Charles Edison

"Economics, politics, and personalities are often inseparable." - Charles Edison

Wednesday, February 16, 2011

Time to Repay the Home Tax Credit

In 2008, first-time home buyers were eligible to receive a tax-credit. The government referred to it as something similar to an interest free loan. Americans could take advantage of this on the condition that starting about now, they would pay back the loan over a 15 year period (if they took the maximum amount of $7,500). When the government gave out these loans, it was 'creating' money and injecting it into the economy. This increased the money supply and expanded the circular flow. Now the government wants their money back. Since households are paying these loans back in taxes, money is being leaked from the economy and the circular flow will shrink.  If people have to pay more a year in taxes, they may have to cut spending in other areas of their lives. If spending drives the economy, this won't bode well for trying to propel the economy up into a recovery period.

Click here to read the article that discusses paying back the credit.

6 comments:

Smith said...

Initially why do you think the government created these first time home buyer tax credits?

Alison said...

The reason the government gave for giving out these tax credits was to ease the pain of having to come up with fees like closing costs and down payments. This would help people buy houses and therefore help the housing market recover.

Garrett T. said...

I thought that the reason why we're in a recession at the moment was because the amount of injections put into the economy making the circular flow too large to support the strength of the American Dollar. If the circular flow shrinks isn't that a good thing?

Tyler said...

I think the reason the government created these was to help the housing market by increasing the sale of homes. That sounds like a good idea to help the economy. But it is only a good idea if the people are buying houses that they can afford. Wasn't that an issue that the government had to bail out mortgage companies who weren't getting paid back? Or was that something different?

Cara Sheffer said...

These injections and so called government creations were almost made up. It was money that did not essentially exist. At the time home owners and buyers thought they could afford the houses the loans would offer, but there was no real money from the buyer's pocket. It was a huge mess and we have discussed in class what effect that had on Wall Street and many other people involved.

taylor said...

The government may have had good intentions on this idea but they apparently didn't think it out too much. These homeowners are looking to buy a house, increase their career without the rushed stress of paying off the loan, and after making the money, will pay back the money to the government. With the government taking back their word on when they're allowed to pay it back, the people are having to figure out how to get the money they didn't have in the first place. Overall this idea was just not a well thought out plan.