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239 IRET Congressional Advisory 1 (2008)

handle is hein.taxfoundation/iretcgadv0236 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. May 2, 2008 Advisory No. 239 THE SENATE'S MISGUIDED HOUSING BILL On April 10, the Senate approved the Foreclosure Prevention Act of 2008 (H.R. 3221) by an 85-15 margin. The proposed legislation is a package of tax and other incentives intended to assist the housing sector. Senator Max Baucus (D-MT), chairman of the Senate Finance Committee, described it as help for home buyers, home-builders, and homeowners, and ... much needed support for the housing market (Congressional Record, April 8, 2008, S. 2719). This paper examines the main provisions in the bill and evaluates their likely economic consequences. Would they strengthen the housing sector, be ineffective, or actually hurt? More important would they help the troubled U.S. economy? The paper also looks at two legislative proposals in the House of Representatives. The economic situation Before examining the bills in detail, it might be useful to review briefly the current mess in the economy and the housing market. The current economic weakness is due only in part to the bursting of the housing bubble, which has reduced construction spending. A broader source of economic weakness is a slowdown in investment across the board. A surge in capital formation and investment was triggered by the lowering of tax rates on capital in the 2003 Tax Act. That added capital formation has run its course. If we want a further round of capital growth, we need to further reduce the tax on capital. That requires not merely extending the 2003 tax cuts, but going beyond that, to reduce the corporate tax rate and make the bonus expensing provision of the recent stimulus bill permanent. And that is what the Congress should focus on. In recent quarters, we have been relying on the Federal Reserve to prop up the general economy by sticking with easy credit and the rapid growth of bank reserves far longer than was wise. Inflationary signs are now appearing, in the form of a plunging dollar, soaring commodity prices, and upticks in the U.S. price indices (especially for food and fuel). Higher inflation will further depress investment by raising tax rates on capital, because capital consumption allowances (depreciation deductions) and capital gains are not adjusted for inflation. The excessive easing by the Federal Reserve cannot continue without doing serious economic damage to the U.S. and world economies, and to the role of the dollar as the primary international currency. Housing market problems An extraordinary housing bubble, during which home prices seemed only to rise and never fall, led to excessive investment in the housing sector relative to the rest of the economy. There were two contributing factors to the housing bubble. One was that the Fed kept monetary policy too easy for too long. The other was the invention of, and global credit market mania for, consolidated debt instruments (mortgage backed securities). Abnormally low interest rates courtesy of the Fed led g~*m S I g6~ g * Agg

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