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Economically this is correct - you do have an imputed stream of rental income from a property. You are just choosing to consume it directly (by living in the ho

Economically this is correct - you do have an imputed stream of rental income from a property. You are just choosing to consume it directly (by living in the house) rather than sell it to another party, receive money and turn the money into other consumer goods. Imagine an alternate scenario. You own a home, but rent it out. Also, you rent an equivalent home from another person. In this alternate scenario, you'd have to pay income taxes on the rent you receive. Similarly, if your employer gave you free rent in a house they owned, you'd need to pay tax on the value of that rent. Economically there is no good reason to distinguish between these two cases. It sounds like NL is doing things right, or at least righter than the US.

rayiner 11y ago
It's a special case of the more general case of taxation of non-market services. Say A is a stay at home dad, B is his spouse, and C works at an office. B and C both make $10 per month and there is a 20% flat tax. So total tax revenue is $4. Now, say that A wants to live a life of leisure. So he hires C to do nannying on the side, and they pay her $3 per month. Now, total income is $23, and total tax revenue is $4.6. But the same amount of work is being done as before! All that's happened is an activity moved from the non-taxed domestic realm to a taxed market one.
- yummyfajitas 11y ago
  This isn't even taxation of non-market services, this is just taxation of in-kind benefits. In much the same way, if YHOO were to give BABA shares to it's shareholders (non-market goods?), that would be subject to taxation.
- mikeash 11y ago
  It makes sense economically, but at some point you have to draw a line. Should I be taxed when I cook a meal for myself, because it's a valuable service that would cost $X if I had somebody do it for me? Should I be taxed based on the price of transportation if I walk somewhere? Breathing? It seems that we typically draw the line at the individual or household. If not there, then where should it go?
  - Steuard 11y ago
    I don't know the answer to this question, but it's clearly related to the fact that work done to maintain one's own household gets left out of pretty much every measure of costs or productivity. (I suppose it's probably some form of externality. I ought to study more economics.) Given traditional gender roles, this is one factor that has historically led to massive undercounting of women's total contribution to the economy, which could potentially lead to distortions in selecting good public policy. (It's certainly not just a women's issue, but that's one of its big impacts.)
- Kluny 11y ago
  This contains the massive assumption, which is repeated throughout every economic textbook I've ever seen, that staying at home taking care of kids doesn't count as labor or economic activity. The free labor donated to the economy by stay at home moms and dads would throw off everyone's equations if they ever bothered to count it.
namecast 11y ago
Assuming your house is rentable and there's a liquid market for rentals in your neck of the woods - and that's an untenable assumption. "Property can be rented for profit" and "Your specific property can be rented profit" are different assertions.
- Lazare 11y ago
  We're talking about the case of a house someone is choosing to live in: You! Obviously its rentable; the question is the price (and it's one of the practical issues with taxing imputed rents; just like with Vanguard it's a difficult question to figure out what rent you would negotiate with yourself in an armslength transaction).
curun1r 11y ago
I'm going skiing this weekend. I own my car, skis and the rest of the equipment I'll need to get there and enjoy a couple days on the slopes, but if I were to rent those items, there would be taxes paid, both in sales tax and on the profits made by the rental companies. So, if I were in the NL should their government require me to pay taxes on the items I own due to it depriving the government of the taxes I'd be generating by renting everything? Would that tax vary depending on how many times I used my equipment? That seems nonsensical and creates an ad absurdum situation...would someone be taxed for cooking their own meals since restaurants pay taxes? > Economically there is no good reason to distinguish between these two cases The good reason is property rights. The ability for people to own things and use them as they see fit is almost a requirement for a free society. Governments have established that by creating rules and an environment where commerce can take place, they can collect taxes on that commerce. But I agree with the post you're replying to...creating fictional commerce and then taxing it doesn't seem right. If you're looking for a difference between the two cases you present, it's that the government is willing to act as an arbiter in any dispute that would result between landlord and tenant. When the landlord and tenant are the same person, there's no need for the government to be involved. Note that this shouldn't preclude governments from collecting property taxes, just from differentiating between landlords and people who occupy their own homes.
- yummyfajitas 11y ago
  Governments have established that by creating rules and an environment where commerce can take place, they can collect taxes on that commerce. This implies that things like dividends should not be taxed, since no commerce occurs. All that happened is a piece of property split into two. Would you favor this outcome? If not, why not? Now personally, I'm in favor of eliminating all taxes on capital income (and capital, e.g. property taxes). Economically, the best tax is a consumption tax; you live in a home, you pay taxes on the value of living in it. No property tax, no income tax, etc. Potentially such taxes could also be levied at the time of purchase, as they would be with a pair of skis. But that's a political non-starter; our western systems of taxation are built around the lie that the rich benefit disproportionately from our society. A consumption tax, which taxes people based on the benefits they receive rather than the value they create for others, would automagically reveal that lie.
lmm 11y ago
Fundamentally income and capital are fungible. A lot of tax avoidance schemes work by turning income into "unrealized" gains. The general solution would be to tax held capital as well as just income. (The rent on a house must be equal to the cost of the capital it represents, as otherwise there would be an arbitrage opportunity).
- yummyfajitas 11y ago
  The problem with taxing held capital is that you are penalizing investment relative to consumption. I.e., a person who consumes today enjoys a much higher NPV of consumption than a person who invests today and consumes in the future. Scott Sumner does careful calculations explaining this here: uhttp://www.themoneyillusion.com/?p=28842 http://www.themoneyillusion.com/?p=28842
  - lmm 11y ago
    That's by design, no? Consumption stimulates the economy better than investment does (particularly under present conditions), and by discouraging investment we disincentivize the concentration of wealth and the political problems that leads to.
    - yummyfajitas 11y ago
      Consumption does in fact help create inflation thereby reducing real wages and fooling prideful workers [1] into returning to the workforce. In the US we are currently at full employment so this is not actually beneficial. In the long run investment - i.e. devoting resources to increasing future productivity - is what is needed. To clarify the distinction, investment is research in self driving cars while consumption is driving an existing car. [1] Prideful workers (the villains in Keynesian economics) are the people who refuse to accept work at a lower nominal wage than what they previously earned. Instead, they sit on their asses enjoying funemployment.
      - lmm 11y ago
        We're at full employment in the sense that workers seeking a job can find one, but wouldn't that figure not count those "prideful workers"? Consumption must grow at the same rate as production, right? So either can be the limiting factor on economic growth, and investing at a rate that doesn't match consumption growth is wasteful (it would be better for the economy if that money were expended on consumption instead), no?
Lawtonfogle 11y ago
Economically there is no good reason to distinguish between these two cases. So you are saying because anything that could be rented can also be owned, the government should get to tax it as if you rented it? This applies to all items that can possibly be sold and creates interesting areas for where something might be illegal but free to give and which still has a market value on the black market, of which income tax is still expect. For example, if you two people have sex, they both need to pay the tax a prostitute would've earned. It also makes every action taxable... even if all you do is clean your room, you aren't paying for someone else to clean your room and thus owe tax.

