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Monday, August 26, 2013

Kahng: Path Dependence in Tax Subsidies for Home Sales

Lily Kahng (Seattle), Path Dependence in Tax Subsidies for Home Sales, 65 Ala. L. Rev. ___ (2013):

At a time of looming fiscal crisis and virtual unanimity that tax expenditures must be curtailed, tax subsidies for homeownership stand out as among the most costly and unfair of these expenditures. As a result of tax subsidies for homeownership, the government foregoes billions of dollars in revenue each year, most of which benefits wealthy taxpayers. Moreover, subsidies for homeownership encourage overinvestment in housing and underinvestment in other business sectors, which impedes economic productivity, jobs creation and the ability of U.S. businesses to compete in the global marketplace.

Scholars and commentators have analyzed extensively the tax subsidy for home mortgage indebtedness but have paid little attention to tax subsidies for home sales. This Article is the first to undertake a comprehensive examination of tax subsidies relating to home sales. The central thesis of this Article is that these subsidies rest upon questionable policy justifications, flawed logical reasoning, and poor design choices. To support this thesis, the Article traces the evolution of tax subsidies for home sales from their surprising origins in a World War I-era tax preference for requisitioned ships to their present incarnation as a practically unlimited tax exemption. This narrative account leads to several important findings. First, it shows how path dependence and bounded rationality have led lawmakers and policymakers to make questionable decisions and support problematic laws. Second, it demonstrates the power of the real estate lobby to shape the story — and the resultant legal rules ― from both tax and social policy perspectives. Finally, it illuminates the political and rhetorical forces that have shaped tax subsidies for home sales. The Article argues that only by understanding where we were before and how we got to where we are now, can we properly assess where we should go from here.

In assessing tax subsidies for home sales, the Article evaluates the subsidies by reference to the established tax policy criteria of efficiency and fairness while remaining cognizant of the broader context of the social and economic policies regarding homeownership. Although a comprehensive assessment of federal housing policies and the role of tax subsidies in structuring the domestic housing market lie beyond its scope, the Article offers important new insights that will contribute significantly to the ongoing policy dialog about homeownership in our society. In particular, it analyzes the economic impacts of tax subsidies for home sales, including whether and to what extent the subsidies contributed to the real estate bubble. Moreover, the Article highlights the important, but underappreciated, disparate race and gender impacts of homeownership as a wealth-building vehicle. Finally, the Article calls for the repeal of tax subsidies for home sales and argues that the “exogenous shock” of the global financial crisis presents a rare and fleeting opportunity to effect this reform.

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"virtual unanimity that tax expenditures must be curtailed,"
Where does that come from?
"Despite the improvements over the past 12 months, there is still room for policies to support the housing market, the IMF said [in a June 2014 report]. As a stronger housing market remains an essential component of the U.S. economic recovery, it would be important to maintain the government-backed programs that facilitated refinancing and modification of loans under stress."
That doesn't sound like taking away tax breaks for home ownership, does it?
True, the freshwater economists still endorse the panacea of austerity. Just because they have been proved wrong for the last three or four years, doesn't mean they still aren't unanimous in the error of their ways. But let's be somewhat more specific about who is endorsing decreases in tax expenditures, over what period of time.

Posted by: Bob | Aug 26, 2013 4:05:52 PM

How is the government not stealing a taxpayer's money any time he sells a house for a gain a "subsidy"? If the author's thesis is that any time a sale occurs for gain that tax should be charged, why shouldn't a taxpayer be allowed to take a loss any time an item she buys depreciates (e.g. taking a dollar's loss on yesterday's newspaper that is worthless today; selling an auto at a depreciated cost). The author's thesis is nonsense.

Posted by: Dan Smith | Aug 27, 2013 1:15:24 AM