes a move on this, and starts the process to forgive a portion of the mortgage debt for underwater homeowners.

Is Mortgage Forgiveness Really Going To Happen?

If you talk to insiders in Washington, it sounds like many of them believe that this could actually happen.

1) Republican leaders believe this is going to happen since GOPers and Democratic moderates in the Senate are unwilling to spend more taxpayer money on more stimulus. But such a housing plan would allow the White House to sidestep congressional objections and show voters it is doing something tangible about an economy that seems to be weakening.

2) Wall Street banks are alerting their clients privately to this possibility. Here is what some are cautiously saying publicly. This from Goldman Sachs:

GSE policies are one of a dwindling number of policy levers the administration has left to pull, so it is conceivable that changes could be made, though there is no sign that a policy change is imminent. The Treasury’s essentially unlimited ability to provide financial support to the GSEs creates an interesting situation over the next twelve months: the GSEs could potentially be used to provide additional support for the housing market and, to a lesser extent, the broader economy in 2H 2001.

And this from Mizuho Securities:

As policy makers ponder their next move the data suggests that they face not only a stalling recovery but a growing risk of deflation taking root in the economy. As a result, the Administration has turned back to industrial policies by approving the purchase of a sub-prime auto lender by GM as a means for pumping up domestic sales, especially since the latest auto sales data indicates that consumers are still responsive to incentives. This precedent increases the risk that the government will use its control of Fannie and Freddie to increase consumer cash flow and juice the economy again.

Moreover, Morgan Stanley is pushing a mortgage relief plan directly to Congress. On August 3, a top Morgan Stanley economist recommended to the Senate Budget Committee that Fannie and Freddie ease their lending standards to allow millions of Americans to refinance their mortgages.

3) Keep in mind the political and economic context. The nascent recovery is already running out of steam. Wall Street economists just downgraded the government’s second-quarter GDP estimate of 2.4 percent to around 1.7 percent. And as even Treasury Secretary Timothy Geithner is warning, the unemployment rate may well begin to rise back toward the politically toxic 10 percent level given such sluggish growth. Many in the White House thought the unemployment rate would be dropping sharply by this point in the recovery.

So could it happen? To me it sure sounds like it’s a real possibility, especially with President Obama’s flagging poll numbers, and Democrat fears that they could lose big in the fall elections. They need to do something in order to appear in control and in charge. By doing this they would gamble that there would be more people who are happy about having debt forgiven, than there are people who are upset with the administration for giving more stimulus – and saddling the rest of the taxpayers with other people’s mortgage debt.

Is Forgiving Mortgage Debt For Underwater Homeowners A Good Idea?

So if this were to happen, and the underwater portions of homeowners mortgages were forgiven – would that be a good thing? Who would end up having to pay for it? :

A massive write-down of principal in underwater mortgages would cost us additional tens of billions of dollars, if not $100 billion or more, in order to get these mortgages to market level. That money won’t come out of thin air, either. Either it will take taxpayer dollars to make up the difference, or the sudden and arbitrary writedown will make Fannie/Freddie investors a whole lot more poor than they were before. The Obama administration can’t afford to send Wall Street reeling with that kind of shock, especially this close to an election and with the economy already sinking, so it would almost certainly require massive taxpayer subsidies to accomplish, on top of what’s already been spent on TARP bailouts.

You can rest assured that it’s probably going to be taxpayer dollars that make up the difference, so that could be another $100 billion or so added to taxpayer obligations.

Barron’s talks about how they doubt it will happen because of the negative consequences it could have.

Suddenly changing to make it easy to refinance, either through principal forgiveness or lowering lending standards for Fannie and Freddie, would cause chaos in the mortgage-backed securities market. The Fed, with a massive MBS position, would be a big loser. So would be Fannie and Freddie. And that ultimately means the American taxpayer.

Moreover, a plunge in the MBS market would mean huge losses for other investors, including those with stakes in mutual funds with big MBS exposure. And a plunge in mortgage securities prices could wind up pushing up mortgage rates in the end, conceivably pricing out some prospective buyers trying to get their proverbial foot in the door of their first house.

