Friday, September 27, 2019

Realized Capital Gains Are Sensitive To Tax Rates

From Tax Foundation, "JCT Report Shows Capital Gains are Sensitive to Taxation" September 25, 2019, by Scott Eastman:
Earlier this month, the Joint Committee on Taxation (JCT) reminded us that capital gains taxes can drastically impact realizations. This is because taxpayers can choose when they sell an asset and pay capital gains taxes. This effect could be eliminated by taxing all capital gains under a mark-to-market system. Mark-to-market taxation of capital gains would eliminate this realization effect but also increase taxes on saving.

Under current law, capital gains—or the value of an asset in excess of its cost basis— are not taxed until an asset is sold (or “realized”). The option to time when capital gains are realized allows taxpayers to minimize their tax bill, and makes capital gain realizations sensitive to tax rates.
Realized Capital Gains Affected By Tax Rates: Chart
Source: Tax Foundation

Monday, September 23, 2019

Updated: Let The Consumer Choose. Comment To WSJ, "How to Cut Emissions Without Wrecking the Economy"

My published comment to The Wall Street Journal, Commentary, "How to Cut Emissions Without Wrecking the Economy: A proposal for carbon dividends, backed by the broadest climate coalition in American history" by Christopher Crane and Ted Halstead:
Global warming is a world-wide problem. The US has a competitive profit motive private sector that constantly reduces production costs using fewer resources and more efficient production processes. The result is reductions in energy use and carbon output and the US is producing more with less energy per unit. Over the last few years, the US has seen a decline in its total CO2 equivalent emissions. While the US has reduced its green house gas output, the rest of the world has not. Virtue signaling, like the Paris Accord, will not reduce emissions. A carbon tax goes to the government and is not a private sector efficiency incentive nor an incentive to realistic approaches, such as carbon capture, nuclear, hydropower and hydrothermal power. Taxes, even refunded carbon based, increase prices, reduce output and wages, create deadweight loss and increase unemployment. Instead of a tax, put a carbon use number, like calories and mpg, on a product and let the consumer choose.

A reply I posted to a comment to my comment in the previous article:
A carbon tax creates inefficiency through the creation of a tax wedge. The price consumers pay, price plus carbon tax, is less than the amount the producer receives for the goods produced, the price without the carbon tax. The tax goes to the government and not the producer. The differential creates a space where inefficient producers can sell their goods at a price higher than similar goods prior to the carbon tax, if they have lower carbon taxes. The carbon tax amount will be decided by bureaucrats and not the marketplace leading to loopholes and market distortions. Non-existing clean power producers, windmill, etc., will have to build new plants and power storage facilities to meet demand. Constructing new clean power facilities will produce carbon emissions. The startup carbon tax may prohibit them, unless they are exempted or subsidized. Exemptions and subsidies will lead to non-taxed carbon emissions. Better to let the consumer choose based on producer's carbon use. Label it.

Wednesday, September 4, 2019

An Expectation View Of The 2008 Housing Crisis

Back in October 2008, I published a list on this blog [below] of some possible future sociological and economic scenarios that would affect the then current prices of homes through a change in expectation. In looking at that list today, it surprises me that so many occurred.
Tuesday, October 21, 2008, "Home Values Were Not In A Bubble" Posted By Milton Recht:
In a rational expectations, efficient market world which is the world economic research finds we live in, house price changes are due to changes in the expectations of the economic fundamentals related to the need, demand and value of houses. Thus, current house prices reflect their true economic value and homes are not undervalued whether due to the unavailability of credit or for other reasons. Arms-length housing market transactions, of which there are still many, occur at the true current price of housing.
Some of the possible future scenarios which would decrease the current value of a home are:
  1. a significant and long-term decline in household formation.
  2. a significant and long-term decline in population growth in the US due to changes in birthrate or immigration policies.
  3. an increase in adult children living in their parents home (including after marriage or cohabitation).
  4. an expectation of an increase in mortality or a shortening of life expectancy due to war, disease or natural or man made disasters. [Add opioids and suicide.]
  5. a change in our preferences so as to prefer multi-family or apartment type dwellings as opposed to single family homes decreasing the need for single family homes.
  6. a significant increase in the costs of owning and maintaining a home which lowers its economic value to a purchaser because of the expected increase cash outflow during ownership.
  7. a decline in both household income or the expected growth rate of household income.
  8. an alternative technology for building homes which will dramatically reduce the costs of building new houses.
  9. a change in home related taxation such as a denial of mortgage interest or real estate taxes deductions.
  10. a substantial expected increase in real estate taxes.
  11. other possibilities that affect the economic value of a home that I have not mentioned.
Some ideas mentioned above are testable. For example, I was going to mention global warming but a recent paper about house price declines in California observed that the decline is greater in central California than along the coast which is contrary to what would happen to house prices along the coast due to rising sea levels due to global warming. See the paper by OFHEO, "Recent Trends in House Price", pages 4 and 5 and note 6 at [The Office of Federal Housing Enterprise Oversight (OFHEO) no longer exist and I am unaware of an updated weblink to the paper.]

The point of this post is that to most economists who believe in economic value, efficient markets and rational expectations, the current decline in home prices is a rational response to a change in expectations about the value of homes. If there were not this belief that current homes are fairly valued, then buyers would be buying up and warehousing the depressed priced homes, the foreclosed homes and abandoned homes. The fact that buyers are not rushing in shows that the current prices of homes are fair and homes are not undervalued.