The New Homeowner Tax Credit
The L.A. Times reports some of the problems with the new homeowner $8000 tax credit in this story. Besides fresh ground for tax cheats to exploit, this tax credit may not be worth getting.
In my introductory economics class, we just finished looking at how taxes get passed forward to buyers in higher prices or back to the sellers in reduced prices received. What we saw in class was that if the buyers faced few alternatives, while the sellers had many, most of the tax gets paid for by the buyer in the form of a higher price. If the sellers have few alternatives, but the buyers have many, the sellers pay most of the tax in terms of a lower received price, while the buyers pay only a little more than the original price.
Of course, if the government subsidizes buyers in a market instead of taxing them, the same thing happens, but in reverse. Subsidies are only negative taxes, so a subsidy to buyers in a market just raises the amount the buyers are willing to pay to the sellers. Consider the $8000 tax credit to home buyers. This tax credit merely raises the amount buyers will pay to sellers. And since the buyers have many alternatives while the sellers, often facing foreclosures, have few alternatives but to sell, have few alternatives but to sell, the price the buyers pay ends up rising almost by the amount of the tax credit. Few new homes are being built in response to the tax credits. So mostly, the tax credit for buyers boosts the prices received by those facing losing their homes in a foreclosure, where only the bank receives the money.
So those considering buying a home before the December 1st deadline because of the tax credit should probably think twice. Most of the tax credit will go to the sellers.
But even if some of it goes to the buyers, shouldn’t it be worth the buyer’s effort? The answer is maybe, but maybe not. One provision of the tax credit is that the buyer has to live in the home at least three years, or the buyer must repay half of the tax credit, or $4000. If the buyer faces the possibility of losing her home, facing repayment of $4000, while having to pay $7000 more for a house and getting an $8000 tax credit may not be that good of a deal.
-MC
November 30th, 2009 at 8:54 am
Offering new home-buyers a tax credit offers an incentive to buy to those who are underinformed about tax incidence in situations involving government imposed taxing. Because to one who does not know the significance of elasticity of supply and demand the offer sounds like a “deal” or free money on the surface of this provision, if considering buying a home now would seem like the time. The larger part of the population would like to be given enough information about a situation concerning them without any further effort of investigating on their part. And probably an almost equal share of the population is not aware that additional details are available. If it is looked at from an economic point of view, there will be a deadweight loss from the tax either way. Some may seem to benefit from this tax credit, however, the minute effect of this on the after tax price may be going unnoticed.
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