rayiner 11y ago

It's a special case of the more general case of taxation of non-market services. Say A is a stay at home dad, B is his spouse, and C works at an office. B and C both make $10 per month and there is a 20% flat tax. So total tax revenue is $4. Now, say that A wants to live a life of leisure. So he hires C to do nannying on the side, and they pay her $3 per month. Now, total income is $23, and total tax revenue is $4.6. But the same amount of work is being done as before! All that's happened is an activity moved from the non-taxed domestic realm to a taxed market one.

yummyfajitas 11y ago
This isn't even taxation of non-market services, this is just taxation of in-kind benefits. In much the same way, if YHOO were to give BABA shares to it's shareholders (non-market goods?), that would be subject to taxation.
mikeash 11y ago
It makes sense economically, but at some point you have to draw a line. Should I be taxed when I cook a meal for myself, because it's a valuable service that would cost $X if I had somebody do it for me? Should I be taxed based on the price of transportation if I walk somewhere? Breathing? It seems that we typically draw the line at the individual or household. If not there, then where should it go?
- Steuard 11y ago
  I don't know the answer to this question, but it's clearly related to the fact that work done to maintain one's own household gets left out of pretty much every measure of costs or productivity. (I suppose it's probably some form of externality. I ought to study more economics.) Given traditional gender roles, this is one factor that has historically led to massive undercounting of women's total contribution to the economy, which could potentially lead to distortions in selecting good public policy. (It's certainly not just a women's issue, but that's one of its big impacts.)
Kluny 11y ago
This contains the massive assumption, which is repeated throughout every economic textbook I've ever seen, that staying at home taking care of kids doesn't count as labor or economic activity. The free labor donated to the economy by stay at home moms and dads would throw off everyone's equations if they ever bothered to count it.

namecast 11y ago

Assuming your house is rentable and there's a liquid market for rentals in your neck of the woods - and that's an untenable assumption. "Property can be rented for profit" and "Your specific property can be rented profit" are different assertions.

