Arnold Kling  

Finally, a Pure Bailout

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The Washington Post headline reads Housing Accord Puts Builders First but waits until the last paragraph to explain.


Both parties wanted to help home builders and other businesses. Under the agreement, corporations that lose money in 2008 and 2009 would be permitted to apply their losses to tax returns from as far back as 2004, making them eligible, according to a bill summary, to "receive any applicable refunds."

Some comments.

1. Homebuilders lost money by speculating on rising home prices. So did other people. After all of the talk about bailouts, this is the first big policy move enacted that is a pure bailout.

2. Of all the forms of tax breaks, the ones least likely to stimulate any economic activity are those that are retroactive.

3. The level of public clamor for giving taxpayer money to homebuilders has not been particularly high, but this bill is being lauded as a response to popular demand.

Pundits have been braying that the subprime mortgage crisis demonstrates the failure of private markets and the need for more regulation. They say that the crisis is a reminder of why we need more government intervention, not less. The housing bill is a reminder of the opposite.


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COMMENTS (5 to date)
Joe Marier writes:

Note that when we want to bail them out, they're not developers. They're homebuilders.

Taimyoboi writes:

Perhaps this is intuitive and I'm lacking, which is often, but why are retroactive tax breaks less likely to stimulate economic activity?

John Thacker writes:

Perhaps this is intuitive and I'm lacking, which is often, but why are retroactive tax breaks less likely to stimulate economic activity?

Roughly, economic activity can be stimulated by:

1) I have more money, so I'm going to spend/invest it.
2) It's easier and cheaper for me to spend/invest now, so I'm going to do more of it.

Retroactive tax breaks completely miss out on 2).

Another way of looking at it is that you're giving people back money for a decision that they've already made; but if everyone had known about the tax break ahead of time, they likely would have made different decisions. Therefore, having it be retroactive is inefficient; people made decisions based on incomplete or incorrect information.

Jon writes:

This housing bill is the bottom of the barrel. The homebuilders profitted heavily from the same excesses the brought us here. Worse, we are going to try to give the $7K tax credit to inflate the value of foreclosed properties--reduce losses for investors who made loans that should never have happened.

At the very least, the previous bills probably bailed out many people who did not understand they were doing the wrong thing; this bill makes sure those who did understand or should have understood what they were doing get help.

Please get all of your friends to write your Congress people to vote "no" on this. If they hear a popular outcry against giving this money away, maybe they will back off.

Michael M writes:

This sounds like a simple increase in the number of years a net operating loss can be carried back. NOL carrybacks (and carryforwards)have been a feature of the Code for decades; 2 and 3 year carrybacks have been the norm, so this policy appears to extend that to 5 years.

Part of the raison d'etre for NOL carrybacks is to ease the tax bite on cyclical businesses. Imagine a company that makes a profit of $1000 in year 1, but then loses $100,000 in year 2. In that 2 year time span, the company has lost $99,000, yet must pay federal income tax (i.e., on the $1000 profit from year 1). The NOL carryback is designed "rectify" that by allowing the company to take $1000 of its loss in year 2, apply it against its year 1 profit, and get a refund of taxes paid on that income.

Not saying whether this is good policy or not, just pointing out that this is not a new concept; it's been in the Code in various forms for many, many years.

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