And politically, it could backfire. There could be many more folks resentful that they couldn’t get a special deal to reduce their mortgage because they did the right thing—put down an ample downpayment on a house they could afford with a margin of safety.

Personally I don’t think it’s a good idea either, and because of the potential backlash such a move would have with it – i doubt the Democrats would want to chance it. But we shall see!

What do you think? Should the government move towards forgiving principal debt for underwater homeowners? Would the consequences of such a move be too much for them to consider it? Tell us your thoughts on this potential move by the White House in the comments.

This article was written by Peter Anderson. Peter Anderson is a Christian, husband to his beautiful wife Maria, and father to his baby boy, Carter. He loves reading and writing about personal finance, and also loves a brisk game of tennis every now and again. You can find out more about him on the about page or check out his design site at http://www.logosforwebsites.com. You can also follow him on Twitter at @moneymatters.

New 1099 Reporting Requirements In Obama Health Care Plan: A Small Business Paperwork Nightmare?

Peter Anderson — Thu, 05 Aug 2010 12:37:52 +0000

When The Obama Health Care law passed this year few people actually knew what was fully contained within the bill’s thousands of pages. Only now after the law has been passed are we finding out the details about some of the provisions within the law that could affect us. A lot of people aren’t happy about what they’re finding.

One of the provisions that has been almost universally spurned by Republicans and Democrats alike is a new requirement that could affect nearly 38 million businesses, including many entrepreneurs and freelancers like myself. The requirement? They must all file tax forms for every vendor that sells them more than $600 in goods.

1099 Filing Requirement Could Bog Down Business Owners In Paperwork

Now that the tax provision has come to light and has become extremely unpopular, both parties have said they would like to repeal the provision (it’s an election year!). They are, however, disagreeing about how to pay for the $19 billion in tax revenue it was estimated to bring in – after all, they need that money to pay for the new health care law.

Republicans have proposed cuts to areas of the health care bill, while Democrats want to raise taxes on corporations and high income earners. From WSJ.com

Tucked into the new health-care law is a requirement that could affect nearly 40 million businesses: They must file tax forms for every vendor that sells them more than $600 in goods.

The goal is to prevent vendors from underreporting their income to the Internal Revenue Service. The government estimates the filing requirement will bring in $19 billion over the next decade.

Business groups say it will swamp their members in paperwork, and Congress is listening. Democrats and Republicans want to repeal it, but getting them to work together on the issue is proving difficult in an election year.

The House rejected a bill Friday that would have repealed the provision. The two parties disagreed on how to make up the lost revenue.

“This foolish policy hammers our business community when we should be supporting their job growth,” Sen. Mike Johanns of Nebraska said in the Republicans’ weekly radio and Internet address Saturday. “It’s only one example of how the administration’s promise to support small businesses really rings hollow.”

Democrats blamed Republicans for Friday’s failure.

“Despite all of their rhetoric about the need to eliminate this reporting requirement, Republicans walked away from small businesses when it mattered most,” said Rep. Sander Levin (D-Mich.), chairman of the House Ways and Means Committee.

So once again, we enter the loop of blame – each party blaming the other for the failure to repeal it thus far. I guess it really comes down to a fundamental difference in strategy and priorities. One party wants to cut, while the other wants to increase taxes. Question is – will they be able to get something figured out?

Paperwork Nightmare For Small Business

If it doesn’t get repealed it will become law, and many have said it will be a paperwork nightmare for small business.

Businesses already must file Form 1099s with the IRS when they purchase more than $600 in services from a vendor in a year. The new provision would extend the requirement to the purchase of goods, starting in 2012.

The requirement would hit about 38 million businesses, charities and tax-exempt organizations, many of them small businesses already complaining of too much government paperwork, according to a recent report by the National Taxpayer Advocate. It would also create enough extra paperwork that it could strain the IRS itself, wrote the advocate, an independent watchdog within the IRS.

Businesses that repeatedly make small purchases from the same vendor would have to keep good records in case the total exceeded $600 in a year. Companies would also have to get vendors’ tax identification numbers to include in the filings.

“Tax paperwork and compliance are already major expenses for small businesses,” a coalition of 80 business groups recently wrote lawmakers. “This new and expanded requirement means that almost every business-to-business transaction is potentially reportable to the IRS.”

