Dumbest Act of Congress - Contestant #1 - 1997 Capital Gains - housing

In 1991 Republicans began introducing bills to make major changes in the Capital Gains tax.   They argued it would stimulate the economy.  In 1994 changes in the Capital Gains tax became part of their "contract with America".  In 1997, after years of battling they pushed the notion through Congress.


Before 1997 if you sold your house you could take all the proceeds and buy another house and not be subject to any Capital gains tax.  Then once in your life, after you were age 55, you could sell your house and buy a smaller, cheaper house and keep a specified amount of the extra money you made on the sale without paying any capital gains taxes.


The old scheme was economically brilliant.  It allowed flexibility to workers to change jobs, even if it meant moving across the country, so helped maintain a mobile work force.  And the one time exception after age 55 allowed people to use their homes as a nest egg, downsizing as they got older and pulling out a tax free nest egg for retirement.  


Congress threw out this law that had worked wonderfully for decades, and provided all sales of houses would be subject to Capital Gains taxes, but provided an exemption so a big part of the proceeds would always be tax free.  The door was opened to the speculators.     


House prices immediately started rising and for the next 9 years speculation on houses was rampant.  Numerous TV shows became very popular teaching people how to buy a house, fix it up a bit, then "flip" it for big profits.  House prices blew up to extraordinary levels.  Banks could make so much money trading, or packaging mortgages they lost touch with reality and rubber stamped purchases by people without the income or resources to pay for the house.  The bubble burst 10 years after the 1997 law and took down the rest of the economy with it.


Congress dumped a law that had served for decades to encourage stability, provide homeowners with the ability to be mobile, and have a nest egg when they retire and replaced it with a law that turned the housing market into a speculators casino.