Tax Consumption. not income or wealth

[powayseller]

It’s hard to get rich when we are taxed on our income, and our slowly accumulating wealth.

It’s time to tax consumption. That way, someone earning $100K/year can spend half of it, and save $50K/year. You don’t need that stupid excuse of a mortgage interest deduction for a tax break.

It also forced illegal producers like drug traffickers and prostitutes to pay tax. Illegals working as nannies, gardeners, or construction crew would be taxed. No more tax evasion.

You only pay taxes on what you use, not what you create.

Does anyone else think it’s unfair that we are taxed on our productivity?

Check out FairTax.Org

[(former)FormerSanDiegan]

A consumption tax would presumably tax people who are currently not paying income tax from illegal activities such as drug trafficking. However, the people who buy those drugs are currently paying income tax on the money they spend one drugs. If a purely consumption tax is instituted guess what happens ? Drug purchasers pay no taxes on the legitimate income they use to purchase drugs illegally. Zero Sum Game. Tax is shifted from the consumers of illegal drugs to the purveyors.

Furthermore, a consumption tax is regressive. A family making $50-60K in San Diego likely would have to spend their entire income to survive. Someone making 300K could live on only 150K and save the other 150K. Net effect is that the high wage earner would be paying 1/2 as much (percentage wise) than the low-to-middle income folks.

Although this would be great for stocks, business and investment capital, it’s not likely to be accepted by the American public because we have an entrenched progressive tax code. If we can’t rally support for a flat tax, how could this fly ?

[surveyor]

Lower Your Taxes…

If you want to lower your taxes, there are ways to do it. It just takes effort and research. It is very possible for a person making $150k to pay less than $5k in taxes using legitimate and legal tax deductions. There are so many of these tax “loopholes” that it is not necessary to petition for the fairtax. And really, do you think Washington D.C. would actually take the time, effort, and pain to give us the fair tax?

I personally would like to have the fairtax so that it would eliminate a lot of the inefficiencies of our tax code and it would also discourage the avoidance of taxes.

However, the way to lower your taxes is out there. Unfortunately I don’t think a lot of people on this board would take this route because it would entail….

…investing in real estate. 🙂

[powayseller]

FormerSanDiegan, it’s not regressive. Read the FAQ on the site. I’d be interested in your further thoughts after reading it.

There is a monthly rebate for living expenses (food, toiletries, etc.) You’d get to tax tourists.

[powayseller]

surveyor, I seriously doubt that. I asked my CPA how tow of my friends, who earn $250K each, can save on taxes. They are single renters, and pay about half their money in taxes. Ok, they can save a little on a tax deduction on a house, depreciating asset, so they lose money. The only way the typical wage earner can save on taxes, according to the CPA, is to start a business, but even then, you can only deduct expenses in excess of your gains. So you really cannot lower your taxes.

If you have a way other than buying an asset losing 10% of its value each year, to save on taxes, I am all ears.

[(former)FormerSanDiegan]

PS –

OK I agree on the progressive aspect of it, accounting for the rebate.

I actually like the concept in theory, the problem will be in the execution and the transition effects.

The underground economy (to avoid sales tax) is already considerable with local rates at 8%. What will happen when the rates are set at 20-30% combined ? The site underestimates the ingenuity of Americans to avoid paying sales tax.

The transition will be disruptive. The site claims that the final production of goods and services includes the impact of corporate income tax (This is true). It also claims that by simply taxing the end goods or services the cost burden is a zero sum game (OK, I buy that). The problem, however, is how do we instantanously go from point A to point B ?

Example: October 19,2007 Congress passes the Fair Tax to go into effect on Dec 31, 2008.

December 31, 2008 – I am on the car lot looking for a new Plug-in Hybrid from Chrysler. It costs $25,000. I decide to wait a day. Jan 1, 2008 I go back into the car dealer.
Either the dealer has to sell me the car for about 19,000 + 6,000 in sales tax and take a big loss, or I have to pay him 25,000 + 7500 and I get screwed.
Or we split the difference and BOTH get screwed.

[no_such_reality]

Argh, I’m surprised PS that you’re getting suckered by the fairtax pabalum. This stuff is junk.

Let’s look at the basic impact of only paying tax on new items. Yep, used items don’t pay tax. Since this is a housing forum. Care to think through what hapens to

A) San Diego home prices when the Fair Tax goes into effect.
B) New housing development when the tax goes into effect.

Joe Middle class, with his mortgage, two kids and child tax credit thinks he’s over taxed, gobbles this stuff up being sold it’s fair and has no clue, he’s going to pay more.

[PerryChase]

We need to reduce the size of all governments by 1/2. I support cutting-off funding to the government and forcing our politicians to make the hard choices.

I don’t mind a consumption tax since I don’t consume much anyway. I may just do all my shopping overseas in that case.

Since we live in San Diego, a consumption tax might be a boon to Mexico and American retailers may setup shop there with American consumers coming in droves.

[surveyor]

PS – one word: depreciation…

See, there’s an interesting tax deduction where if you qualify as a real estate professional, your ability to write off losses against your taxes is almost unlimited.

So if you buy enough real estate and assess depreciation against them, in Uncle Sam’s eyes, you are losing money, but it’s only depreciation.

If you have a way other than buying an asset losing 10% of its value each year, to save on taxes, I am all ears.

