Friday, December 19, 2008

NYT: Preferential tax cuts contributed to financial meltdown, or: What I said in September

The NYT published an article Thursday on something that readers of this blog would have known about back in September: special tax breaks on capital gains from real estate passed in 1997 encouraged the housing bubble, worsening the crash. The article includes a summary of some empirical research:

Perhaps the most detailed analysis of the provision has been the study by a Federal Reserve economist, Hui Shan, who did the analysis while at M.I.T. Ms. Shan looked at homeowners with significant equity gains, before and after 1997, and compared the likelihood of their selling their house. Her study covered 16 towns around Boston and took into account a host of other factors, like the general rise in home prices at the time.

Among homes that had appreciated less than $500,000, she concluded that the change caused a 17 percent increase in sales in the decade after 1997. Before the law changed, many people apparently avoided paying the tax by simply staying in their homes.

Ms. Shan also found that sales actually declined among homes with more than $500,000 of gains after the law passed. (Under the new law, couples have to pay taxes on gains above $500,000, even if they roll all those gains into a new house.) Nationwide, however, less than 5 percent of home sales over the last decade had gains of more than $500,000, according to Moody’s

It also notes that Grover Norquist, America's most prominent opponent of taxes, actually opposed this specific tax cut, on the basis that a broad base and low rates are better than cuts given to special interests:

At the time, Realtors and home builders lobbied for the provision and there was only scant opposition. Grover Norquist — a conservative activist and adviser to Newt Gingrich — said home sales did not deserve special treatment. But Republicans ended up voting for the bill by even wider margins than Democrats.

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