Toddlers Buy Houses When Stimulus Trumps Reason

The huge economic stimulus blew up in the faces of its supporters last week. The legislation led, we now know, to a massive tax fraud. If ever there was an object lesson in the perils of rushing out a stimulus plan, this is it.

At issue was a credit for first-time homebuyers enacted in 2008 and significantly expanded in this year's plan to jumpstart the economy. It gives a refund from Uncle Sam of 10 percent of the purchase price of a home, up to $8,000. The credit is refundable, so individuals who owed no tax at all could receive a tidy $8,000 check from the Internal Revenue Service.

Congress, in a rush to get money out the door, even allowed the credit to be applied retroactively to 2008 taxes, so that credit checks for purchases this year began going out immediately.

The youngest taxpayers receiving the credit were 4-years-old.

The problem with such a program, even if it is competently implemented, is quite obvious: There is no easy way to tell whether people are telling the truth when they assert that they are buying a house for the first time. How do we know, Grandpa, that you didn't own a house back in the 1960s?

The bigger problem in this case is that the program wasn't competently designed and implemented. According to the strikingly defensive congressional testimony of Linda Stiff, the IRS's deputy commissioner for enforcement, "It is important to note that the statute did not grant the IRS the authority to disallow claims solely based on insufficient documentation."

Stiff's testimony in a House hearing last week made it clear why documentation wasn't required: It might have slowed down the stimulus. As she put it: "Requiring paper documentation up-front with the tax return would have caused all taxpayers claiming the credit to wait longer."

No Proof Needed

That's right: Congress passed a law that made it possible to have the IRS mail you a check for $8,000 if you claimed you were a first-time homebuyer. That's all you had to do--assert that you deserved the credit. The IRS didn't require you to provide proof that your claim was genuine before your check was put in the mail. Sound like a recipe for fraud?

The tax fraud was so widespread and egregious that it almost makes you laugh.

Did you forget to buy a house before claiming the credit? Not a problem. "We identified more than 19,300 electronically filed 2008 tax returns on which taxpayers claimed the First-Time Homebuyer Credit for a home which had not yet been purchased," reported J. Russell George, the U.S. Treasury inspector general for tax administration, who testified about his department's investigation.

Prior Home Ownership

Did you claim the credit even though you owned a home previously? Not a problem. George said his office found almost 74,000 claims "by taxpayers who had indications of prior home ownership within the preceding three years."

Were you unable to purchase a home because you haven't finished preschool and don't know how to read the forms? Not a problem. George cited the "more than 580 taxpayers younger than 18 years of age who claimed almost $4 million in First-Time Homebuyer Credits. The youngest taxpayers receiving the credit were 4-years-old."

The shocking facts go on and on. About 3,200 claims were filed with individual taxpayer identification numbers, rather than Social Security numbers, suggesting that alien residents joined American citizens in partaking in this rip-off.

All this probably doesn't disturb the supporters of stimulus that much. After all, it is almost surely the case that this tax credit stimulated the economy. Families that bought a beach house in their toddler's name must have used some of the money from the government to outfit their vacation paradise. All those barbecues and chaise lounges are consumption, and to a devout Keynesian, consumption is just about always good if it happens during a recession.

Chain of Command

Devout Keynesians are, we all know, wall-to-wall in the White House. Now they need to be held accountable.

The IRS is normally very good at anticipating bad taxpayer actions ahead of time and writing rules that avert much of it. In this case, the Treasury's inspector general even advised the IRS that it shouldn't hand out the credit without all proper documentation.

The credit went forward anyway. Why? The key clue is Stiff's concern about making taxpayers wait. The IRS allowed politically charged Keynesian concerns to influence its decisions about how best to enforce this new law.

So if you want to know who is to blame for creating this massive mess, you need to ask a simple question. Who called up IRS officials and told them to cut corners? Was it one of the Keynesians in the White House?

Now that would really be a scandal.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.

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