For example, look at the concept of “no sales tax on used homes”.
In simplest terms, a “used home” would be a home that was not bought from the guy who built it.
But home prices are not based on new vs used. Homes, almost uniquely in the market, are treated as eternal assets. If my house burned down, and they rebuilt it from scratch, it would be unlikely to sell for much more than my neighbor’s house, especially if my neighbor also replaced all his appliances.
So, what is to keep a builder from greating a subsidiary that does nothing but buy the homes from the builder? The builder builds them, then the subsidiary buys them, at some fraction of their real cost. The subsidiary pays the sales tax. Then the subsidiary sells the homes as used homes on the secondary market, for double the price.
OK, that’s more like tax cheating. Let’s look at what would happen in a market of $500,000 homes. On a new home, the tax would be $45,000. On the used home, tax would be zero. So, the used home sales price would increase by $45,000, or more likely the new home would sell for $45,000 less. Why? because the market won’t maintain an inbalance. People only slightly prefer new homes over used ones, and won’t support a 9% premium.
And since the price people pay for homes is what they can afford, the new/used prices will adjust to reflect the extra cost.
I wonder if adding additions to a home makes it new? Because if not, a builder might find it better to buy out some shanty town, and simply “upgrade” the houses and sell them as used refurbished mansions.
I’m sure home builders will have to do something, because this tax will pretty much destroy them relative to the used market, especially in a time when there is already tremendous pressure because of the large foreclosure market.
Of course you won’t be able to deduct your mortgage and taxes. My daughter’s deduction is about 24,000 a year
The “new” vs. “used” is there so that the tax is paid only once. Good point about real estate. There will always be some controversial aspects of any plan...
This is what I’ve been saying all along. I’m stating to worry that Cain needs to get this albatross off his neck soon or Romney’s going to end up our nominee.
I’m sure home builders will have to do something, because this tax will pretty much destroy them relative to the used market.
Basically the “new home tax” will distort the market by encouraging the maintaining of old houses, and discourage building new houses.
It’s social engineering, but seemingly benevolent, because we have a big backlog of unoccupied houses that for all practical purposes are owned by the taxpayers (by the federal government mailing out banks). As a shareholder in that glut, I want the government to protect the value of my asset by discouraging the market being flooded with unneeded new houses.
Yes, it’s not a pure free market move, and eliminating the home mortgage interest deduction, and ending the subsidizing of home loans would probably achieve the same thing.
I believe that regulations could prevent the scams of below market sales of new houses to extinguish the tax bite (local real estate transfer taxes already address this, and you could impute the value by appraisal, and criminally sanction those whose sale price was much lower than a flipper got without a rise in the market. Building new houses on old foundations to call them refurbished used could be similarly regulated.
>>I’m sure home builders will have to do something, because this tax will pretty much destroy them relative to the used market, especially in a time when there is already tremendous pressure because of the large foreclosure market.<<
Well, if you think about it, we sure don’t need any new homes in many areas for a while, so builders should be doing only remodeling jobs, not adding to the supply.
But this is America, and if you want to build new even when there are hundreds of used, unoccupied homes nearby, then go for it...
But then here comes Cain’s 9/9/9 and suddenly those hundreds of used homes make a lot more sense, so instead of adding to the supply, you buy one of the existing ones instead...
To me, Cain’s 9/9/9 looks like the best solution to the present housing mess I’ve seen so far. It will raise the price of existing houses and discourage more inventory from being added, exactly what is needed to clear the market and get building going again.
As for you worries about fraud, anytime taxes are involved, checks against fraud have to be established. In this case the checks would be simple, and a builder would be foolish to establish a pattern of fraudulent behavior because it would be relatively easy to detect.
There could be a rather easy way to track this, actually.
I'm sure we can't know the answer to this because the “plan” is not much more than talking-point form right now. Cain is presenting it as if it is all thought-through, but it is not. It's a starting point.
I wonder if one way of handling this is that every individual component of a new home (the lumber, the paint, the carpet, the appliances, the roofing, etc.) is purchased.... I wonder if those components would be considered Retail purchases that would be taxed at 9%, or if they would be considered Business Purchases and therefore included in the Business tax of 9%... Cain states that nothing would be “taxed twice”, so if the individual components were considered retail purchases, then the home itself should not be taxed upon sale.
Who knows. Time will vet the details.
All I know is it's a starting point for serious discussion about revamping the tax code. And that is what I like about it, whether or not any of it ever gets passed.