A tax incentive is a manipulation in the price of a good in an attempt to increase or decrease demand. For example, if you’re willing to pay $900 for a new television but it costs $1,000, you’re less likely to purchase that television. But if the government were to allow that item to be tax-free or make it cheaper through tax incentives, in the overall population the television company would ultimately sell more televisions.
Tax incentives are a tool used to increase aggregate spending in the economy by putting more money in your pocket as well as creating an incentive to invest in certain markets. Examples are the deductions for having children and the tax credit for first time homeowners. Getting a deduction per child is mainly to help aggregate spending; nobody in their right mind will have a child simply because they get a tax deduction. That money saved by the individual goes directly into the economy in the form of groceries, childcare, clothing, and other necessities; which are then taxed accordingly. Since parents and homeowners have the largest propensity to consume, it makes sense to put money in their pockets to stimulate to economy. In 2012, the tax credit of $1,000 per eligible child was extended through 2017 under the 2010 Tax Relief Act. (TurboTax). Helping out households with children is one thing; it’s the incentive in the housing market that alarms me. Considering we just got ourselves out of a very deep hole dug by the access to credit and unreasonable demand on housing, maybe we need to let the housing market adjust naturally for a while.
If the housing market bubble is partly to blame for the recession, why are we back to our old tricks of encouraging people to invest in housing? The first time homebuyer incentives in 2009 was an $8,000 stimulus authorized by the American Recovery and Reinvestment Act and a tax credit of up to $8,000 for first-time homebuyers and $6,500 for existing homeowners was issued in 2010 for review in 2017 (TurboTax). I agree that these incentives were needed initially to keep the market afloat so the effects wouldn’t be worse than what we all experienced; but is it still necessary or even wise to encourage people to buy homes? Seven years after the recession began we are back to increasing demand on housing through the same tax incentives and access to credit as before, with an interest rate of 0.05% for a 3 year T-bill (www.barchart.com/economy/treasuries.php), banks have even more incentive to lend. Realtor.com was nice enough to spell out incentives for buying a home in this click-bait worthy article. In the article, low interest rates, tax credits, and energy efficiency credits are all terrific reasons to purchase a home. Luckily, we have done away with adjustable-rate mortgages as well as having a heavily regulated financing industry. We have made progress, but there is still a long ways to go before the housing market will recover.
My argument mainly focuses on areas where tax incentives have further manipulated the price of the market and increased demand from an already high level, causing inflationary pressures. Case in point: Washington DC and New York City. A $120,000 home in Buffalo, NY would sell for over $500,000 in Washington, DC. In New York City; Manhattan dwellers pay, on average, $4,081 per month in rent on an island with an occupancy rate of 98.93% (New York Post). With an average 2014 annual income of $58,878 for the State of New York. That’s 83% of the average New Yorker’s (state) income and 34% of the average New York City resident’s income at $2,749 per week, which only recently spiked 12% from 2013 figures and is more than 2 ½ times the national average (Bureau of Labor Statistics). This can also be attributed to rent-control that has caused developers to create more condos for purchase than rental properties, but the message is clear; if there is already a large demand for something, increasing an incentive will cause inflation and severe inequality.
There should not be an equal tax incentive to purchase a home in Detroit, Michigan than downtown Washington, DC; but according to the current tax code that is exactly what we have. The logical policy approach would be to attempt to deter people from buying property in DC to adjust the equilibrium of the market and help mitigate the inflation we already see. My macroeconomics teacher once referred to flipping houses in an inflated market as the “biggest idiot dilemma”. Meaning that flipping a house is risky and irresponsible, but the industry exists because there’s always a bigger idiot who will buy the house from you. One day, just like every ponzi scheme, the amount of participants will no longer grow and the biggest idiot will be left with the worthless property.
The recession was caused, in part, by access to credit and an overall incentive and social attitude towards purchasing houses. People need a place to live and a home is an excellent investment, but it isn’t that simple, not everywhere. Through the creativity of the Federal Reserve Bank, automatic entitlements like unemployment insurance, fiscal stimulus in 2009 by the Obama administration, and the solidarity of industry leaders we were able to avoid a catastrophe in 2007. Had we let it, the recession of 2007 could have been another global depression. Today, the Federal Reserve Bank’s ledger is full of everyone else’s bad investments that they purchased through quantitative easing, the interest rates are at an unprecedented constant low at below 1%, and people as a whole want to get back to the way things were. The economy cannot survive another asset bubble popping; we called in every favor, the national deficit keeps growing, and we are running on fumes as it is. The Federal Reserve and market leaders are playing this one close to the chest because they know that a bad attitude about the economy can be a self-fulfilling prophecy. We, as consumers, need to realize how bad things could have been in 2007 and be more fiscally conservative, not go back to a system that was doomed to fail in the first place. The government has created blanketed tax incentives to purchase homes and the effects are being felt regionally. Now that we are out of the weeds, we should focus tax incentives regionally based on market projections to get a more sustainable and effective adjustment to the market. The first time homeowner credit is good until 2017, we need to review this legislation and either let it expire or adjust our approach to create a better future for our citizens in a more sustainable economy.
Thank you for your time.