>>>Needless to say, some will invest it in passive investments and you can't get much more passive than gold (we agree on this) but a good portion of that money will wind up in stocks, bonds or in a company that they actively run.<<<
So you say, but that was not necessarily the case pre-TRA 1986. Much more of it landed in passive investments than you'd imagine. Dept. of the Treasury and therefore Congress new this.
I finally found an analysis of TRA 86 and its effects on the real estate industry. This might help illustrate how other tax treatments, other than a rate reduction for the rich, generate economic activity.
Seems I did recall correctly that the depreciation schedules for business/residential real property had lengthened. Also the Act severly limited passive activity loss limitations and established a less favorable capital gains tax. The net affect was to make real estate investment less attractive. Congress/Reagan? reasoned was "the rich" were pouring lots of money, way too much money, into real estate in order to get the passive losses on operations (primarily due to fast depreciation schedule) and hopefully make a capital gain on the back end at sale and not enough money into activities that would spur real economic growth. The trade off was generally lower rates for the rich in exchange for a different kind of investment on their part...hopefully investments that would produce dividends and interest (now taxed at lower rates) than investments which produced paper losses for the holder and no real economic activity.
nysscpa.org
Abstract- he Tax Reform Act of 1986 has contributed to the decline of the real estate industry. The changes that have contributed to the decline of the industry include the elimination of the capital gains tax differential, the increase in the period for writing off taxes for depreciable real property, and the limitation of the deductions of passive investment losses. These changes have reduced the market value of real property, created an incentive for divesting real property, increased the difficulty of divesting real estate, and reduced the attractiveness of investing in new housing and construction.
(The author fails to note that the historic rehab credit for business/residential rental property was scaled back which also made this kind of passive real estate investment less attractive. These credits were quite juicy and passed directly to the partners.)
and
At the time TRA 86 was being debated, some argued, as a justification for the change, that the pre-1986 tax treatment of real estate provided a tax preference for investment in real property. Because of this, it was argued, the tax law was causing inefficient over-investment in real estate at the expense of more productive investment in other kinds of capital. The change in the law was seen, then, as a move in the tax code to a more efficient treatment of real estate investment.
Whether or not the 1986 changes to real estate tax preference items was a smart idea remains debatable. I'm simply reporting what happened and why. The why was that many of the rich were not seen as making smart decisions with their marginal dollars which were tied-up in activities which produced paper losses and no taxable income except on the back end at sale at favorable capital gains rates. The what happened was that Congress/Reagan said we're changing the rules. Invest differently or suffer. |
