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To: flatsville who wrote (108200)	6/12/2001 11:12:58 AM
From: GraceZ	Read Replies (1) \| Respond to of 436258

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 You are helping to illustrate my previous point which was that in a high tax environment capital winds up going into a money shuffle or tax shelters not productive assets. The passive loss tax shelters were set up and employed when marginal rates were high and inflation was high. '86 tax reform gave a considerable shove to people to unwind these types of shelters, but it also had a devastating effect on the inner cities which were full of residential investment real estate. Baltimore real estate is just now starting to recover 15 years later. What wound up happening was the properties could no longer act as a decent passive loss for individuals with lots of active income (also sheltering active income became less important with lower marginal rates) so the houses were dumped on the market. Some were simply dumped on the city. Five years ago the city of Baltimore was looking at 40,000 houses that were empty, tax delinquent and needed to be destroyed. Previous to those tax changes the city was in a Rennaisance of sorts with lots of people buying and renovating older houses. After '86 the residential investment housing was largely bought up by a couple of large concerns that basically only fixed the houses up enough to get them to pass section 8 standards or rented out "as is" for cheap and allowed to deteriorate. Meanwhile the lists of people wanting to get into section 8 housing anywhere but in the city grew longer and the list of those people wanting subsidized housing grew longer as high rise projects were destroyed. All the while a person like me could buy a house for 2k cash if I didn't mind the fact that no insurance company would give me fire insurance for it. The real estate tax changes in '86 had a far worse effect on the poor in my city then they did on the rich who simply moved their money to other assets. The poor lost their homes and neighborhoods. This is further proves my point that in an effort to sock it to the rich, Congress winds up socking it to the poor. Although the situation for this to happen was really set up years early with the high tax rates and passive loss rules in combination with high inflation which made real estate an attractive investment. The '86 changes simply pricked that bubble. When you have high marginal rates it behooves those with high incomes to put their money into assets that either produce a tax loss or ones that don't produce active income. Real estate produces capital appreciation without attendant taxable income. So does holding stock long term. When marginal rates are lower it makes active income producing assets more attractive. High marginal rates encourage shenanigans to avoid taxes because the return from tax savings is higher than the after tax income in income producing vehicles, low marginal rates encourage investment in productive assets because the after tax return is return is higher than in tax shelters. Money moves to where it will get the best return. I don't know why the members of Congress have such a difficult time understanding this concept. Maybe it's that it's not an idea that gets people elected or it isn't easily fit into a sound bite.