Is there a Correlation?

In a report issued Tuesday, the National Association of Realtors stated that July home sales in the U.S. have fallen over 25% to their lowest level in over ten years. Coincidentally, tax credits for new home buyers ended in July.

When the tax credits were in affect, home buyers benefited. Home builders benefited. Realtors benefited. Neighborhoods benefited. The economy benefited. Arguably, only the government did not benefit. I say arguably because it is not certain that government lost. They may have lost some tax revenue, but new homes and residents are not quite the burden many might think. Those new residents will have to buy things. The people who built and sold those homes made money doing so. They will pay taxes on the money they made. They will also buy things with the money they made. The people who sell things will make money. The government makes money when people buy and sell things: local government anyway.

Now that the tax credits have expired, national home sales have declined 27.2% since June and now stand at their lowest point since 1999. Mark Dozier, chief economist with the Real Estate Center, said matter of factly that the decline in sales "just means that the tax credit induced a higher than normal sales volume and we should expect sales to be lower without the credit." In other words, lower taxes boosted the market. Now that taxes are higher, the market has cooled.

Tax breaks and credits have served to stimulate a variety markets and activities across the U.S. Tax increases have retarded them. With the expiration of the tax credits, the government is hoping to recoup some of its losses. It is almost as if the government believes that money it surrendered in tax breaks belongs to them and was more like a loan than a gift: if allowing people to keep their own money can be construed as a gift. Gifts once given belong to those who receive them. Tax breaks are not gifts. They do not belong to the tax payers. The government expects to get its money back.

There is a correlation between lower taxes and economic activity. If the government wants to encourage a particular activity, it lowers taxes. When the government wants to discourage something, it raises taxes. This correlation, unfortunately, is often only recognized in proportion to its convenience.

It is true that lower taxes curtail the government's ability to do its job. There is a down side to that since some of what the government needs to do is important. Roads, and national defense for example are things best left to the government. But there is also an upside in increased economic activity. The trick is finding the balance. Key to finding that balance is determining just what it is that people want and expect from government and how much they are willing to pay. The best way to find that out is to ask them.

Left to its own, in a choice between a vibrant economy or big government, Washington will take big government every time.