Consumption Taxes and Housing
The treatment of consumption taxes on new homes is well known, whether the tax is a contemplated Value Added Tax (VAT) or the Fair Tax. In either case, taxes will be either included in the price and disclosed at settlement or separately charged over and above the price – although the price would be lower for not including taxes during the production stages. Business receipts taxes and residual payroll taxes will not be disclosed, but will still be paid, just as they are now. Indeed, payroll taxes for social insurance and the income taxes of everyone involved in building, selling and financing the house are implicit in both the price of the house and the interest rate charged to finance it. None of this will change the price of the house, although adding consumption taxes to replace some or all of income and payroll taxes will make these taxes more visible.
What is not often spoken of is the extent to which the Fair Tax or the VAT will be collected on the sale of used property. While these taxes won’t be paid explicitly by the buyer, no one should be surprised to see them on the seller’s side of the HUD-1 form.
The first place they will show up (whether VAT or Fair Tax) is in the realtor commissions. Currently, any taxes accruing to these transactions are hidden in the income tax paid by the agents and their staffs. If a VAT is enacted, any high income surtax retained will remain hidden, but some percentage of what was once hidden will show up as VAT. In a Fair Tax, the entire tax will be explicit, but the commission rate will likely be lower.
When a home is sold, there are often renovation costs that are due at settlement. Again, VAT or Fair Taxes will be due on these services, although again they will be paid by the seller in the same way real estate commissions are.
Home Owner Association or Condo Association Fees will also be subject to VAT or the Fair Tax. While in the latter case the fee will be lower because income taxes will no longer be paid for association staff or for utility company employees or contractors, all of these services will be subject to the Fair Tax. Utilities will have to offer two rates – one to associations, which are tax free and one to individual home owners, for whom the tax will have to be collected. When a used home is sold, usually condo fees are due for the remainder of the month by the buyer and often there are past due fees to be paid at settlement by the seller. For each of these, VAT or Fair Tax must be listed.
However interest is taxed under Fair Taxes or a VAT, points will be taxed in the same way. Indeed, if taxation is made explicit rather than implicit for finance charges and other bank services, such taxes will appear on whatever disclosure in necessary in signing the mortgage note(s) and any VAT or Fair Tax paid by the buyer will be added to the amount borrowed, so it will be taxed at least twice.
One last area where tax is due is for capital appreciation. The capital gains exclusion for home sales would no longer apply without the income tax and the tax losses for non-excluded gains no longer taxed must be either included in the Fair Tax rate overall or gains must be subject to tax upon sale. While this won’t be paid by the buyer explicitly, the need to pay such a tax will undoubtedly be considered in establishing the purchase price – especially if the seller is using the proceeds to “move up” to a bigger house. Even though the seller pays the tax explicitly, that tax increases the price of the home – so the buyer pays it implicitly – and if the buyer is financing the purchase with a mortgage interest will be paid on the initial implicit tax payment and tax will be paid on that interest as well.
Is this an increase in taxation? As I stated at the outset, banks, realtors, renovators and HOAs all have staff which pay income taxes. Cities do too, so even the property taxes paid by to escrow accounts includes some kind of implicit tax. Enacting a VAT or Fair Tax will simply make what was hidden explicit. In the end, if the same level of government services are demanded, the amount of tax actually paid will not change much at all.
What is not often spoken of is the extent to which the Fair Tax or the VAT will be collected on the sale of used property. While these taxes won’t be paid explicitly by the buyer, no one should be surprised to see them on the seller’s side of the HUD-1 form.
The first place they will show up (whether VAT or Fair Tax) is in the realtor commissions. Currently, any taxes accruing to these transactions are hidden in the income tax paid by the agents and their staffs. If a VAT is enacted, any high income surtax retained will remain hidden, but some percentage of what was once hidden will show up as VAT. In a Fair Tax, the entire tax will be explicit, but the commission rate will likely be lower.
When a home is sold, there are often renovation costs that are due at settlement. Again, VAT or Fair Taxes will be due on these services, although again they will be paid by the seller in the same way real estate commissions are.
Home Owner Association or Condo Association Fees will also be subject to VAT or the Fair Tax. While in the latter case the fee will be lower because income taxes will no longer be paid for association staff or for utility company employees or contractors, all of these services will be subject to the Fair Tax. Utilities will have to offer two rates – one to associations, which are tax free and one to individual home owners, for whom the tax will have to be collected. When a used home is sold, usually condo fees are due for the remainder of the month by the buyer and often there are past due fees to be paid at settlement by the seller. For each of these, VAT or Fair Tax must be listed.
