Business Perspectives

September 20, 2012

Debunking myths about health care law, speculation

It apparently is human nature to believe highly dubious assertions as long as they reinforce the way we frame public issues.

It apparently is human nature to believe highly dubious assertions as long as they reinforce the way we frame public issues.

At least that is the conclusion I have come to after 13 years of hearing from readers concerned about one thing or another. Two such assertions came across my desk just this week.

The first is that the 2010 Affordable Care Act introduces a new 3.8 percent tax on sales of homes and that this tax will be a particularly heavy burden on seniors moving from houses they have long occupied.

As with many commonly believed fables, this is based in a germ of reality. The new law does impose a 3.8 percent tax on capital gains from the sale of homes or any other assets. However, it does not apply to the entire sale price, only the capital gain, or increase in value between when purchased and when sold.

More important, it will apply to only an exceedingly small fraction of such sales because of two limitations seldom mentioned by the demagogues who are twisting the facts.

First, any couple with taxable income under $300,000 (or individual under $250,000) will be exempt from the tax. Senior citizens meeting this threshold are rare indeed.

Second, the first $500,000 of any capital gain is excluded from the tax. So a house would have to have appreciated by a half-million dollars for the seller to owe anything. Again, this is exceedingly rare for all but highest-income households.

Combine the two – sellers with other taxable incomes over $300,000 and gains in the asset of over $500,000 – and you eliminate more than 99 percent of all home sales.

Yes, for the highest-income fraction of households, however, this is a tax increase. High-income people tend to receive a much higher share of their ongoing annual income in the form of capital gains than do the rest of the population. This often occurs because some businesses can use various loopholes, including “carried interest” for hedge fund managers and some stock options for other high-level executives, to convert what really is a salary into lower-taxed capital gains for their most highly paid employees.

For those above the total taxable income threshold and whose capital gains income surpasses $500,0000 a year, this new tax will add to their taxes due.

A second preposterous assertion was sent by a reader of an opinion piece in another newspaper that asserted that speculators, such as large investment banks, earn $30 to $40 on every barrel of oil used in our country. Since Brent crude oil has been running in the $100 range, this would mean that 40 percent of our nation’s spending on petroleum is getting siphoned off through financial speculation.

While it’s an absurd notion to economists, it’s apparently believed by a significant fraction of the population.

As with the tax on home sales, this starts with a kernel of fact. Speculation can affect the price of crude or refined petroleum, especially at the extremes of price trends. In volatile situations like 2008, when gas surpassed $4 per gallon and spot prices for crude neared $150 before collapsing in the fall, letting Barack Obama get inaugurated with gas at $1.87, speculation undoubtedly added to the highs hit in the summer and the lows late in the year.

Yes, some speculators did make money that year, just as some do every year. Others lost money. Much research shows that, over the long run, speculation in any commodity from corn or wheat to oil allows more efficient use of resources and there is little, if any, net increase in cost to users.

Speculation, like making loans or writing insurance, can be a profitable business, but the profits are constrained by competition, and occasional windfall gains by some players come largely at the expense of losing speculators.

How can this be, if speculation can, in some circumstances, move market prices? The answer is that much of the benefit of any increase, even if speculation-driven, accrues to the existing traditional owners of the product in question.

Right now we are seeing dramatic increases in corn prices, driven in part by real news about drought in the Midwest, but probably accentuated by financial speculators hopping aboard a trend. Some speculators buying now will succeed in selling higher down the road, although some may get caught in a losing position and lose. But even real net gains by futures speculators as a group will be small compared to those garnered by farmers and grain handlers, who own real, physical corn in their bins or fields right now.

Even the most theoretical economists would shake their heads at either of these popular myths. If a new 3.8 percent tax really had been applied to all home sales, that would have been the central issue of the health financing legislation, not the mandate or state exchanges. If one really could earn 40 percent of the value of each barrel via oil speculation, everybody would want to get into the act.

But the reality, as usual, is much less dramatic.

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