Some time ago I traced the so called "housing bubble" in N.Z. to screwy tax structures and their resulting incentives. This line of reasoning is now being advanced in respect of the U.S. housing capital.....
Good tax policy (by Russell Roberts)
from Cafe Hayek by Russell Roberts
Commenter j williams writes in response to my post arguing that the reduction in capital gains on housing in 1997 may have been the decisive event that started the rocketing upward of housing prices that created the mortgage mess and subsequent financial collapse:
What conclusions do you draw from this interpretation?
That the government should not have reduced taxes on home capital gains? That the taxes should have been decreased more gradually? That all capital gains taxes should be equal to avoid favoring one investment over the other?
The latter. You don't want to tax-advantage one investment over another or you induce a disproportionate flow of capital into that asset. That's the tragedy of the last ten years that's hidden. Tax policy and what came afterward caused trillions of dollars (not millions, not billions, but trillions) from China and here and elsewhere to go into building new and bigger houses rather than into more productive assets. It was a colossal mistake approved by a Republican Congress and signed by a Democratic president.
The defenders of such policies usually argue that you want more capital to flow into homes because home ownership creates a good society of responsible individuals. Maybe. Maybe not. But such talk is accepted most readily by those who benefit from the policies.
Ever-increasing home ownership is not the American dream. It's the dream of the National Association of Home Builders.
Good tax policy (by Russell Roberts)
from Cafe Hayek by Russell Roberts
Commenter j williams writes in response to my post arguing that the reduction in capital gains on housing in 1997 may have been the decisive event that started the rocketing upward of housing prices that created the mortgage mess and subsequent financial collapse:
What conclusions do you draw from this interpretation?
That the government should not have reduced taxes on home capital gains? That the taxes should have been decreased more gradually? That all capital gains taxes should be equal to avoid favoring one investment over the other?
The latter. You don't want to tax-advantage one investment over another or you induce a disproportionate flow of capital into that asset. That's the tragedy of the last ten years that's hidden. Tax policy and what came afterward caused trillions of dollars (not millions, not billions, but trillions) from China and here and elsewhere to go into building new and bigger houses rather than into more productive assets. It was a colossal mistake approved by a Republican Congress and signed by a Democratic president.
The defenders of such policies usually argue that you want more capital to flow into homes because home ownership creates a good society of responsible individuals. Maybe. Maybe not. But such talk is accepted most readily by those who benefit from the policies.
Ever-increasing home ownership is not the American dream. It's the dream of the National Association of Home Builders.
I have explained elsewhere how the absence of capital gains tax drives prices not only upwards but also further beyond the reach of some would be purchasers. Just how big is this effect? The opportunity cost of investing in assets other than housing (for example equities or bonds of equivalent risk) rises as the "tax avoided" increases with the advantage to housing being capitalised into house prices.
What has caused the significant growth in the capital value of housing in New Zealand over the past five years, why was it so extreme relative to other economies where house prices boomed and why was it so widespread and prolonged?
To date no entirely satisfactory explanation has emerged and yet the phenomena has been of significant influence in numerous areas not the least of which has been in monetary policy responses to inflationary expectations perceived by the Central Bank as being unduly fueled by rising house prices.
A more than plausible explanation may lie in tax policy - and more than just the capital gain story alone.....
To date no entirely satisfactory explanation has emerged and yet the phenomena has been of significant influence in numerous areas not the least of which has been in monetary policy responses to inflationary expectations perceived by the Central Bank as being unduly fueled by rising house prices.
A more than plausible explanation may lie in tax policy - and more than just the capital gain story alone.....
