Economist proposes way to increase housing, 'raise money' for government

Key Concepts

• Mansion Tax: A tax levied on high-value residential properties, specifically implemented in Los Angeles.
• Capital Gains Tax: A tax on the profit realized from the sale of a capital asset, like a house.
• Step-Up in Cost Basis: A tax rule allowing heirs to inherit assets with a cost basis equal to the asset’s fair market value at the time of the owner’s death, potentially avoiding capital gains taxes.
• Indexing Capital Gains for Inflation: Adjusting the cost basis of an asset for inflation to reflect its real gain, rather than a nominal gain.
• Laffer Curve: A theoretical relationship between tax rates and tax revenue, suggesting that beyond a certain point, increasing tax rates can actually decrease revenue.
• Affordable Housing: Housing that is accessible to individuals and families with moderate to low incomes.

Los Angeles Mansion Tax: A Failed Experiment & Proposed Solutions

The discussion centers around the implementation and consequences of a “mansion tax” in Los Angeles, and potential solutions to the ongoing housing shortage. The initial premise is the failure of the tax to deliver on its promised benefits.

The Failure of the LA Mansion Tax

The mansion tax, intended to fund affordable housing and address homelessness, has demonstrably underperformed. As of the discussion, less than 1% ($9.38 million) of the collected revenue has been allocated to affordable housing, with a substantial 72% diverted to government bureaucracy and handouts. This outcome was foreshadowed on the program previously. The tax has also had a negative impact on the luxury home market, with sales declining by 32-50% and further development being stalled. The panelists highlight a pattern in states like California and New York, where high taxes on the wealthy often lead to an exodus of high-income earners, diminishing the tax base. Specifically, three billionaires recently left California to avoid a new wealth tax. Steve Moore argues that chasing away wealthy individuals with “idiot mansion taxes” is counterproductive.

Addressing the Housing Shortage: Indexing Capital Gains

A significant portion of the conversation focuses on a proposed solution to the housing shortage: indexing capital gains on residential real estate sales for inflation. The core argument is that much of the apparent gain in home values over long periods is attributable to inflation, not actual profit.

• The Proposal: The proposal suggests taxing only the real gain – the increase in value above the rate of inflation. Currently, homeowners can exclude up to $500,000 in capital gains per couple, representing a significant government subsidy.
• The Rationale: Steve Moore argues that taxing inflationary gains is unfair. He uses the example of a home purchased for $250,000 forty years ago now worth $1.5 million, asserting that much of this increase is due to inflation. Indexing would encourage more homeowners to sell, increasing housing supply.
• Potential Benefits: Increased housing supply, potentially lowering prices and making homeownership more accessible. Increased revenue for the government as people sell homes instead of holding onto them to avoid taxes.
• Addressing Concerns about Revenue: Moore counters concerns about potential revenue loss by explaining the “step-up in cost basis” loophole. Currently, if a homeowner dies before selling, their heirs inherit the property with a reset cost basis, avoiding capital gains taxes altogether. Eliminating this loophole and encouraging sales now would generate more revenue than the current system. He references a piece he co-authored in the Wall Street Journal detailing this.
• The Existing Subsidy: Brian notes the existing $500,000 capital gains tax exclusion for homeowners is already a substantial subsidy, totaling around half a trillion dollars annually.

Debate and Perspectives

Dagen McDowell initially disagrees with the proposal, arguing that eliminating the step-up in cost basis is a “huge tax dodge” for the wealthy. However, Brian Bonar, while initially skeptical, expresses increasing sympathy for Moore’s argument, recognizing the potential for increasing housing supply. He also raises concerns about the impact on the federal budget deficit and debt, referencing the Laffer Curve. Moore clarifies that the proposal wouldn’t lose revenue, but rather shift the timing of tax payments and potentially increase overall revenue by encouraging sales.

Notable Quotes

• Steve Moore: “Why is anyone surprised that this money is not going to the important it was intended?”
• Steve Moore: “If you want to keep wealthy people in the state, you want to keep them paying taxes in the state don't chase them out with things like the idiot mansion taxes.”
• Steve Moore: “If the inflation rate is up by 50%, and value of home gone up by 50, you have not made a gain, Brian, why are we taxing it?”
• Dagen McDowell: “It garbage. I want my gains on stocks and gold…”

Synthesis/Conclusion

The discussion highlights the unintended consequences of wealth-based taxation, exemplified by the failure of the Los Angeles mansion tax. The conversation pivots to a potentially innovative solution to the housing shortage – indexing capital gains for inflation – which aims to increase housing supply by incentivizing sales and addressing the unfairness of taxing inflationary gains. While debate exists regarding the fiscal implications, the proposal presents a compelling alternative to current policies and warrants further consideration. The core takeaway is that well-intentioned policies can have detrimental effects, and solutions require a nuanced understanding of economic incentives and market dynamics.