Monday, August 13, 2007

Since I previously brought up the FairTax...

Since I brought it up, I figured I should post up how I believe real estate would be handled.

The tax is only on new items and services. So, obviously new homes would be taxed. The tax would be included in the sale price when the home is sold the first time. Under the FairTax, the rate is 23% (inclusive), so that means if the taxed price is $300,000, the house is $231,000 and the tax is $69,000. Opponents of the tax like to paint this as actually being a 30% tax, and $69k/$231k is 29.9% so they aren't being totally dishonest... totally. What they are failing to mention is that they current income tax (which the FairTax would be replacing) is also figured on an inclusive basis. When we make $100,000 and pay a tax of $31,000, we are paying 31% inclusive, or we are paying 45% on an exclusive basis. This corresponds to the 23%and 30% quoted for the FairTax.

Back to the subject...

So, the $231,000 brand new home has $69,000 in tax attached to it. Sounds bad so far, right? But, as the house is built, there are no taxes being charged on the incomes of the builder or his sub contractors. There are no taxes being charged on any of the companies that supply products. Also, the buyer is getting their ENTIRE paycheck. If they make $50,000/year, they actually get paid $50,000/year.

Ok, that sounds a little better, but it looks like all of the companies are cleaning up... no taxes, so they make more money. Well, what happens when one builder lowers his prices because his costs go down? And, since the builders know how much their costs have gone down, do you think they will expect their subs to drop their prices too? And what about their suppliers? We all know that when one commodity producer lowers prices, ALL have to lower prices. When the gas station across the street drops their price, all of his competitors do too.

Used homes (we like to call them existing homes) would be unaffected by the tax. If prices go up for new homes (because of the included tax), the value on existing homes will also go up. Back to our gas stations... we know that they all raise prices within minutes of each other. But, as a side effect, conservation and recycling will be positively affected. Although, building supplies for retail (DIY) would be taxed.

But, how will it affect real estate agents...

Well, we won't need an accountant to figure out our taxes. The money we spend for business would be without the tax. The money we spend for personal things would be taxed. If I buy a new laptop for my business, I don't have to pay the tax (or I can get it refunded). If I later sell that laptop, I would have to collect the tax on that sale. Same for a new vehicle. We won't have to pay Federal Income Tax, Self Employment Tax, Medicare Tax, Social Security Tax, Inheritance Tax, etc. Get the idea? Our cost of doing business would go down. However, we would have to collect the sales tax (actually our brokers would). So, if we received a $10,000 gross commission, we would get $7,700, and $2,300 would be paid as tax. Personally, I can honestly say that I would absorb the cost of the tax. I wouldn't be paying income taxes and other taxes, and I wouldn't have to have an accountant for tax purposes (I would be using my accountant to figure out ways to make me money...). I can honestly say that I think I would net more money after taxes and tax compliance costs with the FairTax than under the current system.

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