As if the IRS and tax paperwork wasn’t already extremely bloated, this promises to only add to the reporting and paperwork.

I for one hope that they get the law repealed as I can’t see it being a good thing. In fact I can see how it would only be a millstone around the neck of small business at a time when that is exactly what we don’t need.

What are your thoughts on the new reporting requirements? Do you own a small business or are you a freelancer – and would it affect you? Tell us your thoughts in the comments.

The Bush Tax Cuts Are Expiring. Will The 2011 Tax Hikes Bring On A Double Dip Recession?

Peter Anderson — Thu, 17 Jun 2010 15:01:55 +0000

At the end of the 2010 there will be a tax increase for all taxpayers, if something isn’t done. Back in 2001 the Bush administration helped to get an across the board tax cut passed that effectively lowered the marginal tax rates for all people paying taxes. (If you didn’t pay taxes, it doesn’t matter too much does it?). Now those cuts are expiring and on January 1st, 2011 the new marginal tax rates will go into effect unless extended by legislation.

Thankfully for many of us the Obama administration has decided that they will push to renew the tax cuts for all taxpayers making less than $250,000 a year.

Obama wants tax breaks proposed by President George W. Bush to expire this year. His budget would eliminate tax breaks on those making more than $250,000 a year, a move almost certain to be opposed by Republicans and perhaps some Democrats as the economy crawls out of the recession.

“We extend middle-class tax cuts in this budget,” Obama said Monday at the White House, but “we will not continue costly tax cuts for oil companies, investment fund managers, and those making over $250,000 a year.”

So only those taxpayers making more than $250,000 a year (joint) will see an actual increase in their tax rates. The rest of this (hopefully) will see an extension of the Bush tax cut.

For more of a look of what your tax rate would be if the cuts were to expire, check out this article: Tax Rates If Bush Tax Cut Expires

Will Tax Hikes On Higher Income Taxpayers Bring On A Double Dip Recession?

There is no consensus as to what effect tax increases will have on the economy, but there are some pretty strong opinions on both sides. Democrats are saying the tax increases are needed to help close the deficit and Republicans counter by saying that tax increases would cripple our economy in this tough environment. I suspect the truth lies somewhere in between.

Today I read an editorial by prominent economist Arthur Laffer where he argues a tax increase for higher income individuals could have a crippling effect on our economy, and could bring on a double dip recession.

On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush’s tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.

Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there’s always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.

Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.

Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe “double dip” recession.

Joel Slemrod, a professor of economics at the University of Michigan argues that increases on the wealthy are painful but necessary:

Obama’s approach of raising taxes only on the wealthy is probably the safest bet. While acknowledging that the economy will remain shaky next year, Slemrod said “not raising any taxes in the face of this fiscal imbalance also has economic effects.’’

“We start to play out a scenario where interest rates go up,’’ Slemrod said. “So it’s not as if increasing taxes has certain adverse impacts, but not raising taxes do not.’’

One thing that most agree on is that the coming year has some shaky prospects regardless of the tax cuts are extended or not. The economy has taken a pretty severe blow these past 2-3 years, and who knows what effect tax increases or the lack thereof will have.

What do you think? Will a tax increase on higher earners have a negative effect on the economy? Are tax increases necessary – or an extremely bad idea? Tell us your thoughts in the comments!

When Will I Get My $250 Medicare Part D Donut Hole Check?

Peter Anderson — Wed, 09 Jun 2010 11:50:04 +0000

Earlier this week President Obama spoke with seniors at a town hall meeting in regards to the Medicare Part D prescription benefit, and talked about how many of those seniors would be receiving a $250 check in the mail as a result of the health care reform passed earlier this year. Today I thought I would explain a bit more about that rebate check being sent out, who will get it, and when they can expect it.

What is the Medicare Doughnut Hole?

One thing that may not have been explained adequately is – just what exactly is the Medicare doughnut hole?

From HealthCare.gov

Medicare Part D provides prescription drug benefits to Americans on Medicare. This benefit comes with a $310 deductible. After you’ve spent $310, you pay 25 percent of the cost of your prescriptions until the total cost of all the medicine you have received in a year hits $2,830. Then, you are stuck with 100 percent of the bill until the total cost of your medicines hits $6,440. The gap when Medicare does not cover the cost of your prescription drugs is known as the doughnut hole.

