Real Estate NewsTax Battle Heats Up In Washington
With the election over you can begin to hear the rumble in Washington.
The alleged subject is "tax reform" and the issue soon to be debated is whether or not stock dividends should be taxed less or taxed not at
all.
The case for such a write-off revolves around several ideas. First, there is the notion that a tax on dividends amounts to "double taxation" since dividends were previously taxed as corporate profits. Second, there is the thought that an end to the dividend tax would encourage companies to produce more profits and less financial vapor, thus making it easier to determined share values. Third, an end or a reduction to dividend taxes would put more money into citizen hands, or at
least the hands which hold stock. Money would then go into the economy as giddy shareholders spent their new-found bounty.
Also, of course, stock prices will generally rise -- thus "justifying" predictions of future financial value by the very people who have previously recommended Enron, WorldCom, and the rest. Stock values will rise not because companies are more profitable or productive, but because more dollars will be chasing a limited number of equities as a result of changing national tax policies.
You can guess that if there is a case "for" an end to dividend taxation, there is also an argument against. One argument is that with the federal government now operating at a deficit it hardly seems right to cut taxes. A second issue is that reducing dividend taxation does little or nothing for the poor or young workers, two groups not well-represented in the shareholding class. Third, dividends paid into retirement accounts now are obtained tax-free. Fourth, "double taxation" is common. For instance, if you buy something and pay a sales tax you have a case of "double taxation" because you"re paying with after-tax dollars. Lastly there is the idea that there should be a dividend tax because dividends are income and if we can tax worker wages why not the checks of the rich and famous?
From a real estate perspective, an end to dividend taxation would move investor dollars into the stock market -- not good news for those who need mortgages. Profits from investment real estate would continue to be taxed, a treatment which would result in less investment ownership demand.
In a counter-intuitive way, it might seem that less demand for investment property would drive down prices, but that"s not what would happen. Instead, investment property values would likely rise because rents would soar.
Why would rents climb? Because few people will want to build apartment units that produce taxable profits. Thus, supply would be constrained while
demand in the form of a rising population continued to grow -- good news for today"s property owners but not so good for those who want affordable rentals within 75 miles of their work.
What about residential real estate values? They would rise at first as people seek the benefits of ownership -- but not for long. Rising prices and higher mortgage rates will reduce the pool of would-be buyers, especially the 40 percent or so who enter the market for the first time each year. Compress the number of first-time buyers and prices will begin to ebb marketwide -- you can"t be a move-up buyer if your starter home remains unsold and certainly your children won"t be buying
in their 20"s and 30"s. In many cases they"ll be living with you.
Combine an end to estate taxes -- another hot proposal in Washington -- with an end to dividend taxes and you"ll produce a new class of super-rich, hereditary, politically-powerful patricians -- several thousand extended families nationwide who will reap the rewards of citizenship while avoiding the bills.
The issue here is not that we should discourage the accumulation of wealth -- certainly I favor a larger net worth, especially my own. Nor is the idea that we should have a 100-percent tax on inheritances, a notion scorned by my children and other loved ones.
Instead, there are issues of fairness and citizenship. Why should a teacher struggling to earn $30,000 pay taxes while someone making $30,000 a year in dividends pays nothing? Do they both use public roads? Are they both protected by the military?
The rich, to a surprising degree, seem to understand that taxes are both irritating and necessary. Bill Gates and Warren Buffett would be among the greatest beneficiaries of insanely-preferential tax rules yet argue against them. Less understandable is that many of those who would gain nothing from untaxing the super-rich greatly favor such changes. There seems to be a matter of rigid principle at work here, the unfettered right to avoid your own self-interest in the pursuit of inflexible dogma.
Should we tax dividends? Of course. If there is to be tax relief it should be for the people who struggle most. Raise the income level at which individuals pay no taxes and then everyone so situated will benefit, whether their dollars come from wages or dividends.
Should there be an estate tax? Absolutely -- but a tax which starts high enough so that most individuals can pass on business interests, farms, heirlooms, and various assets to children, charities, and other beneficiaries. It"s the very system we have today, one which imposes a tax on less than two percent of the nation"s estates. In fact, according to an IRS study, 2,314,254 people passed away and 41,331 estates paid taxes in 1996.
That means 98.21 percent of all heirs were untouched by estate taxes. It"s the upper crust, the 1.79 percent of all estates that paid at least $1 to Uncle Sam, who would gain relief with an end to estate taxes. Of course, if some people don"t pay taxes that means bills must be paid by the people who do.
There is no such thing as an objectively "fair" tax system -- if there were the tax code would be two pages long, CPAs would be looking for a new line of work, and members of Congress would receive fewer PAC dollars. But if we tilt the rules too much we will create an unprecedented concentration of inter-generational wealth in just a few households. You can see this today in many countries where the super-rich live in gated fortresses, gilded reservations they cannot leave unguarded for fear of kidnapping -- or worse.
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