A $5,OOO Cat? - The NRST and Real Estate

NRSTA - Virginia Chapter ^ | N/A | Steve Hayes

[Principled]

So since $2.30 of the $10 is tax, that's how they get 23%...

But if the price BEFORE tax was $10, the price AFTER tax would be $13...meaning 3 of 13 was tax (ie 23%).

It is against the desires of our government that we understand tax inclusive rates IMO. Income taxes are figured tax inclusive.

WHen one thinks of sales tax, one thinks of adding that percent to the price of the good/service. Hence the fact that the nrst is a "sales tax" leads many to erroneously assume the rate is added onto the price.

The rate is whateevr rate is needed to make it so total out of pocket is 23% federal tax.

[kevkrom]

From a builder of new homes, the NRST sucks BIG TIME.

No it doesn't. First of all, the tax is only on the improvements to the property -- this price of the property itself is not subject to the NRST since it is deemed already taxed. Depending on the price of land and the type of house, this can lead to half or more of the selling price being untaxed.

Secondly, the NRST would provide better incentives to house ownership. Instead of just interest being paid with pre-tax dollars (subject to deduction limits like the AMT), the principal and interest are both paid with pre-tax dollars. Interest rates will drop by 25% or more (compare tax-free to taxable bonds to see this effect in action already). And you, the builder, will see your production prices will fall as the effects of removing the tax ripples through the entire chain of production.

[Remember_Salamis]

All of your materials would drop 20 -30% in price. You would then pass this on to the consumer. Americans For Fair TAxation (AFT), the brains behind the FairTax, specifically researched how it would address people like you, who at first glance would think they're being screwed by the FairTax. Well, here if their research:

Homebuilders and the FairTax(SM)


Homebuilders will Reduce Costs and Increase Profits
Like other firms, homebuilders will enjoy a zero corporate tax rate under the FairTax. Also, shareholders will not be taxed on dividends received from homebuilders or on capital gains from their investments. Partnerships, limited liability companies and sole proprietorships will also not be taxed on profits because of the repeal of the individual income tax.


Overall compliance costs of the current income tax system will be reduced. These costs, which are estimated conservatively to be $225 billion,[1] are partly borne by homebuilders (discussed below).


All purchases by homebuilders of building materials will be free of consumption tax. Business-to-business sales are not taxed under the FairTax. Moreover, since all producers of these materials will be operating free from income tax and with dramatically lower compliance costs, material (wood, sheet rock, nails, etc.) prices that now contain these costs will fall significantly. This will allow homebuilders to sell their products at lower prices while maintaining their current profit margins.


Research by Dr. Dale Jorgenson, Chairman of the Department of Economics at Harvard University and one of the country’s leading economists, shows that producer costs in the construction industry will decrease in the first year by as much as 25 percent. Economic output in the construction industry during the first year of implementation of the FairTax is expected to increase by more than 50 percent. The huge boom in this industry will be due largely to a significant rise in the demand for all investment goods. Dr. Jorgenson’s research shows that these increases will continue well into the next quarter century with the 25-year outlook still showing a 13 percent increase in output.[2]

As an immediate compliance savings, there will no longer be any need for homebuilders and other employers to maintain the distinction between employees and contract labor for tax purposes. This will also result in a substantial labor cost savings, because homebuilders and other employers will no longer need to collect payroll taxes. Payroll taxes (including the employer portion and FUTA) will be repealed. The repeal of this tax will also fuel the economy. Consumers will have more money in their pockets and, therefore, more money to spend, save or invest.


The Demand For New Homes Will Increase
Demand for new homes will increase, due to at least two factors. First, most economic projections predict a much healthier economy under a consumption tax. People are willing and able to purchase more and better homes in a healthy economy. Typical estimates are that the economy will be 10 to 14 percent larger than it would have been under the current income tax system within 10 years and consumption will grow
substantially.[3] Some studies show the potential gains to be much higher.[4] These studies typically do not account for the productivity gains that will be achieved due to lower compliance costs.