Health reform will close the doughnut hole. Reform also offers immediate relief by providing a $250 rebate this year to seniors who hit the doughnut hole.

According to CBS News White House Correspondent Mark Knoller the checks could start going out as early as this week.

Obama says as more seniors hit the donut hole, more checks will hit the mail – helping 4 million seniors by the end of this year.

So over 4 million checks being sent by the end of the year – that’s a lot of people in the doughnut hole!

Who Will Get A $250 Medicare Donut Hole Check?

Ok, so how do you qualify to get a check? First, you have to be signed up for the Medicare Part D prescription drug benefit. Here’s how it works:

The prescription drug benefit has a $310 deductible.
Once the deductible is paid, Part D covers 75% of your benefit up to $2,830.
After $2,830 in drugs are paid for, you’ll have to pay 100% of your drug costs, up until $6,440.
After $6440 Part D pays for 100%.
If you are stuck in the $2,830-$6,440 doughnut hole, you should be receiving a check to help offset the costs.

So if you’re stuck in the doughnut hole you’ll be receiving a small amount of help via the check to help pay for your drugs.

When Are The Checks Being Sent?

The checks are starting to be mailed out this week, and as mentioned above as many as 4 million seniors will receive the check by year’s end.

The $250 checks will be mailed by the Department of the Health and Human Services (HHS), and the HHS logo (see image above) will be clearly displayed on the envelope. It will also include Medicare’s 1-800 toll-free number in case Medicare beneficiaries have any questions. It should be noted that the checks will be mailed by one of Medicare’s contractor. The envelope will include the contractor’s Wisconsin address in case any checks are returned for follow-up.

So if you’re already in the donut hole for the year, keep your eye out for your check in the mail – it should be on it’s way.

Note: There is no need to go through an application process or file anything to receive your check. Once you reach the threshold, the check will be sent automatically.

Medicare Part D Donut Hole Starts Going Away In 2011

The Health Care Reform bill that goes into effect soon made changes that will include closing the donut hole gap.

Among the donut hold changes:

Beginning in 2011, seniors in the donut hole will receive a 50 percent discount on prescription drugs.
The Medicare share of costs will increase so that the donut hole will be completely closed in 2020

Stay tuned for further developments!

Are you slated to receive your check this year? Will it make much of a difference for you? How do you feel about the rebate checks? Tell us your thoughts in the comments.

Obama Administration Urges Congress To Pass Another $200 Billion Stimulus Package

Peter Anderson — Fri, 28 May 2010 11:56:39 +0000

As the effects of the $787 billion stimulus package of last year begin to wear off, the Obama administration is now looking at the option of passing yet another “limited” stimulus package to help dig the economy “out of a deep valley”. Without it they fear that the slow gains our economy has made this year could be lost. The Financial Times explains:

The Obama administration made a strong plea to Congress on Monday to grit its teeth and pass a new set of spending measures – dubbed the “second stimulus” by some economists – in order to help dig the economy “out of a deep valley”.

The call for action, which was made by Lawrence Summers, Barack Obama’s senior economic adviser, who urged Congress to pass up to $200bn in spending measures, came at the same time as Mr Obama asked Capitol Hill to grant him powers to cut “unnecessary spending”.

The combined announcements were made amid rising concern that centrist Democrats, or those representing marginal districts, might vote against the spending measures, which include more loans for small businesses, an extension of unemployment insurance and aid to states to prevent hundreds of thousands more teachers from being laid off.

On the heels of a $787 billion stimulus package, $200 billion doesn’t sound nearly as large, but the fact is – it is money that we don’t currently have. A lot of people aren’t quite as sure another stimulus package is a good idea, they say it’s throwing good money after bad.

The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened….

It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

So there is quite a bit of debate as to whether the first stimulus actually did very much, and now we’ve got quite a bit of debate as to whether there should be another one.

What do you think? Should there be another stimulus? Will another $200 billion in unemployment extensions, small business loans and aid to states make a difference? Should we stop the spending now in light of ballooning deficits? Tell us your thoughts in the comments.

