The tax code changes of the 1990s, and the early 2000s not only brought more investors into the single family home market, families also realized they could earn a large amount of tax free money by selling their highly appreciated home. When the financial sector created the debt (money) for the buyer to purchase the home, the financial sector flooded the economy with new money by monetizing the equity in the homes. The home buyers also realized that in a couple of years, because of the high price appreciation rates of single family homes during 2000 to 2007, it was possible that they also could receive a large amount of tax free money. Because of this realization they were not too concerned about what price they were paying for the home. Considering interest, and property taxes were 100% tax deductible, and they would be using the "investment in the property "to live in the home" made the "investment" even better.
With higher collateral prices, the financial sector can create larger loans, creating more money (debt). As the high appreciation/inflation cycle progresses the middle class, and the working poor's, "Animal Spirits" are excited, and they then put it "all on the line" by increasing their debt beyond what they can afford. You guessed it! The banks, Wall St. the entire financial sector, and the real estate sector profits go up, while the working poor, and the middle class can't earn enough money, fast enough, to maintain their debt load, and their standard of living without both parents working, or using more credit. Many of the middle class will go further into debt if they can obtain a larger loan on their homes, as the selling price of their home increases. If the mortgage has a balloon payment, or an Adjustable Interest Rate Mortgage, the homeowner may not be able to make the balloon payment, or the higher mortgage payments, if interest rates rise, they could lose their home to foreclosure. The result is that the economy, and society are increasingly becoming more unstable.
The 2% Policy would help reduce wealth inequality
The 2% Policy tax change would help create more real wealth, and less paper profits. When the middle class and the working poor are able to stay employed during economic cycles, the middle class, and the working poor would be able to accumulate, and maintain their wealth. It would help close the wealth gap between the people at the top of the economic ladder, and everyone else in the economy, because the economy would maintain a closer balance. The middle class and the working poor would stay employed as the economy balanced supply and demand. The money that the middle class, and the working poor earned would maintain its value over a longer period of time after the 2% Policy was enacted. If there was a recession, caused by oversupply, the excesses would be used up quicker if more people remained employed earning a higher income than if they were drawing unemployment insurance. Only certain sectors of the economy would be affected by the over supply. Economies are local therefore tax policies should be applied locally. The entire national economy would not be affected as when interest rates are raised to slow down an over heated economy. State governments should adopt the 2% Policy to maintain demand, employment, productive investment, and production, rather the federal government.
The 2% Policy would help reduce the economic cycles that reduce the income and wealth of the middle class and the working poor, and help reduce the economic cycles that increase the wealth of the upper income people, as we are currently witnessing with the foreclosure crisis, and the massive investment by investors in single family homes. In some single family home markets we have seen the middle income people, and the working poor being out-bid by investors, and Wall St. hedge funds with all cash offers as they buy 40%, or more of the single family homes for sale.
We need to empower qualified families, and the working poor, with new mortgage terms, to purchase the single family homes, as I have written about in the article "Resolving Underwater Mortgages Without Inflating Asset And Primary Home Prices".
The single family home market should be made up of those people that want the home to live in. Single family home prices should reflect their purchasing power. Investors have many other multi-unit housing investments available to them. The single family home market should not include investors, and hedge funds. Encouraging investors to get into the single family home market during a recession, with tax incentives and other financial incentives, to inflate single family home prices, is shortsighted, and will lead to another sell off, and a possible financial crisis. This could happen when investors decide to sell, and families can't qualify for a mortgage to purchase the single family homes at their current inflated prices.
The tax deduction that investors currently have, that allows investors to deduct the cost of repairing a house should be given to homeowners. so neighborhoods do not deteriorate. Homeowners will hire contractors to do the work, thereby reducing unemployment and neighborhood blight. All tax incentives for investors, or Wall St. firms to invest in a single family home should be eliminated from the tax code. This tax code policy change would not affect investors that own existing single family homes. Only new purchases of a single family home by an investor would be affected by the tax policy change. If an investor does buy a single family home, they will quickly build multi-unit housing on the property, if zoning codes allow it, thereby increasing the supply of housing.
I would like to point out this fact. If families could not maintain the payments on the inflated home prices before the financial crisis of 2008 occurred, they won't be able to afford to purchase, and make the mortgage payments on homes with the same inflated prices. If interest rates rise it will make primary home less affordable. In the last 20 years personal income for millions of people have decreased, yet home prices have increased due to investor demand.
Think about it. If we can create an economy where people can stay employed, housed, and productive, they are able to provide for themselves. More taxes do not need to be collected, or tax rates do not have to increase to support a larger government "safety net."
Our country is the "Land of Opportunity". We must take this opportunity to change policies that have reduced opportunities for people to provide for themselves, and their families. The crowding out of families in the single family home market by investors must be corrected. Monetary policies and tax policies that help create high housing cost, unemployment, bankruptcies, foreclosures, and the closing of small businesses must be changed to increase opportunity in the economy of our great nation. I would suggest that to say it out loud, and to set a goal for our nation, we should add two words to the Pledge of Allegiance. The Pledge should reflect what America is committed to. The words that many of our Presidents, Governors, and Representatives repeatedly speak of. The words Responsibility and Opportunity should be included in the last sentence of the Pledge. The last sentence of the the Pledge should include, " WITH LIBERTY, JUSTICE, RESPONSIBILITY, and OPPORTUNITY FOR ALL."
With the 2% Policy in place, the people at the top of the economic ladder would have to make money the "old fashioned way", they would have to "earn it". More long term investments would be made to create products and services, at create good paying jobs and "real wealth" rather than "paper profits" and higher prices.
The 2% Policy is a better way to guide people's financial decisions, than the Fed's policy of changing interest rates. Instead of interest rates changing by excessive amounts, the 2% Policy would help maintain interest rates in a much narrower range. This would allow businesses, and consumers to make long term financial decisions.
Tax policy would automatically change, when needed, rather than interest rates changing after the damage has already been done. After the 2008 financial crisis occurred is when we found out that consumers, investor, businesses, banks, Wall St., and the entire financial sector had created too much private sector debt(money). That is too late, and is very damaging to people lives, and our economy.
Conclusion
It makes no sense to maintain policies that push an economy so hard that it blows up every high appreciation/inflation cycle, and then it has to go through a balancing process during a recession, creating untold misery. By automatically changing tax policy we can slow down the economy without creating a deep recession.
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