Fraud, Waste, and the First Time Homebuyer Credit
The Cash for Clunkers program was by many accounts a waste of taxpayer money because its primary economic effect was to time-shift a bunch of new car sales that would have happened anyway. We also need to critically examine the first time homebuyer credit because the real estate industry is lobbying Congress to extend and expand it. That alone makes me suspicious that the program is a taxpayer ripoff.
An economist at the Brookings Institution ran some numbers in September and came up with these conclusions about the practical effect of the program:
The tax credit is very poorly targeted. Approximately 1.9 million buyers are expected to receive the credit, but more than 85 percent of these would have bought a home without the credit. This suggests a price tax of about $15 billion – which is twice what Congress intended – for approximately 350,000 additional home sales. At $43,000 per new home sale, this is a very expensive subsidy.
It’s even worse in that most of the new home sales just result in moving renters to owners, which does not absorb the excess supply of houses. The core of our weak housing market is that the housing bubble led to too many homes being built, and the recession has led to a decline in household formation. By moving renters into owners, the tax credit does not address either of these causes.
So this fellow believes that each home sale subsidized by the credit will actually cost us about $43,000. More recently, he applied a similar analysis to the pending proposal to extend the credit beyond November and to expand it to $15,000. This, he believes, would ultimately cost the taxpayers between $259,000 and $292,000 per additional home sale generated by the credit.
Mr. ToughMoneyLove doesn’t like the sound of those numbers.
Some readers may be inclined to ignore these estimates because they won’t believe anything they read or hear from the Brookings Institution. Fair enough. I feel the same way about tax legislation from Charlie Rangel whom I wrote about last year and is back in the news with his tax-dodging exploits.
So let’s shift gears to the issue of fraudulent claiming of the homebuyer credit, now a more bipartisan concern. According to the Wall Street Journal, the IRS is already examining more than 100,000 suspicious claims for the credit and 167 different “criminal schemes” related to it.
The discovery of massive fraud in the program would not surprise me for the simple reason that the credit is claimed on a tax return and not at the time of sale. From a recent White House advisory panel came this testimony:
Bonnie Speedy, national director of AARP Tax-Aide, a volunteer service for low-income people, suggested that abuse of the home-purchase credit appeared to be widespread, in part because of relatively loose standards for claiming the credit.
The credit “has some fraud issues because it’s not being done at the time of the sale,” said Ms. Speedy. “People are filing for the home credit who don’t have a right to file for it.” Taxpayers don’t have to file their claims as part of a real-estate transaction and instead can file or amend their income-tax returns to claim the credit.
I’m a Tax-Aide Volunteer myself. I’m now having to mentally prepare myself to cross-examine the credibility of those who come to me claiming to be first-time homebuyers. If I get folks asking for help amending their 2008 returns, the warning bells will go off. There seems to be an endless supply of scam operators and fraud enablers in our culture along with thousands of unethical taxpayers willing to play along.
I hope the IRS finds everyone of them. And I hope that Congress lets the first time homebuyer credit disappear as a lesson learned.