Second, discretionary income will increase. Consumers will see their paychecks increase by over $1.6 trillion because income and payroll taxes are eliminated (estimated for 2001). This increase in disposable income will help to generate both consumption and savings.

Interest Rates Will Drop
Under the FairTax, conservative estimates predict that mortgage interest rates will fall by 25 to 30 percent or about two points on a 30-year conventional mortgage.[5] For example, for a $150,000 thirty-year home mortgage at an interest rate of 8 percent the monthly mortgage payment would be $1,112.64. On that same mortgage at a 6 percent interest rate the monthly payment would be $907.64. The two-point decrease in interest rates in this instance would result in a $73,800 cost savings to the consumer over the life of the mortgage.


To illustrate the source of the reduction in interest rates, it is useful to examine the bond market. Current taxable interest rates include a tax premium. The cost of this premium can be determined by comparing the interest rates on taxable bonds to the interest rates on tax-exempt municipal bonds of comparable risk and term. The difference between the return on investment of a taxable bond and that of a tax-free bond of comparable risk is about 30 percent. Interest rates will decline due to the elimination of this tax premium because interest earnings will no longer be taxed.


With lower interest rates, more consumers will qualify for new home purchases and will refinance to obtain equity from older homes.

Homeownership Under the FairTax Will Be More Affordable
Under the current income tax system, a home must be purchased from after-income-tax and after-payroll-tax dollars. Under the FairTax, a home is purchased from income dollars that have not been taxed, since taxation occurs at the time of purchase. A consumer may choose to roll the consumption tax into a mortgage payment, just as state sales taxes on most purchases are today. The home mortgage interest deduction available under the current income tax system only has value when an income tax liability exists. Under the FairTax, there is no need to mitigate income tax liabilities, since none exist.

Homebuilders’ Compliance Costs Will Be Lower
Instead of having to comply with the complexities of the income tax and the payroll tax, there will be one consumption tax on all new goods and services. A firm will simply need to calculate, on a monthly basis, its total retail sales of new homes.


The homebuilder (as with other businesses who collect the FairTax) will receive an administration fee of one-quarter of one percent for complying with the consumption tax.


The firm’s accounting, tax, and personnel (human resources) departments will shrink dramatically.


There will be:

No more uniform inventory capitalization requirements
No more complex rules governing employee benefits and retirement plans
No more tax depreciation schedules
No more capital gains tax and depreciation recapture
No more tax rules governing mergers and acquisitions

---

[1] "Compliance Costs of Alternative Tax Systems II," Arthur P. Hall, Ph.D., Senior Economist, The Tax Foundation, Special Brief, House Ways & Means Committee Testimony, March 1996.

[2] "The Economic Impact of Taxing Consumption," Dale W. Jorgenson, Ph.D., Harvard University, Testimony before the Ways and Means Committee, March 27, 1996.

[3] Ibid. "The Economic Impact of Replacing Federal Income Taxes with a Sales Tax," Laurence J. Kotlikoff, April 15, 1993, Cato Institute Policy Analysis.

[4] "Looking Back to Move Forward: What Tax Policy Costs Americans and the Economy," Gary Robbins, Aldona Robbins, Policy Report No. 127, September 1994, Taxation Analysis, The Institute for Policy Innovation.

[5] "Effect of a Consumption Tax on the Rate of Interest," Dr. Martin Feldstein, Ph.D., Working Paper 5397, December 1995. See also, The Flat Tax, 2nd Edition 1995, Robert E. Hall and Alvin Rabushka, The Hoover Institution Press.

[Principled]

Unfortunately, my new houses loaded with a 30% tax...

If you stop there, you're showing signs of understanding.

AR, your houses are already loaded with 22% (tax inclusive) or 30% (tax exclusive) tax.

Eevrything you buy to build with (nails, screws, lumber, etc) has an inflated price.

Are you making progress? NRST would be great for new home sales. I've got a dozen yrs in the RE industry myself.