You don’t have to buy in California. Buy in other places that are doing well. Texas, North Carolina, Idaho. Also, do NOT buy residential. Buy 4 plexes or more.

My wife and I make about $200k and our total federal taxes total $6k. There isn’t a whole lot you can do about social security, but federal and state tax can be lowered by quite a bit.

[SD Realtor]

Surveyor I am a bit puzzled. Don’t you have to recapture depreciation when the property is sold? True you can 1031 to defer until you die which is smart. Also I was under the impression of a 25k loss cap regardless of how many properties you own.

I am not expert on tax law though. Please correct my misinformation.

[surveyor]

From “Real Estate Investing Loopholes”, page 36:

“If you can qualify as a real estate professional, then 100% of your real estate losses can be used to offset your other income. Otherwise this real estate paper loss is limited to $25,000 if your income is less than $100,000, and begins to phase out as your income increases. At $150,000, the $25,000 real estate paper loss is totally disallowed… One way around the paper loss limitation is if you or your spouse (if filing jointly) can qualify as a real estate professional. ”

The book also states a test as to how you can fulfill IRS requirements that you qualify as a real estate professional.

page 54

“When you sell your property, you will be required to recapture the depreciation at ordinary income tax rates. You then pay the capital gains rate on the difference between the basis and the sales price (less costs). Or you can delay the tax through a like-kind exchange.”

So yes you have to recapture the depreciation when you sell it, but if you keep doing 1031 exchanges, you can essentially avoid paying it (which was my plan). Also, if you do have to pay taxes on your depreciation, you can at least arrange your depreciation to be paid at your ordinary income rate, which in the future should be lower if you have planned it out right.

[(former)FormerSanDiegan]

surveyor –

Depreciation is nice if you are a RE professional, but if you are not and you make over 150K per year, it doesn’t help too much in the first 5-7 years of property ownership.

I have a tax loss on investment property thanks to depreciation (it cash flows otherwise). Fortunately we make too much to take the loss. But neither of us is a full-time RE professional. If one of us changed our profession we would take a large pay cut and get the depreciation, but that would be a losing proposition.

Also, you wrote that “When you sell your property, you will be required to recapture the depreciation at ordinary income tax rates.” The law is now such that depreciation recapture is a special 25% rate. This went into effect in 1997. Your reference is stale and incorrect.

As a consequence, we are sitting on about 20K of carryover losses. If we sold today, we would reduce the capital gains (15%) put have to pay 25% (Recapture of depreciation is 25% not ordinary tax rates). So, the depreciation would result in a net ADDITIONAL TAX of 10% on the amount I have depreciated. Not exactly a benefit.

The good news is that when we pay off the loan we can have multiple years of tax-free income because of the carryover depreciation loss.

The lessons:
1. Verify anything you read or hear regarding tax rules. They change and some folks out there don’t know them.
2. Don’t assume that an investment strategy that is tax advantageous to someone else is advantageous to you.

[powayseller]

nsr, the consumption tax should apply to all items, new or used. In Arizona, you don’t pay sales tax when you buy a used car from a private party, but in CA you do. So the tax law can be such that you pay taxes on used goods.

[surveyor]

2. Don’t assume that an investment strategy that is tax advantageous to someone else is advantageous to you.

I wasn’t suggesting an investment strategy or a lifestyle change. I just stated that there is a way to significantly lower your taxes using certain tax rules.

Also, you wrote that “When you sell your property, you will be required to recapture the depreciation at ordinary income tax rates.” The law is now such that depreciation recapture is a special 25% rate. This went into effect in 1997. Your reference is stale and incorrect.

I do not have the book with me right now, but I believe it did cover the 25% rate. I don’t remember specifically what it said, I believe it stated that the 25% rate is for depreciation taken above the depreciation tables. I’ll look it up when I get home. But my point was that this tax can be avoided by a judicious use of a 1031 exchange.

Also, one of the things I read in the book is that when you do sell, whether or not you took the depreciation, the IRS will assume you did. So you should at least document the depreciation. Even if you make too much, the loss is not eliminated, it is deferred until the next year (and so on).

But hey, playing around with your taxes is not something you should just go off by some guy in a website. You have to research it and talk to knowledgeable tax experts.

But neither of us is a full-time RE professional. If one of us changed our profession we would take a large pay cut and get the depreciation, but that would be a losing proposition.

Read the book and take a look at what the IRS qualifies as a real estate professional. It does not require that you become a full-time real estate professional. It just requires that you spend more time on that job (real estate professional) than you do any other job. It also requires a minimum of 750 hours a year spent on that work. That’s 14 hours a week.

I bet powayseller spends at least that much time reading this website… Under the book, that might be considered one of the activities that a real estate professional would do…

Anyways, my point is that if you take the time, you can find a way to make the tax code work for you, instead of working for the tax code. Maybe they will change the taxes to make it more fair, or increase taxes or whatever. You have the power to take action now and make full use of your money instead of giving it to the U.S. gov’t.

[powayseller]

Would you still come out ahead on your taxes if you buy today, and your investment house depreciates 10% a year over the next 3 years? I expect a 30% median decline for the US as a whole, after reading Roubini. Before I read his blog,I thought it would be only 10%.

This is probably a good strategy in 2010.

[Author]

Posts