When Is a Tax Cut Not a Tax Cut?

When it spawns a new tax. Remember last December when our public "servants" in Washington "gave" working folk tax relief in the form of a payroll tax holiday? Yay! An early Christmas! Thank you Santa!

Well, they needed to "pay" for this generosity somehow, so our dear Congresscritters and president devised a brand new tax--sorry, fee--on home mortgages originating from Fanny Mae and Freddy Mac, or about 90% of all new mortgages.

Let's look at some of the salient features of this political sleight-of-hand:

  • The fee is not broken out as a separate line item in the loan paperwork, it's just rolled into the overall interest rate, so most people are unaware of it.
  • The payroll tax holiday is for two months, but the fee will be imposed on most all new loans and refis for the next 10 years (what are the chances it will be canceled when it expires?).
  • The fee lasts for the lifetime of the loan.
  • Right now it's "only" 0.001%, but it can go much higher.
  • "The $35.7 billion collected in fees won't go into the Social Security fund to replace the lost payroll tax. It goes to the general treasury where Congress can spend it however they please."

This episode is emblematic of how politicians "work." The payroll tax goes into the Social Security Trust Fund (as in "Trust me! Your pension will be there! Trust me!"), so a holiday from the payroll tax is raiding the Trust Fund, to use one of the Democrats' favorite verbs when talking about Republican tax cuts.

For a $200,000 loan, the fee amounts to $180 per year. To illustrate the results on a real person, CBSNews uses the example of one Patty Anderson of Virginia, who "will save a couple hundred dollars from having her payroll tax cut extended but her mortgage broker told her the new fee would cost her almost $9,500." Talk about fantastic return on investment--for the government.

Is this a politician's dream or what? The tax holiday will go away sooner or later, with great crocodile tears and gnashing of teeth from the liberals, but their new fee will be with us always, and none will be aware of it. No wonder the administration loves it:

An Obama administration official defended the mortgage fee, calling it "modest" ... And it will "help bring private capital back into the mortgage market, which [is] good for borrowers over the long term."

The administration has demonstrated, once again, its utter ignorance of economics. "If you want less of something, tax it" has been a staple of economic theory for a long time, but the administration labors under the delusion that taxes somehow stimulate the private sector. But not to worry, whatever baneful effects the fee might engender, it's "modest." Of course it is. Who could be opposed to modesty?

I had finished this last night. This morning I opened my Wall Street Journal to discover in an article on broadband spectrum that Congress is considering a bill to allow another auction. This measure "would be attached to a bill extending the reduction in the payroll tax that would be funded by the billions raised in the auction." It has been scarcely a month since Congress "paid" for the payroll tax holiday with the mortgage fees, fees scheduled to be imposed for a decade, and already those public "servants" are casting about for more money. As progressives of all ranks, from the president on down, are wont to lament about millionaires and billionaires, When is enough enough? Our politicians have revealed one more time that their ravening appetite for the people's money knows no bounds.

Henry Percy is the nom de guerre for a technical writer living in Arizona. He may be reached at saler.50d[at]gmail.com.

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