FAIR TAX FAQ.

[Remember_Salamis]

New home builders that build houses on expensive land will benefit more than homebuilders that build homes on sh*tty land because you don't pay taxes on the land. The actual "House" on an expensive piece of property is a lower percentage of the selling price than one built on cheap land.

In my example, it costs $50,000 to actually build the house, whatever piece of land it is on. One lot costs $200,000, while the other coasts $50,000. Therefore, on the price land, only 20% of the selling price would be taxable, whereas 50% of the selling price would be taxable on the cheaper land. Make sense?

[lewislynn]

Fred and Joan are paying the NRST on the principal over 30 years.

They're also paying a NRST on the mortgage interest...Interest is the fee you pay for buying/borrowing money.

Don't beleive me? Check out `CHAPTER 8--FINANCIAL INTERMEDIATION SERVICES...
`(3) IMPLICITLY CHARGED FEES FOR FINANCIAL INTERMEDIATION SERVICES-

`(ii) with respect to any underlying interest-bearing debt, the product of--

`(I) the excess (if any) of the rate paid on such debt over the basic interest rate (as defined in section 805); and

`(II) the amount of the debt.

[kevkrom]

They're also paying a NRST on the mortgage interest...Interest is the fee you pay for buying/borrowing money.

You know you are misinterpreting that section of the code, because this has been explained to you many times. What you are quoting is to cover cases where the interest rate includes additional service fees -- only those additional fees would be subject to the tax, not the entire interest rate.

For example, I've owned a mutual fund where there was an annual 0.75% management fee removed from the rate of return (or taken out of the principal in the cases of a loss or negligible gain -- but this particular fund returned about 14% a year at the time) -- that fee would be subject to tax, but not the rest of the interest earned (in this case) or paid.

[Principled]

lewislynn's MO is to misquote, cut-n-paste random things and post them as if they were real.

His sole purpose is to turn people away from finding out about the nrst. He has a vested interest in keeping the current income tax mess in place. He likes it. Ask him.

[lewislynn]

I build new homes, and I can say with 100% certainty, if they added 30% sales tax on to the cost of new homes, I would be out of business.

Wait a minute. You forgot that the exact science of competition would force you to lower your home prices 30% because of the repeal of your federal taxes...

I guess you didn't know, as they do, that you're paying 30% federal tax on the gross sale of your homes. < /sarcasm >

And if you're a contractor or any other profession perfoming a service you too can lower your prices 30%...never mind the fact that you'll eventually have to pay tax out of your reduced income when you choose to spend it...

< /sarcasm >

[Orange1998]

ditto...

[templar]

The NRST is definitely catching my eye these days, but I read different things regarding its effect on FICA. Why retain FICA?

It provides the money for the governments daily operations (at least till the baby boomer start retiring en masse), It is the justification for the numbering and tracking of all Americans, It allows the intrusion into the daily economic (and personal) life of all Americans. This is the basis for our way of life (covert control vs overt control), as it makes all the government controls look like they are voluntary for citizens and keeps them hidden. Doing away with FICA is unthinkable (to Republicans and Democrats) for these reasons.

[lewislynn]

Well, simplify it for me. Under the NRST, if I buy an item that is listed at $10, how much cash do I give the sales person?

It depends on what your state sales tax is. Their "NRST" is really a tax "of the gross payment"

Your $10.00 item with a 7% state tax would be $13.90.

$3.90 is 23% "of the gross payment".

[ancient_geezer]

A Taxreform bump for you all.

If you would like to be added to this ping list let me know.

John Linder in the House & Saxby Chambliss Senate, offer a comprehensive bill to kill all income and payroll taxes outright, and provide a IRS free replacement in the form of a pure consumption tax:

H.R.25, S.1493
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.

Refer: http://www.fairtax.org & http://www.salestax.org

[kevkrom]

It depends on what your state sales tax is. Their "NRST" is really a tax "of the gross payment"

Another classic lewislynn lie. The NRST does not tax taxes. The state and federal sales taxes would be calculated exclusive of each other. But never let facts get in the way of lewislynn's agenda...

