Posted by Howard Richman on August 17 2008 at 09:59:51:
In Reply to: How Clinton and Bush Slowed Economic Growth - My father, homeschooled son and I are published in this week´s Enter Stage Right! posted by Howard Richman on August 10 2008 at 24:20:22:
In our commentary on the capital gains tax in Enter Stage Right this week (How Clinton and Bush Slowed Economic Growth) we pointed out that the housing bubble started up right after President Clinton virtually eliminated capital gains tax for homeowners in 1997. We wrote:
America has not always been victimized by bad capital gains tax ideas. From 1951 to 1997, whenever a homeowner sold his or her primary residence to buy another residence, the capital gains tax was deferred until the second home was sold. As a result, our nation experienced a long real-estate boom during which homeowners kept adding to their wealth.We are not the only ones who realize that Clinton´s new capital gains treatment caused speculation in the housing market. Congress is belatedly trying to close that barn door, though the housing bubble horse has already left and been replaced by a housing crash horse. Here is a selection from the story by Kenneth R. Harney in the August 9 Washington Post about rules put into the new housing bill that are designed to close some of the speculation incentive of Clinton´s 1997 bill:But in 1997, President Clinton ended that rollover, instead he reduced the capital gains tax to zero on most home sales. No longer did homeowners have any tax liability when they sold their homes without buying another. They could consume the entire sales price without paying any tax at all.
This new provision encouraged people to consume the value of their homes. Although it is hard to know whether the speculation that it encouraged started the real estate bubble, economist Thomas Palley points out that "the easing of the capital gains rules occurred close to the beginning of the bubble." During the bubble, homeowners consumed their capital by increasing the amount that they borrowed on their increasing home equity and then spending the proceeds on consumption. When the bubble burst they often found themselves facing loss of their homes and of the capital that they had invested in those homes.
Deep in the nearly 700 pages of the new housing bill is a complicated change in the tax code that could affect substantial numbers of people who purchase second homes or investment real estate in the coming decade with an eye to occupying those homes as their main residence later.The story goes on to describe the complexity of the new rules. You really have to read them to believe them. And even after you do so, you may not understand them. If you are selling a second house, you will likely need to consult a tax attorney to help you thread these rules.The bill narrows the use of the code´s tax-free exclusion that allows sellers of principal residences to escape taxation on the first $500,000 of their profit (married joint-filers) or $250,000 (single-filers). Under current law, sellers can claim the full exclusion if they have used a property as their principal residence for at least two of the five years preceding a sale.
They can claim the exclusion even if they convert an investment property or vacation house into their principal residence and live there for at least two years. This flexibility has been a boon to many tax-wise owners of multiple houses -- particularly during the bubble years when values doubled in some parts of the country.
Property owners in markets with high appreciation rates could sell their principal residences for hefty profits -- pocketing the first $250,000 or $500,000 tax-free -- and then move into their rental condo or vacation property for a couple of years and repeat the process.
In effect, it was a form of financial alchemy where taxable profits could be magically transmuted into tax-free gains -- at least up to the $250,000 and $500,000 limits.
President Truman´s 1951 tax treatment was much simpler. Truman was a rarity -- a President with common sense. His GI Bill and Marshall Plan prevented the unemployment and recession that usually follows wars. His tax treatment of capital gains set into place rules that led to 46 years of wealth building by American homeowners.
If we were to shift our income tax to the FairTax, a common sense plan that Governor Huckabee understands, there would be no need for tax attorneys when you sell a home. In fact, our entire economy would be freed from the expense of consulting tax attorneys. Moreover, the FairTax would encourage wealth building in all areas of American life, not just the housing market. The FairTax would have the same beneficial effect upon the American economy that Truman´s 1951 plan had upon homeowners.
Howard