Democrats Hope To Pass A Second U.S. Stimulus Bill By Early 2010

Peter Anderson — Thu, 03 Dec 2009 20:40:49 +0000

Fresh off of a $787 billion stimulus package passed in February of 2009, congressional Democrats are now beginning to talk about passing a second, more modest stimulus package sometime within the next few months – aimed at easing the unemployment crisis. From Reuters:

Congressional Democrats’ push for another U.S. stimulus package got a boost on Tuesday from an analysis that found their earlier effort had blunted the impact of the worst economic downturn in 80 years.

As Democrats weighed measures to bring down the nation’s double-digit unemployment rate before the November 2010 congressional elections, they touted a nonpartisan report that showed the $787 billion stimulus package passed in February had kept between 600,000 and 1.6 million people off the unemployment rolls.

That effort, panned as a boondoggle by Republicans, also boosted the nation’s GDP between 1.2 percent and 3.2 percent, the Congressional Budget Office found.

Democrats hope to pass a more modest effort in the next two months, targeted at bringing down the unemployment rate.

That rate, currently at 10.2 percent, could have been above 11 percent had Congress not passed the first stimulus package, House Majority Leader Steny Hoyer said.

“Is it where we want to be? It is not, but it is certainly a very, very definite, positive impact on the economy,” Hoyer told reporters. “The actions we have taken have worked.”

Elements of the next package are still up in the air

There is still a lot of debate about whether the first stimulus did what it aimed to do, or whether it just added to our national debt. In any event, the Democrats are satisfied that it did what it set out to do, and they plan to pass another one to help ease the high national unemployment.

What Will Be Included In The Second Stimulus?

So what are some of the things that are going to be included in the new stimulus bill? No bill has been finalized yet, and the proposals seem to vary quite a bit, but here are a few of the provisions that have been proposed.

New spending on highways, rail, water and sewer systems, and other infrastructure
Increased lending for small business, using funds left over from the $700 billion Troubled Assets Relief Program
Money to help struggling state governments avoid laying off police, schoolteachers and other public employees
Money to local governments for job creation programs like park cleanups and refurbishing public buildings
Further extending unemployment benefits and health-insurance subsidies for the jobless
A tax credit for businesses that hire new employees
Extending a package of soon-to-expire business tax breaks, such as a credit for research and development.
Unspecified measures to help domestic manufacturing
Upgrading buildings for greater energy efficiency

So it doesn’t look like there are a lot of stimulus measures being discussed that would give individual tax breaks, stimulus checks or other benefits for individual taxpayers. Most of the measures seem aimed at creating jobs, or saving existing jobs.

How Will They Pay For Another Stimulus?

One concern I have with any of these proposals for stimulus spending is – how are we going to pay for it? More taxes? Yes, probably.

The package could also include a tax on financial transactions to help cover the cost, but several Democratic senators said it would have to be written in a way to avoid driving financial activity offshore.

“I don’t want to impose a tax that clearly is going to make American companies less competitive, (but) it’s on the table,” said Democratic Senator Max Baucus, chairman of the tax-writing Senate Finance Committee.

Lawmakers are considering other ways to pay for the measure without threatening the shaky economic recovery. Highway construction, for example, could start quickly but be paid for through measures that would take effect in several years when the economy is healthier, said Democratic Rep. Betty Sutton, co-chair of a House task force set up to consider proposals.

Is it just me, or do they really not know how they’re going to pay for these measures – except through imposing a new tax on businesses – that will in the end cause more jobs to be lost? It really seems like their attempts to solve the problem are creating new problems in the process.

What do you think about these proposed stimulus measures? Do you think they should pass, or would you rather see them not taken up? Will they improve the unemployment situation or will they just add to the ballooning deficit? Let us know your thoughts in the comments!

Tax Rules And Consequences Of The Cash For Clunkers Program

Peter Anderson — Fri, 28 Aug 2009 17:52:28 +0000

I’ve written quite a bit about the cash for clunkers program here on Bible Money Matters in relation to how the program worked, who qualified for the rebate, and how you could go about redeeming your voucher.

The program has now run its course, and now that the excitement has died down people are beginning to wonder if there are any other consequences to the program, specifically when it comes to their taxes.

