An Upcoming Speech by the President of the United States?

SIDNEY, BC, Jan. 19 /CNW/ - I am pleased to announce today that Congress has come together on a non-partisan basis to ratify a decision that will improve the way Americans deal with the interest-expense deduction on their residential mortgage at tax time.

It is becoming evident that most countries around the world - including our own - are recovering from a worldwide financial crisis.  Responsible governments are now turning their attention to eliminating deficits and reducing debt.  We are taking that responsibility seriously.  A coordinated bipartisan effort against deficit and debt will allow us to look forward to a resumption of economic growth over the years ahead.

With the cooperation of both Houses of Congress - and with a helpful idea from our friends in Canada - we are in agreement that it is time to phase out the current giveaway of tax deductions for mortgage interest.  That's the bad news.

The good news is that a superior program is being put into place that will allow mortgage holders to convert their current mortgage balances into investment capital on which the interest expense will be tax deductible.  Our existing program will phase out at 10% per year for 10 years, and the new program will phase in at the same rate, or faster.

Several developed countries including Canada, Australia, Germany and Japan do not allow residential mortgage interest to be deductible.  In Canada though, over the past 27 years, thousands of Canadian residential mortgages have been converted such that their interest expense is now deductible.  It is being done with the tacit approval of the Canadian government.

Homeowners in Canada have learned how to implement The Smith Manoeuvre.  This is a strategy that gradually converts their non-deductible mortgage loan into a deductible-interest investment loan.  The amount of the debt does not increase, it remains constant, but the interest on the debt gradually becomes deductible.  In this fashion, Canadians are able to generate mortgage-interest tax deductions just as we have always done in our country.  We give our deductions away - Canadians earn theirs by investing every month for their own future security.

The mechanics are simple.  Each month, the amount of principal reduction of the first mortgage is re-borrowed and invested to produce income.  The interest expense on the re-borrowing is tax deductible in both countries.  We are distributing a Canadian article published in 2005 by Firstline Mortgages, a subsidiary of the Canadian Imperial Bank of Commerce. The article explains The Smith Manoeuvre in detail. 500 Billion Mortgage Opportunity.pdf

Our current residential mortgage interest-deduction program gives away over $100 billion each year.  This will amount to over $1 trillion in tax refunds over the next 10 years if left unattended, with no offsetting new investment made.  We simply cannot continue to let the US Treasury hemorrhage in this fashion, with next to nothing beneficial for our country coming back.

In America today, the current mortgage debt has grown to exceed $10 trillion.  Our new program would make it possible for that same $10 trillion to be converted to new investment.  It does not require a mathematician to demonstrate that $10 trillion in incremental investment will be very good for our economy.  The IRS will be delighted to provide tax refunds in exchange for new investment.  Why?  Because they will have new tax targets in the form of those new businesses and new employees that our new tax program will foster.

In either scenario the tax loss to the US Treasury will exceed $1 trillion dollars over ten years.  However it is apparent that our current system is not facilitating investment while the Canadian strategy does.  Imagine this: $1 trillion in tax deductions over ten years would mean that we had generated $10 trillion in new investments.  Any fraction of that amount is worth the effort.

There is an important synergistic effect.  Trillions of dollars in personal investment would be incremental to government and corporate pension plans.  We can view these new investment pools as personal pension plans.  This will reduce the pressure that is mounting on our stressed Social Security programs.

Up until now, our mortgage interest tax policy has been a giveaway - there is currently no quid pro quo for the tax refunds gifted to mortgage holders.  That is about to change.  All American taxpayers, including those that do not own a home, pay for those tax refunds.  The Smith Manoeuvre gives homeowners their tax refunds, but only if they are willing to provide a quid pro quo by converting their mortgages to investment loans over time.

In summary, introduction of The Smith Manoeuvre will enable us to end an unsustainable tax giveaway on a phase-out basis, while simultaneously substituting Canada's proven alternative on a phase-in basis.

Both houses and both parties concur that this is an elegant and egalitarian way to solve what some have thought was an intractable problem.  Nothing much exceeds the power of all of us working together to improve the lives of all Americans.

I would like to offer my personal thanks to my colleagues in both Houses of Congress for assisting in this historic improvement to our tax program.   And thank you Canada - you are a great neighbor.

Boiler Plate:

Fraser Smith is the author of the Canadian best seller entitled "The Smith Manoeuvre: Is Your Mortgage Tax Deductible?"  As a retired financial planner, Smith is confident that this Canadian-made mortgage debt-conversion strategy could go a long way towards eliminating the 100 billion dollar tax leakage experienced every year in the United States. The strategy relies on the fact that in both Canada and the United States, interest is deductible if money is borrowed for investment.  In Canada however, interest is not deductible on loans taken to buy a home - unless the Canadian homeowner utilizes The Smith Manoeuvre.  Smith's simple suggestion is that the US government phase out the giveaway deduction, but simultaneously encourage homeowners to convert their loans to investment loans utilizing The Smith Manoeuvre.  If that was agreed in Congress, President Obama could convert this mock speech to the real thing.

SOURCE The Smith Manoeuvre

For further information:

Name :  L. Olson
Phone:  (250) 656-7077 

Name :  L. Olson
Phone:  (250) 656-7077

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