Speculation with credit would decrease.
During the high appreciation/inflation cycle, with the 2% Policy enacted, less people would not feel as if they needed to spend their money, or invest their money to protect it against high inflation, which increases demand unnecessarily, which increases the appreciation/inflation rate excessively.
The long term capital gains tax rate would be neutralized, during the high appreciation/inflation cycle, because the return on investment would be the same as on high appreciation/inflation derived profits, when interest income is being taxed at the same tax rate as long term capital gains.
The almost 50% differential between the tax on long term capital gains tax, and savings and money (debt) investment would be automatically eliminated until the high appreciation/inflation rate was reduced to 1 to 2 percent. Also during the high appreciation/inflation cycle the interest paid on loans would not be 100% tax deductible, which will reduce the stimuli in the tax code for people to increase their debt for unproductive investments, and speculation reasons.
If interest rates are not raised excessively to control inflation and inflation psychology, people living on interest income will not have an income increase, therefore they will not increase demand in the economy when less demand is needed to balance the economy. The cost of government programs that are index to inflation will not increase as much when inflation and inflation psychology is correctly controlled with the 2% Policy.
The lower long term capital gains tax rate would still be available, and meaningful to those people who want to make, or sell productive investments.
We have had a couple of periods in our history where the long term capital gains tax rate was the same as the tax rate on interest income, and other forms of income. From 1913 to 1921 and 1988 to 1990 the tax rates for both forms of income were the same. When we lowered the long term capital gains tax rate lower than other forms of income, economic activity increased, reducing the length and depth of the recession, but if it was left at the lower rate for too long it contributed to excessive debt (money) creation, speculation, and high appreciation/inflation rates in the private sector. Long term capital gains taxes were lowered in the recession of 1921 which helped end the recession. The lower long term capital gains tax rate was lowered to 12.5 % in 1922 from 73% in 1921. The tax on interest and earned income remained at 73%. The lower tax rate for long term capital gains was left in force for too long, from 1922 to 1931. Also the top income tax rates on earned income, and other types of income was lowered each year until 1931 to 25%, which left more money in the hands of speculators, increasing speculation, ending in the financial crisis of 1929, and the Great Depression.
The surge in primary home prices from 2000 to 2007 has a distinct correlation with the stock market price surge from 1922 to 1928, and the rapid price decline in 1929.
Some of similarities between tax policies before the financial crisis of 1929 and the financial crisis of 2008 are:
The financial sector was regulated very little by the government in the 1920s. In 1999 Congress and President Clinton eliminated some of the regulations the federal government had enacted in the 1930s, during the Great Depression. In 1920 our economy was in recession. To stimulate the economy, Congress lowered the long term capital gains tax rate (LTCGTR) from 73% to 12.5%. Interest income was taxed at 58%. By 1929 the tax rate on interest income was lowered to 24%. In 1999 Congress, to stimulate the primary home market, eliminated long term capital gains taxes on up to $500,000.00 on the sale of a primary home. In 2000 the LTCGTR was reduced from 29% to 21%. interest income was taxed at 43%. In 2003 the tax on interest income was lowered to 35%, and the LTCGTR was lowered to 15%. The economy was in recession in 2000. The Fed lowered interest rates. The 0% tax rate for home owners, and the 15% tax rate for LTCG made the selling, and buying of primary homes more profitable than holding debt as an investment. Leaving the differential in the tax rates for so long, with a deregulated financial sector, is what triggered the creation of the primary home price bubble from 2000 to 2007. In 2008 when nobody was willing to hold the over-leveraged mortgage debt as an investment, in other words, the debt was not able to be refinanced or roiled over, it caused the rapid decrease in the prices of primary homes. The same process occurred with the over leveraged margin debt of the stock market of the 1920s.
The financial sector is involved in the creation of economic bubbles by doing what it was created to do, make loans. The problem is it doesn't know when to slow down making loans. It feels it is providing a service, that allows the economy to grow. If the collateral prices are increasing it can make larger and larger loans, on existing assets, which increases it profits. The financial sector feels the loan is secure, because primary home prices, in the past, had increased nationally over a long period of time.
There have been times in our history, that there have been major price drops, and price increases in home prices in individual States, and geographical areas. What was different between 2000 and 2007 was that Congress had enacted tax policy that affected the taxation of the profit from the sale of primary homes nationally. Because of global money markets, banks, Fannie Mae and Freddie Mac, and Wall St. were selling the Mortgage Backed Securities (MBS), and our other debts all over the world. The low reported inflation rates, 2000 to 2007, that was being reported by the government, even though primary home prices were rising 30% annually in some markets, gave the Fed no reason to limit private sector debt. The AAA rating on the MBSs satisfied bank regulators for reserve requirements. With willing borrowers, and willing MBS investors primary home prices began to rise dramatically.
The Fed, and the Federal Government managed to prevent another Great Depression with fiscal, and monetary policies. These policies have worked some what, but asset, primary home prices, and the debt bubble are being inflated again.
When appreciation rates are higher than 1 or 2 percent the "Animal Spirits," John Maynard Keynes, the British economist referred to in his writings, are released, and the herd begins to gather, until an investor stampede is created to cash in on the easy paper profits to be had with the lower tax on long term capital gains. The herd bids up the prices of assets, and real estate until prices are unsustainable, and then the bubble goes boom, and prices collapse.
Fraudsters will tell you, the easiest, and fastest way to motivate people to act, or to defraud them is to offer something for free, or include them in the idea they will reap a reward without working for it. The person, or persons that benefit the most are the fraudsters. They are in control of the whole scram. In regards to the primary housing bubble Wall St. and the Bank directors are the people that walked away with billions of dollars of bonuses, and stock options at the expense of the shareholders, and tax payers. It was the financial sector that lobbied Congress and the Presidents to deregulate the financial sector.
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