Cash For Clunkers And Federal Taxes

Many people were concerned that when it came to their federal taxes they might have to treat the $3500-$4500 voucher as taxable income. When you go to the government’s website, however, they are quick to dispel that notion. From the cars.gov FAQ:

Is the credit subject to being taxed as income to the consumers that participate in the program? NO. The CARS Act expressly provides that the credit is not income for the consumer.

Since the credit is not treated as taxable income, you won’t have to pay taxes on the voucher for your federal income taxes.

The question still remains, however, will you have to pay state taxes on the voucher/credit?

Cash For Clunkers And State Taxes

The question of whether you’ll have to pay taxes on the credit for state taxes is a bit more murky. From the cars.gov FAQ:

Do I have to pay State or local sales tax on the amount of the CARS program credit? MAYBE. The question of whether a consumer must pay State or local sales tax on the amount of the CARS program credit depends on the sales tax law of each State or locality. Consumers should review the law of their respective States or consult a tax advisor to answer this question.

So the answer is that yes, you might have to pay taxes on the credit if your state and local authorities say you have to. I don’t want to post an entire list here of which states do and don’t count the credit as taxable income, but one of my blogging colleagues put together a pretty good list. You can find it here:

Cash For Clunkers Tax Rules

Time Is Running Out To Get The $8000 First Time Homebuyer Tax Credit

Peter Anderson — Thu, 27 Aug 2009 13:12:22 +0000

A few months ago we wrote for the first time about the $8000 first time homebuyer tax credit that the Obama administration passed as a part of the 2009 stimulus bill. The measure was aimed at helping to improve the real estate market that has taken such a huge hit over the past year. They wanted to get the market moving, and get first time homebuyers interested in buying a home instead of just sitting on the sidelines as they have been.

By and large the measure has gotten quite a few people back into the buying process, up to a 1/3 of all sales of existing homes in the past few months have been to first time buyers. Even so, there are still quite a few people biding their time trying to find the perfect house. But the time to claim the tax credit may be running out.

$8000 Tax Credit Expires December 1st 2009

The $8000 tax credit is a great deal for people who are first time home buyers. But let’s review the tax credit and it’s provisions:

First-time buyers can claim a credit worth $8,000 – or 10% of the home’s value, whichever is less – on their 2008 or 2009 taxes.
To qualify for the credit, the home must be purchased between Jan. 1, 2009 and Nov. 30, 2009.
You cannot have owned a house for the past three years to qualify as “first time” buyer. You also must live in the purchased house for at least three years, or you will be obligated to pay back the credit.
To get the credit, homebuyers have to earn less than $75,000 for singles or $150,000 for couples. If you make more than that you may qualify for a partial credit.

Getting the credit should be pretty easy, just claim it on your return. One caveat, however. You have to close on your new house by November 30th. That may sound like it’s a long way off, but in reality it’s coming a lot faster than you think.

You may think that you’ll be able to close on your new home right before the November 30th deadline, but you’d probably be wrong. Consider this – according to themortgagereports.com the end of November 2009 will not be a good time to close on your new home:

This is when it starts to get messy. Check out the calendar.

November 30, 2009 is the Monday after Thanksgiving Weekend.

November 28-29, 2009 is a weekend. No closings on weekends.

November 27, 2009 is the Friday after Thanksgiving — an unofficial holiday.

November 26, 2009 is Thanksgiving — an actual holiday. No closings.

November 25, 2009 is the day before Thanksgiving — a national “half-day”.

So, that backs up the November 30, 2009 first-time home buyer tax credit deadline by 6 days to November 24, 2009 — a Tuesday.

The end of November is thrown for a loop because of the Thanksgiving holidays, and when you’re talking about trying to squeeze in a closing in all that madness, you had better be extremely lucky. Instead it is suggested that you try and schedule your closing for at least the week of November 16th, just to give yourself some breathing room for things that can often come up in the buying process (problems with the final walk-through, mortgage documentation problems, etc).

Now when you think about closing on a home around November 16th, and considering that normally closings are done 60 days out by default (can be negotiated down in some cases), that means that you would have to put in an agreement on a house by September 16th in order to close on your house in time – that’s only about 3 weeks away!

