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More Calls for Additional Tax Preferences for Housing

2 min readBy: Gerald Prante

A week after Texas Republican Senator John Cornyn called for more tax preferences for housing, Connecticut Senator Joe Lieberman is calling for a $2,000 credit for first-time homebuyers. From ABC6.COM:

Senator Joe Lieberman says the middle class is getting squeezed out of the chance to buy homes.

Today, he proposed a two-thousand-dollar taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. credit for first-time home buyers, saying it could help put home ownership within closer reach of people struggling in the tough economy.

Lieberman made that proposal, plus another to help small businesses with health care costs, in an appearance today in Wolcott.

He emphasized the middle class, saying it’s the backbone of the economy. (Full Story)

Would such a policy really promote home ownership? As we have pointed out on this blog many times, much of the subsidy to housing is merely capitalized into the price of the home, leaving future buyers no better off on net.

Consider this story: Assume you had four houses and each was worth $500,000, but in House A there was $20,000 sitting on the kitchen table waiting for you if you bought it. What would happen to the price of House A relative to the other three? It would increase by $20,000, and the net price you would pay on each of the houses would equalize. You would be no better off by having that $20,000 in the kitchen table than before because the price of that home would just become $520,000. The same is true for when the government provides money to a homebuyer for making a purchase of a home.

But even if one wishes to ignore the capitalization reality and truly believes that subsidies should be made to homeowners, why should it be done in a complicated matter through the federal income tax code? Why not just have the Department of Housing and Urban Development (HUD) write a $2,000 check to first time homebuyers?

Unfortunately, lawmakers typically don’t like to frame the issue this way because they would rather be seen as “tax cutters” than “spending increasers.” In reality, however, they are merely looking to spend through the tax code.