[lewislynn]

As an immediate compliance savings, there will no longer be any need for homebuilders and other employers to maintain the distinction between employees and contract labor for tax purposes

WRONG!

`SEC. 903. WAGES TO BE REPORTED TO SOCIAL SECURITY ADMINISTRATION.

`(a) IN GENERAL- Employers shall submit such information to the Social Security Administration as is required by the Social Security Administration to calculate Social Security benefits under title II of the Social Security Act, including wages paid, in a form prescribed by the Secretary. A copy of the employer submission to the Social Security Administration relating to each employee shall be provided to each employee by the employer.

`(b) WAGES- For purposes of this section, the term `wages' means all cash remuneration for employment (including tips to an employee by third parties provided that the employer or employee maintains records documenting such tips) including self-employment income; except that such term shall not include--

`(1) any insurance benefits received (including death benefits);

`(2) pension or annuity benefits received;

`(3) tips received by an employee over $5,000 per year; and

`(4) benefits received under a government entitlement program (including Social Security benefits and unemployment compensation benefits).

`(c) SELF-EMPLOYMENT INCOME- For purposes of subsection (b), the term `self-employment income' means gross payments received for taxable property or services minus the sum of--

`(1) gross payments made for taxable property or services (without regard to whether tax was paid pursuant to section 101 on such taxable property or services), and

[Principled]

The nrst does not retain FICA. It eliminates all withholding.

[ancient_geezer]

From a builder of new homes, the NRST sucks BIG TIME.

Interesting, others in construction find otherwise:

Associated General Contractors of America Legislative Information --- Testimony Submitted on the Fair Tax, H.R. 2525

Mr. Chairman and Members of the Committee on Ways and Means:

The Associated General Contractors of America (AGC) has endorsed the FairTax national sales tax (currently embodied in H.R. 2525) that is promoted by the Americans for Fair Taxation. This federal legislation would eliminate the death tax, self-employment taxes, corporate and individual income taxes, the alternative minimum tax, the capital gains tax and replace these taxes with one simple, single rate, national sales tax on the personal and final consumption of goods and services at the retail level only. It would not affect social security benefits, but simply change the funding mechanism. It would not affect those Federal excise taxes used to fund construction programs. In this endorsement, AGC joins other significant national business groups including the National Small Business United (the nation's oldest small business organization) and the American Farm Bureau Federation among other notable groups.

[Remember_Salamis]

FICAs getting repealed under the NRST. And the statement still hoilds true. The statement does NOT say that employee salaries don't need to be tracked anymore. Left-wing disinformation at it's finest.

I think I remember you saying that you are in the financial services biz, and if so I can see your motivation. America's biggest "brain drain" is all the higlhy intelligent people who decide to devote their lives building tax shelters for the likes of John Kerry and his ilk.

[lewislynn]

Sorry, but you're misinformed if you think land purchases aren't taxed.

`(6) Intangible property-

`(A) IN GENERAL- The term `intangible property' includes copyrights, trademarks, patents, goodwill, financial instruments, securities, commercial paper, debts, notes and bonds, and other property deemed intangible at common law. The Secretary shall, by regulation resolve differences among the provisions of common law of the several States.

`(B) CERTAIN TYPES OF PROPERTY- Such term does not include tangible personal property (or rents or leaseholds of any term thereon), real property (or rents or leaseholds of any term thereon) and computer software.

(14) Taxable property or service-

`(A) GENERAL RULE- The term `taxable property or service' means--

`(i) any property (including leaseholds of any term or rents with respect to such property) but excluding--

`(I) intangible property, and

`(II) used property, and

`(ii) any service (including any financial intermediation services as determined by section 801.

You people really need to read and understand your product before trying to sell it.

[kevkrom]

Lewis -- land is not taxable because it has already been taxed. It is, by definition, a "used" good.