3 Weeks And Counting To Find Your House!

So this post is a cautionary one in case you’re still considering buying your first home using the first time homebuyers tax credit. It’s time to get cracking, time to find the house that you want to buy, and time to put in a purchase agreement. If you wait too much longer, you may find yourself with the short end of the stick and no $8000 tax credit!

Are you considering buying a home using the $8,000 tax credit? Did you realize that the time to find your new home was so short? Have you already bought your new house and filed for the tax credit? Tell us about your story in the comments!

Cash For Clunkers Program Is Dead Again. Gas Guzzler Trade-In Program Ends Monday.

Peter Anderson — Fri, 21 Aug 2009 13:50:10 +0000

We’ve been talking a lot recently about the Cash For Clunkers program, and how the program has been successful by some standards, and troubled in other ways. The program ran out of money one week after it launched, and was only re-launched after congress passed another 2 billion dollars for the program.

Now the program is beginning to run out of money again. The Obama administration has announced that the Cash For Clunkers program will end on Monday:

The popular Cash for Clunkers program will end on Monday at 8 p.m. Eastern time, the Obama Administration said Thursday.

As of Thursday, the Administration said the Clunkers program, officially the Car Allowance Rebate System, had recorded more than 457,000 dealer transactions worth $1.9 billion in rebates.

“Applications for rebates will not be accepted after 8 p.m. EDT Monday and dealers should not make further sales without receiving all the necessary paperwork from their customers,” the Administration said in a statement.

The Administration expressed confidence that money would be available to pay all eligible rebates. A total of $3 billion has been allocated to the program.

The Department of Transportation “has been very focused on making conservative assumptions about this program, and it’s precisely why they’ve announced the winddown at this moment,” a senior Administration official said.

The Administration has countered recent complaints of payment delays by saying that many of the applications to the program from dealers have been incomplete and needed additional review or had to be sent back.

Want to take advantage of the program before it runs out? Don’t forget to read our posts detailing the program, and get to your participating dealer before 8pm eastern on Monday!

Also, if you’re signing a deal this weekend, be careful of what you’re signing as some dealers are adding clauses to the contract stipulating that you will have to pay them back for your clunker rebate if the voucher is denied by the government.

Dealers Opting Out Of Cash For Clunkers

In the last week or so a large number of dealers have been opting out of the Clunkers program as they have been having major problems even getting paid for the Clunker deals that they have signed and sent to the government for approval. In a cash important business like the car business, this could be a huge problem for a lot of dealers.

Some dealers.. already have stopped participating in the $3 billion Cash for Clunkers program. On Wednesday, Transportation Secretary Ray LaHood sought to assure dealers that they will be reimbursed for money they have essentially fronted to customers buying cars.

“They’re going to get their money,” he said.

The Greater New York Automobile Dealers Association, which represents dealerships in the New York metro area, said Wednesday that about half of its 425 members had left the program because they could not afford to offer more rebates. They also are worried about getting repaid.

In the Kansas City area, program delays prompted Randy Reed’s Buick-Pontiac-GMC and Nissan dealerships to stop participating in Cash for Clunkers on Monday. Including a dealership in St. Joseph, Reed said his stores had not been reimbursed yet for about 40 deals.

“It seems like a program the government has mismanaged from the start,” he said. “Our number one goal is not do anything to put ourselves at risk with our customers. None of us can afford the kind of losses we’re looking at if we continue participating and don’t get reimbursed.”

I for one am not sad to see the Cash For Clunkers program go. The program, while popular (anytime you “give something away” it’s probably going to be popular), has been beset with problems. The aim of trying to have a positive environmental impact is dubious at best with even environmental groups saying they aren’t impressed. The economic impact isn’t really agreed on either with some experts like Alan Greenspan saying that he didn’t think that the program stimulated the economy. Add to that the fact that the program has probably moved many people into a worse debt situation than they were in previously, and I am actually happy that the program is over!

What do you think? Are you going to be taking advantage of the program in it’s last weekend? Are you glad to see the program go? Do you think all of these dealers with pending deals will get paid, or will the government stiff them? Let us know what you think in the comments!

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