The current economic crisis is based on the enormous mortgage credit bubble and the eventual crash which tightly squeezed overleveraged consumers as well as institutions. Yet there has been very little done to directly stem the hastening downward spiral of home prices and consumer spending. Liquidity at the consumer level and the resulting confidence to get back into the housing market is key to the fundamental stability of our economy right now.
There is a vast amount of capital which can easily be released to provide hundreds of billions of dollars directly to consumers almost overnight, and at no current cost to taxpayers. The IRS estimated in 2004 that there were 2.7 million US adults who had gross assets of greater than $1.5 million. In total, these top wealth holders owned nearly $11.1 trillion in assets. After accounting for debts and mortgages of $850.1 billion, these individuals had a combined net worth of over $10.2 trillion. In Cash and Money Market type accounts alone this group had roughly $1 Trillion. Granted these numbers have been severely diminished by the recent correction but the fact remains that there are large stockpiles of untapped capital.
By simply allowing a temporary (say one month) gift tax exemption to a blood relative with a cap of $500,000 per gift and a maximum of 5 family members receiving the gift for a total gift exemption of up to $2,500,000, (per giftor) desperately needed capital would be released into the economy. This is less than the current amount which would be exempt from estate taxes if passed in 2009. This is money that has already been earned and taxed, and due to the restrictive estate tax structure sits dormant in hopes of more advantageous future tax treatment. If only 100,000 persons transferred $1,000,000, this would be a total of $100 Billion (the number could easily be multiple times this) injected directly into the economy and into the hands of consumers who could immediately take advantage of severely depressed real estate prices by purchasing a home or stimulate the economy through consumer spending.
Zillow estimates that only 8.6% of the homes in the San Francisco Bay Area will qualify for the current mortgage modification program while nationwide the number approaches only 25%. The restrictions that the loan to be modified not be “Jumbo” or more than 5% “underwater” means that the hardest hit areas (where many houses are 50% “underwater”) are not being assisted. Implementing this temporary tax treatment for gifts could easily release between 100 and 500 billion directly to consumers at a time when our economy is in dire need of consumer liquidity. No delays or government administration is necessary. There is very little downside, and everybody benefits when housing prices stabilize, foreclosures slow, and consumer spending is stimulated. Retail Wins, Automakers win, Housing market wins. Financial institution's balance sheets win. Liquidity, by the people, for the people. No printing press required.
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