Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

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. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Saturday, October 08, 2005

Increase in Taxes Will Make Housing More Affordable?
How So?

From this morning's Today's Papers by

The Los Angeles Times leads locally, but off-leads the discussions that will begin on Tuesday among policymakers that might reduce several key tax benefits that are now granted to homeowners. Although the mortgage-interest deduction, which saved homeowners $61.5 billion last year, is not expected to go, other benefits could be eliminated, which would mean a significant increase in taxes for many, especially those in high-priced markets. The reduction of incentives might decrease demand and ultimately make housing more affordable.
What am I missing? It looks to me as if a reduction in incentives is a euphemism for a tax increase. And, yes, a tax increase would shift the demand curve facing suppliers to the left. But once the taxes are added to the new lower price that sellers would receive, the total price will be higher (except under the unrealistic assumption that housing supply curves are vertical).

This policy would surely have a dampening effect on housing construction. It would also reduce homeowners' wealth as resale prices fall. Watch out aggregate demand.
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