Getting public policy just right is never easy. But getting it less wrong than this should be. From Slate's Daniel Gross, writing of proposed legislation pending in the Senate:
The bill includes several items that are likely not to do much harm--boosting deductions for property taxes, tax-exempt bonds for local housing agencies, and modest tax credits for people who buy homes out of foreclosure. But it also includes a provision, detailed in this Associated Press story, that is perverse, absurd, and unwarranted. In short, I don't think it's a good idea.
Under the proposal, the AP reports, "companies would for two years be allowed to carry back losses incurred in 2007 and 2008 against profits accrued over the previous five years, instead of the usual two year timeframe." Under current rules, companies can effectively call up the Internal Revenue Service and declare a do-over, applying losses racked up in 2008 against income reported in 2007 and 2006, and then claim a retroactive tax refund. The utility of this benefit rises as the size of the loss increases. If, for example, you're forced drastically to write down the value of land you've acquired, the loss in 2008 could easily swamp the profits reaped in 2007, 2006, and several years before.
The technical term for this is a tax-loss carryback. But it should perhaps be known as a bubble-head tax break. Companies that vaulted into a hot sector and then used lots of leverage to increase their profits in said sector (the Internet, real estate) light up the charts during the boom years. But come the pop, their fortunes plummet rapidly down the same steep slope. And because accounting rules require companies to mark assets to market, erstwhile high-flyers frequently report massive losses.
...
Homebuilders argue that they need relief because their sector, which provides a great deal of domestic employment, is on the ropes, and they're finding it more difficult to raise capital. Which is as it should be. After bubbles pop, those who screwed up really badly fail and get taken over by creditors or opportunistic investors. Those who have sound underlying franchises but merely got a little carried away can survive if they take painful restructuring moves. This is what is known as market capitalism. For all the talk of a credit crunch, capital is still available—it's just not available on the easy terms managers had come to expect during the late Greenspan years. Citigroup, Merrill Lynch, and plenty of other firms tied to the mortgage/finance complex have taken steps to shore up their balance sheets and replenish lost capital. But investors, having been burned, demand more downside protection and better guaranteed returns. Thornburg Mortgage was forced to pay 18 percent interest for an emergency round of capital raising that allowed it to stave off bankruptcy. This is also what is known as market capitalism.
The proposal to give new tax breaks to homebuilders and banks is yet another example of the pernicious trend of privatizing profit and socializing losses, which is gnawing away at faith in the system. Dilute the shareholders, not the taxpayers.
Dilute the shareholders? You mean like this?
Sources
Daniel Gross, "A Tax Break for Bubble Heads," Slate, April 7, 2008
Jonathan Stempel, "WaMu gets $7 billion infusion, cuts jobs, sees big loss," Reuters, April 8, 2008