4 ms·

Property taxes are not wealth taxes, they are consumption taxes. You can easily tell this because a person who owns a home outright pays the same tax as someon

by harryh 7y ago

Property taxes are not wealth taxes, they are consumption taxes. You can easily tell this because a person who owns a home outright pays the same tax as someone who owns a similar home but has a large mortgage. These two people have different levels of wealth but pay the same tax. This is because their consumption is the same.

rayiner 7y ago
Wow this just blew my mind.
- harryh 7y ago
  Well I will take this small piece of credit in return for all the times your comments have blown my mind. :)
shajhansbx 7y ago
Hmm, I wonder if this is the first good argument for the mortgage interest deduction.
- harryh 7y ago
  I certainly didn't mean it to be. I think the mortgage deduction is an abomination.
Domenic_S 7y ago
Say you and I each buy a house. Yours is new construction and cost $1mm, mine was built in 1970, never remodeled, and is perhaps located somewhere more expensive and also cost $1mm. Common scenario in the SFBA. Is one year of your consumption equivalent to one year of my consumption? Like a car, the longer you use it the higher the likelihood that something expensive goes wrong. But unlike a car, our homes are probably appreciating at close to the same rate.
- harryh 7y ago
  Is one year of your consumption equivalent to one year of my consumption? Yes. That's why both houses cost the same.
  - Domenic_S 7y ago
    That's a circular explanation, but maybe I'm reading it that way because we aren't aligned on what 'consumption' means. For a durable good like a house or a couch I think it would be something like expected service life / interval * over-or-underuse multiplier. The interval technique makes sense to me on goods that are used over time or taxed over time. You can pay for a house all at once, and if you were only paying property tax once I think I would agree with you that the tax is consumption tax. Yet property taxes are annual, so in order for property tax to be a consumption tax we would have to enumerate how much consumption is occurring during that year. Consider something simpler, like a sofa. We both buy the same sofa with a service life of 10 years. Did we consume the sofa when we bought it? Or do we consume it over its useful life? If I jump on the sofa daily and it lasts for 1 year, I've consumed it in a year. If you barely sit on it and it lasts you 20 years, you've consumed it over 20 years. Does that make sense? How are you defining consumption?
    - beerandt 7y ago
      I believe that in most jurisdictions, the "guts" of property tax millage formulas is based on a 10-year interval (or maybe more accurately, 1/10 of the assessed value). However, that's always seemed arbitrary to me, as: 1) it's never "paid-off" and 2) millage rates are set in conjunction with this known value. So while it may not be a satisfying answer, in my experience, self-circular is just sort of the way it is. Also, the consumed / depreciated value comparison doesn't sit right with me, since for business expenses (tax write-off purposes), it's based on zero value at end of life. Any previously depreciated value recovered at sale has to be (re)taxed; you only get to ultimately deduct true depreciated value, albeit (re-)payment is delayed to year of sale. Regardless, real property (non-movable) is rarely disposed of for zero value, so "depreciated" value isn't a good estimate for "consumed " value.
rad88 7y ago
The wealth difference is not as great as it seems, it's just the interest on the mortgage minus tax incentives and the opportunity cost of paying it off.
- harryh 7y ago
  If I have a $1M house I can sell it and have $1M in cash. If I have a $1M house and a $900k mortgage then I can sell it and only have $100k in cash.
hueving 7y ago
That's not how consumption taxes work: https://en.wikipedia.org/wiki/Consumption_tax https://en.wikipedia.org/wiki/Consumption_tax A property tax takes effect without sales occurring, without the property being used, etc. There is no act of consumption to tax, other than simply existing. And before anyone argues that the use of the land is the consumption, that would only make sense if the value of the house wasn't taken into account as part of the property tax. If property taxes were only levied at the time of sale (e.g. stamp duty in Australia), then it would be fair to call it a consumption tax.
- harryh 7y ago
  It's not exactly the same as a sales tax that is paid all at once, but it's basically the same as the size of the tax scales with the size of the consumption rather than the size of one's wealth.
- FabHK 7y ago
  Consumption is not buying a house, the consumption is living in it.
  - hueving 7y ago
    The tax is not based on living in it. Nor is it based on the space it consumes.
    - FabHK 7y ago
      No. And if you buy an apple pie, you pay the sales tax on it, even if you give it to your kids to eat. And the sales tax is based on the price of the apple pie, not how many apples it contains. It is still a consumption tax. If you rent the house out to others, presumably you'll pass on the consumption tax (or not, it doesn't matter).
ars 7y ago
Property taxes are neither wealth or consumption taxes. Those are not the only two options. You could just as easily charge the mortgage holder the property tax, and that mortgage holder will then charge the that amount as an extra fee on the mortgage. What does that do to your argument? Seem to me Property tax is basically a toll. Just like you pay a toll to use a road, you pay a toll to use a house.
- harryh 7y ago
  What does that do to your argument? It does nothing to my argument. Because the tax incidence would all still be on the consumer of the property. Just like with a rental property: the cost of the property tax is passed on to the renter.
dorfsmay 7y ago
Consumption tax are paid once. Property tax are every year! If you put that money in the bank, you'd only pay taxes on the cap gain, not on the capital itself.
- FabHK 7y ago
  Consumption taxes are paid every time you consume something. You buy an ice cream and eat it, you paid VAT on it. Now with a house, the consumption is living in it, and while you own the house, you pay for that consumption at some rate. A bigger, more expensive house corresponds to more consumption, and thus you pay more tax on it. Consumption of a house is basically the product of house value and time, and that's what you pay tax on.
  - dorfsmay 7y ago
    What if you're into houses, you don't have a car, don't have a computer, you spend all your money on a nice house. Why should you pay more local taxes than people who pay one-time taxes on stuff (computers, music, clothing#? If we believe rich people should pay more taxes (higher percentage), then we have already established a system for this. Why not making local taxes a fraction of income taxes? Why are lower class people who's only capital is their house taxed on their capital, while rich people who own bonds and stock not get taxed on THEIR capital?