Lazare 11y ago
We're talking about the case of a house someone is choosing to live in: You! Obviously its rentable; the question is the price (and it's one of the practical issues with taxing imputed rents; just like with Vanguard it's a difficult question to figure out what rent you would negotiate with yourself in an armslength transaction).

curun1r 11y ago

I'm going skiing this weekend. I own my car, skis and the rest of the equipment I'll need to get there and enjoy a couple days on the slopes, but if I were to rent those items, there would be taxes paid, both in sales tax and on the profits made by the rental companies. So, if I were in the NL should their government require me to pay taxes on the items I own due to it depriving the government of the taxes I'd be generating by renting everything? Would that tax vary depending on how many times I used my equipment? That seems nonsensical and creates an ad absurdum situation...would someone be taxed for cooking their own meals since restaurants pay taxes? > Economically there is no good reason to distinguish between these two cases The good reason is property rights. The ability for people to own things and use them as they see fit is almost a requirement for a free society. Governments have established that by creating rules and an environment where commerce can take place, they can collect taxes on that commerce. But I agree with the post you're replying to...creating fictional commerce and then taxing it doesn't seem right. If you're looking for a difference between the two cases you present, it's that the government is willing to act as an arbiter in any dispute that would result between landlord and tenant. When the landlord and tenant are the same person, there's no need for the government to be involved. Note that this shouldn't preclude governments from collecting property taxes, just from differentiating between landlords and people who occupy their own homes.

yummyfajitas 11y ago
Governments have established that by creating rules and an environment where commerce can take place, they can collect taxes on that commerce. This implies that things like dividends should not be taxed, since no commerce occurs. All that happened is a piece of property split into two. Would you favor this outcome? If not, why not? Now personally, I'm in favor of eliminating all taxes on capital income (and capital, e.g. property taxes). Economically, the best tax is a consumption tax; you live in a home, you pay taxes on the value of living in it. No property tax, no income tax, etc. Potentially such taxes could also be levied at the time of purchase, as they would be with a pair of skis. But that's a political non-starter; our western systems of taxation are built around the lie that the rich benefit disproportionately from our society. A consumption tax, which taxes people based on the benefits they receive rather than the value they create for others, would automagically reveal that lie.

lmm 11y ago

Fundamentally income and capital are fungible. A lot of tax avoidance schemes work by turning income into "unrealized" gains. The general solution would be to tax held capital as well as just income. (The rent on a house must be equal to the cost of the capital it represents, as otherwise there would be an arbitrage opportunity).

yummyfajitas 11y ago
The problem with taxing held capital is that you are penalizing investment relative to consumption. I.e., a person who consumes today enjoys a much higher NPV of consumption than a person who invests today and consumes in the future. Scott Sumner does careful calculations explaining this here: uhttp://www.themoneyillusion.com/?p=28842 http://www.themoneyillusion.com/?p=28842
- lmm 11y ago
  That's by design, no? Consumption stimulates the economy better than investment does (particularly under present conditions), and by discouraging investment we disincentivize the concentration of wealth and the political problems that leads to.
  - yummyfajitas 11y ago
    Consumption does in fact help create inflation thereby reducing real wages and fooling prideful workers [1] into returning to the workforce. In the US we are currently at full employment so this is not actually beneficial. In the long run investment - i.e. devoting resources to increasing future productivity - is what is needed. To clarify the distinction, investment is research in self driving cars while consumption is driving an existing car. [1] Prideful workers (the villains in Keynesian economics) are the people who refuse to accept work at a lower nominal wage than what they previously earned. Instead, they sit on their asses enjoying funemployment.
    - lmm 11y ago
      We're at full employment in the sense that workers seeking a job can find one, but wouldn't that figure not count those "prideful workers"? Consumption must grow at the same rate as production, right? So either can be the limiting factor on economic growth, and investing at a rate that doesn't match consumption growth is wasteful (it would be better for the economy if that money were expended on consumption instead), no?

Lawtonfogle 11y ago

Economically there is no good reason to distinguish between these two cases. So you are saying because anything that could be rented can also be owned, the government should get to tax it as if you rented it? This applies to all items that can possibly be sold and creates interesting areas for where something might be illegal but free to give and which still has a market value on the black market, of which income tax is still expect. For example, if you two people have sex, they both need to pay the tax a prostitute would've earned. It also makes every action taxable... even if all you do is clean your room, you aren't paying for someone else to clean your room and thus owe tax.