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When members of the real estate industry
first hear of the specter of a national sales tax plan to replace the
current income tax system, their initial reaction is often mixed. On one
hand, they are excited about the prospects of no income tax on sales
commissions. But they also wonder about the consequences of the home
mortgage interest deduction (MID), the taxation of tax real estate, and the
impact on real estate prices and sales. Fortunately, many economists and
industry leaders believe that the sales tax plan is a win-win for members of
the industry, actually making homeownership more affordable, stimulating the
sale of more homes, and accelerating home buying decisions. A national sales tax -- like the FairTax
plan promoted by the Americans for Fair Taxation (AFT)-- would eliminate
every Federal income based tax. No
more personal income taxes. No
corporate taxes (now buried in the prices of all the goods and services we
buy). No payroll and
self-employment taxes. No death
taxes. No capital gain taxes.
Business-to-business transactions would be exempted.
No tax on saving, investing or earning.
Each of us could keep our entire paychecks.
In fact, since the tax it is only collected by retailers (who are
already collect sales tax in 46 states), it would exempt 115 million
Americans from ever filing a return or dealing with tax authorities.
Complexity would vanish and with it the more than $250 billion we
waste on compliance every year. But how would such a plan be so
beneficial to an industry that has preserved special advantages already?
There are essentially four reasons.
Reason 1: Individuals could save for down payment faster. Today, despite the lowest savings rate
since the Great Depression, savings are further discouraged by multiple
taxes. Consider most home buyers have only 70 to 50 percent of what they
earn even available to save in the first place, that the interest from those
savings is taxed, and that when the underlying asset is sold, the capital
gains (which is nothing more than the capitalized income stream) is taxed
again. Under a national sales tax, wage earners
would keep every dollar they earn and their savings increase tax-free and
could save for a home purchase nearly twice as fast as current law.
This not only ensures more people can purchase real estate, but they
can buy it sooner. Reason 2: Interest rates will fall.
The prosperity of the real estate
industry over the last seven years has had much to do with low interest
rates, which benefit homeowner and purchaser equally. Yet, interest rates,
as favorable as they are today, are inflated by taxes.
Consider this: for each year of most of this century municipal bonds
have averaged an interest rate of about 200 basis points or so less than
for-profit industrial bonds. Why the big difference?
The immutable law of economics.
For-profit bondholders must charge more to exact the same after-tax
rate of return for their dollar. Similarly, when interest is no longer
taxed to banks and mortgage holders, the cost to lend capital will decline
and these savings will be passed along in lower interest rates to home
buyers. Reason 3: The FairTax would create
something akin to a 'supercharged mortgage interest deduction’.
As glorious as some feel the present MID
is, it is only half a loaf. Its
sole purpose is to allow interest at the artificially high rates to be paid
with "after-income tax" dollars.
It does not allow a deduction against payroll taxes or
self-employment taxes, which for most first time home buyers are the
greatest taxes they pay. The FairTax would allow interest
payments to be made with pre-income and pre-payroll tax dollars since
interest is simply not taxed. This
is the same as allowing the MID to apply to payroll taxes-something that
will never happen under current law. The final reason: The amount one must earn to pay principal would decrease. Remember home buyers get no deduction
for principal payments today. If
a home buyer is in the 28 percent tax bracket (makes about $25,000 in
taxable income), he must earn $1,760 to pay for every $1,000 principal
payment (after payroll taxes). Under
the FairTax, the rate is 23 percent. And
better yet, that only applies to new homes.
Used homes, since they are deemed to have already been taxed by the
taxation of the timber companies, the material suppliers and the builder,
are not taxed again. Next time you hear talk of the FairTax, think about the consequences of such a plan on yourself, your industry, and your country. A sales tax like the FairTax is quite possibly the best tax plan for you, for real estate, and for the US. |
