e-commentary

When the technology bubble burst in March, 2000:

     1.     Individual investors who had invested post-tax or pre-tax (SEP; IRA; 401(k), etc.) funds often were left with marginal or worthless investments;
     2.     The invested funds were transferred to those individuals, usually Americans, who were clever or tenacious enough to sponsor an ipo (“initial public offering” of stock) and offer their “blue sky” ideas to the public;
     3.     They spent some of the money on yachts, polo saddles and large vacation homes and likely on other productive investments that spurred economic growth;
     4.     A few of the ideas endured, gained traction and contribute to growth and productivity today;
     5.     The taxes on the economic expansion resulted in more bountiful federal and state treasuries for a time;
     6.     The investors who lost money soldiered on and consciously or unknowingly delayed some purchases and/or other investments and deferred their retirements by a few years; and 
     7.     Life went on.

Direct tax impact:  The federal and state governments taxed the earnings each year and added substantially to their coffers.  The decline after March, 2000 negatively impacted federal and state revenue.  The local governments typically do not tax earnings; a few may have benefited from revenue sharing provided by the state.  Some taxpayers are able to take capital losses of up to $3000 a year on their federal returns which impacts somewhat on federal tax revenue.

As the real estate bubble deflates and bursts today:

     1.     The last domestic American industry (the real estate industrial complex) which was jump-started by the Fed (Federal Reserve) in 2001 ran its course by 2006 [See the e-ssay dated April 25, 2005];
     2.     Many houseoccupiers are saddled with investments they are not be able to afford particularly those who purchased at the peak with interest-only or adjustable rate mortgages (ARMs) and those who used the houses as an ATM (automatic teller machine) to finance other purchases [See the e-ssay dated February 7, 2005];
     3.     The size of the average house may be too large for the typical family, unless the house is occupied by two or three generations of a family [See the e-ssay dated April 24, 2006];
     4.     The house likely is not as energy-efficient as economically possible and desirable which is impacting and will impact the economy/environment for decades [See the e-ssays dated May 8 and June 19, 2006];
     5.     The structures are in the nature of durable consumer goods not productive investments that provide jobs and growth; 
     6.     The financiers, both domestic and foreign, likely will confront many foreclosures and suffer substantial uninsured losses;
     7.     The resulting dislocations and forced moves will weaken families and undermine community ties and involvement (PTAs, Little Leagues, etc.);
     8.     The Bankruptcy Code is now a more expensive and inaccessible safety valve [See the e-ssays dated March 21, 2005 and October 16, 2006];
     9.     Consumer spending remains the double-edged sword because it drives current economic growth but also increases personal debt owed to foreign nations [See the e-ssay dated January 17, 2005];   
     10.     The taxes on the appreciation in the value of real property filled local and some state treasuries while negatively impacting federal tax revenue slightly; 
     11.     The federal deficit and debt are growing exponentially while the unfavorable trade deficit continues to expand;
     12.     There is no other major domestic industry to stimulate; and 
     13.     Life will go on, because it goes on; however, it will go on very differently.

Direct tax impact:  The federal government does not tax real property, but it does allow homeowners to write-off local and state property taxes which may cost the federal government as much as 20 billion dollars a year.  State governments typically do not tax real property.  Local governments typically tax real property and received a tremendous influx of funds from the inventory of more expensive real property within their jurisdictions.  However, as the value of the houses declines, the local tax revenue will decline.  

The “Marketplace” radio program produced by American Public Media and available on National Public Radio presented a program “Local budgets rise and fall with housing” on November 29.  The program notes that the public desires roads without pot holes and safe streets without additional tax increases.  “This dilemma is motivating some like [Scott] Peterson [with the National Association of State Budget Officers] to look at how governments are funded: cities and counties mostly count on property taxes.  States, on the other hand, tend to rely on sales and income taxes.  And it was just a couple years ago that states battled horrible budget crises as those revenues plummeted after 9/11.  Peterson believes it shouldn’t be boom for one and bust for another.  So he’s taking a tax proposal to Indiana’s state legislature that would allow local governments to also charge sales or income taxes if they cut back on property taxes.  The state, in turn, would get a share of cities’ property taxes.  These are big new ideas.” 

Bumper stickers of the week:
 
If it can’t go on forever, it won’t.

If it sounds too good to be true, it is.

This entry was posted on December 4, 2006 at 12:58 pm and is filed under Economics, Housing, Taxation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.