However interest is taxed under Fair Taxes or a VAT, points will be taxed in the same way. Indeed, if taxation is made explicit rather than implicit for finance charges and other bank services, such taxes will appear on whatever disclosure in necessary in signing the mortgage note(s) and any VAT or Fair Tax paid by the buyer will be added to the amount borrowed, so it will be taxed at least twice.
One last area where tax is due is for capital appreciation. The capital gains exclusion for home sales would no longer apply without the income tax and the tax losses for non-excluded gains no longer taxed must be either included in the Fair Tax rate overall or gains must be subject to tax upon sale. While this won’t be paid by the buyer explicitly, the need to pay such a tax will undoubtedly be considered in establishing the purchase price – especially if the seller is using the proceeds to “move up” to a bigger house. Even though the seller pays the tax explicitly, that tax increases the price of the home – so the buyer pays it implicitly – and if the buyer is financing the purchase with a mortgage interest will be paid on the initial implicit tax payment and tax will be paid on that interest as well.
Is this an increase in taxation? As I stated at the outset, banks, realtors, renovators and HOAs all have staff which pay income taxes. Cities do too, so even the property taxes paid by to escrow accounts includes some kind of implicit tax. Enacting a VAT or Fair Tax will simply make what was hidden explicit. In the end, if the same level of government services are demanded, the amount of tax actually paid will not change much at all.
posted by Michael Bindner at 12:56 PM
5 Comments:
If you think Fairtax would "make the hidden explicit" -- then it's clear you don't have a clue.
Ironically, Fairtax hides the most astonishing level of taxation - an entire "second tier" of taxation.
Fairtax spokesmen have now admitted what was long alledged, about this hidden tax. In fact, Fairtax spokesmen, in a laughable "defense" of Fairtax, actually quote the fine print about this hidden tax.
Go learn the real deal, and see if you got what it takes to admit you were fooled by nonsense.
To call yourself the "Cente for Fiscal Equality" is really amusing.
http://fairtaxfineprint.blogspot.com/
The hidden taxes I was referring to are income taxes paid to employees, which are embedded in the sales price. The Fair Tax has too much potential for tax dodge to ever be enacted.
Thanks for the reference, however. I have not seen it before.
I am not in favor of Fair Tax, by the way, as my other posts on the topic show.
I knew about the federal angle, but not the local one. They seem oblivious to the possiblity that their perfect little plan will never be enacted - but that any momentum they create will lead to a VAT, a VAT-like business receipts tax and a residual income tax on the wealthy. Huckabee says he likes Social Security privatization, but it is very difficult to do this in a Fair Tax environment. It is much easier to do it if you keep the tax - see my libertarian tax plan posting from last week.
As I stated previously, Neil Boortz does not understand the rules about taxing governmental operations in a consumption tax environment. You tax them when the government sells, not when it buys. Revenue neutrality is not enough - expenditure neutrality is required - however, your research shows that it is the intent of the Fair Tax organization to force across the board spending decreases in government spending and hiring by 30%. As I said in 2008, that is treason in wartime.
The question of taxing government is an intersting one.
The VAT literature on taxing things the government sells is quite developed.
I do not believe in single tax solutions, since they make rates ripe for evasion. I suggest a VAT, a business receipts tax (which employers can offset with deductions), social security OASI payroll taxes and an income surtax on wage, non-wage and inherited income (but not assets).
The VAT literature is already well developed on taxing government and non-profit entities. Payroll taxes and income surtaxes would not change.
The business revenue tax would likely stay in place in the same way it would for non-profits, except that most of the federal BRT would eventually be taken over by the state to fund non-retirement payments to individuals and health care benefits (including mental health care - and mental health care in lieu of incarceration). Businesses would also be able to offset contributions to alternative providers, like religious charter schools and religously sponsored adult literacy programs replacing welfare.
If enough businesses go the privatization route, the Business Revenue Tax would collect little and there would be few state employees to tax anyway.
This is where my plan is better than the Fair Tax. In the FT, every thing must come through government, even though FT sponsors claim an anti-government bias. Flat taxers are the same way. They both wish to radicalize people against government spending but they kill all alternatives to it, making their approach logically inconsistent.
Of course, for agruments sake, lets say nothing is privatized. In this case, the federal government would give a PILT to states for business receipt taxes it would otherwise have paid as income taxes for employees, while local government would pay the tax. Of course, the two might actually cancel each other out, depending upon tax rates and the number of employees on each side. If the numbers are close, the fiscal impact of cross taxing would be minimal - but it certainly would not raise additional revenue to justify Fair Tax rates.
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