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Member Questions of the Week of July 19, 2010

Andrew Leonie of Rowlett, TX asks: “What tax policy would be the best to realistically get us out of the economic slump and huge deficits? Some suggest a two or three stage policy starting with higher taxes to pay for it all including the government stimulus then progressively lowering taxes to encourage private investment.”
OUR ANSWER: “Now is the worst possible time for tax hikes,” according to this blog post by Heritage senior policy analyst Curtis Dubay. As Dubay explains, tax hikes slow job creation and economic recovery. “Higher income tax rates and taxes on capital gains and dividends … cause investment to fall,” Dubay writes. That means “fewer jobs and lower wages for American workers.” Furthermore, Obama’s proposed tax hikes won’t raise revenue for the federal government. Revenue remains constant even as the top income tax rate changes because taxpayers change their behavior to account for changes in rates. In other words, when workers know they will be taxed at higher rates, they choose to put in fewer hours or to take compensation in non-income forms, like employer-provided health insurance or a company car.

So, if tax increases won’t stimulate the economy, what will? At a 2008 House Budget Committee hearing, Heritage’s Bill Beach, director of the Center for Data Analysis, testified that pro-growth tax policy will reinfuse life into the economy. Beach advised Congress to make the 2001 and 2003 tax cuts permanent, lower the corporate income tax rates, lower capital gains and dividends taxes and lower the tax rates on small businesses. Beach’s data-supported suggestions are as valid now as they were then.

John Saunders, Abbeville, AL asks: “Can the healthcare bill really be repealed if the Republicans take back the house and presidency?”
OUR ANSWER: Rep. Steve King (R-IA) certainly seems to think so. According to King, the sequence is simple: Republicans just need to sign a repeal bill, bring forth a discharge petition, use the discharge petition as a litmus test against Blue Dog Democrats in the November elections, win back a majority, pass a repeal bill in the new Congress, endure Obamas inevitable veto of it, shut off the funding for the 2011 and 2012 enactment of Obamacare, and, finally, elect a new president in 2012. In Kings vision, the new president would literally sign the repeal into law at the podium on the west portico of the Capitol as he finishes his oath of office. King and 121 of his colleagues in Congress are already on step two of that process. That is, they’ve signed Discharge Petition #11, a petition to discharge Rep. King’s repeal bill from committee. If the petition collects 218 signatures, then House Speaker Nancy Pelosi would be forced to bring Rep. King’s repeal bill to the House floor for an up or down vote. But repeal is not only possible — it’s imperative. According to this blog post by Heritage’s Kathryn Nix, If Obamacare is not repealed, it will cause health costs to skyrocket, cause millions of Americans to lose their current coverage, force millions into Medicaid and fail to adequately address pre-existing conditions.

Neil Billings of East Sandwich, MA asks: “Will you please lay out the series of events that led us to the financial breakdown we experienced? … I believe it started with the introduction of the affordable housing bill passed by Carter first and enhanced by Clinton. Your help will be greatly appreciated.”
OUR ANSWER: Monetary policy that created misaligned incentives — and, yes, the consumers who rationally responded to those incentives — caused the financial crisis, law professor Todd Zywicki said at a recent Heritage event. The foreclosure and mortgage crisis, Zywicki said, occurred in three different waves — even though the full effects of the crisis weren’t felt until all three waves had crashed. In the first phase, Federal Reserve monetary policy created a strong incentive for consumers to shift from 30-year fixed-rate mortgages to adjustable-rate mortgages. This led to a fall in housing prices — the second wave of the crisis. As Zywicki explains, when housing prices fall, consumer foreclosures rise. Why? Because, every month, consumers have the option to continue to pay their mortgages or to stop paying them and essentially give their houses back to the bank. Consumers act on this option in a rational way — and choose to walk away from their houses when they owe more on their mortgages than their houses are worth. Those with no equity in their houses entered negative equity territory faster and were more likely to walk away. In the third phase, macroeconomic conditions combined with negative equity caused those with prime fixed-rate mortgages to default. While Zywicki nowhere mentions the affordable housing bill passed by Carter and enhanced by Clinton, you’re still right that housing regulation rarely helps to make housing more affordable. For more on that subject, check out this backgrounder.

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