Clinton's Gains-Tax Break Pumped Up Housing Bubble

Eliminating levy on profit from home sales encouraged Americans to play the market
By Clay Dillow,  Newser Staff
Posted Dec 19, 2008 11:18 AM CST
A foreclosure sign stands on top of a sale sign outside an existing home for sale in the west Denver suburb of Lakewood, Sept. 28, 2008.    (AP Photo)
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(Newser) – A tax break introduced by President Clinton and made law in 1997 helped fuel the housing bubble that eventually led to the current economic crisis, the New York Times reports. The cut, which allowed owners to sell their homes without paying capital-gains taxes on profits up to $500,000, created an incentive to pump money into housing rather than other, taxed investment instruments.

“When you give that big an incentive for people to buy and sell homes, they are going to buy and sell homes,” one investor said. Economists say the break didn’t cause the bubble, but creating tax-free windfalls alongside low interest rates and lax lending standards cultivated an environment ripe for over-speculation—with one study finding the tax cut alone increased sales 17% from 1997-2007.