by harryh 7y ago

rayiner 7y ago

Wow this just blew my mind.

harryh 7y ago
Well I will take this small piece of credit in return for all the times your comments have blown my mind. :)

shajhansbx 7y ago

Hmm, I wonder if this is the first good argument for the mortgage interest deduction.

harryh 7y ago
I certainly didn't mean it to be. I think the mortgage deduction is an abomination.

Domenic_S 7y ago

Say you and I each buy a house. Yours is new construction and cost $1mm, mine was built in 1970, never remodeled, and is perhaps located somewhere more expensive and also cost $1mm. Common scenario in the SFBA. Is one year of your consumption equivalent to one year of my consumption? Like a car, the longer you use it the higher the likelihood that something expensive goes wrong. But unlike a car, our homes are probably appreciating at close to the same rate.

harryh 7y ago
Is one year of your consumption equivalent to one year of my consumption? Yes. That's why both houses cost the same.
- Domenic_S 7y ago
  That's a circular explanation, but maybe I'm reading it that way because we aren't aligned on what 'consumption' means. For a durable good like a house or a couch I think it would be something like expected service life / interval * over-or-underuse multiplier. The interval technique makes sense to me on goods that are used over time or taxed over time. You can pay for a house all at once, and if you were only paying property tax once I think I would agree with you that the tax is consumption tax. Yet property taxes are annual, so in order for property tax to be a consumption tax we would have to enumerate how much consumption is occurring during that year. Consider something simpler, like a sofa. We both buy the same sofa with a service life of 10 years. Did we consume the sofa when we bought it? Or do we consume it over its useful life? If I jump on the sofa daily and it lasts for 1 year, I've consumed it in a year. If you barely sit on it and it lasts you 20 years, you've consumed it over 20 years. Does that make sense? How are you defining consumption?
  - beerandt 7y ago
    I believe that in most jurisdictions, the "guts" of property tax millage formulas is based on a 10-year interval (or maybe more accurately, 1/10 of the assessed value). However, that's always seemed arbitrary to me, as: 1) it's never "paid-off" and 2) millage rates are set in conjunction with this known value. So while it may not be a satisfying answer, in my experience, self-circular is just sort of the way it is. Also, the consumed / depreciated value comparison doesn't sit right with me, since for business expenses (tax write-off purposes), it's based on zero value at end of life. Any previously depreciated value recovered at sale has to be (re)taxed; you only get to ultimately deduct true depreciated value, albeit (re-)payment is delayed to year of sale. Regardless, real property (non-movable) is rarely disposed of for zero value, so "depreciated" value isn't a good estimate for "consumed " value.

rad88 7y ago

The wealth difference is not as great as it seems, it's just the interest on the mortgage minus tax incentives and the opportunity cost of paying it off.

harryh 7y ago
If I have a $1M house I can sell it and have $1M in cash. If I have a $1M house and a $900k mortgage then I can sell it and only have $100k in cash.

hueving 7y ago

That's not how consumption taxes work: https://en.wikipedia.org/wiki/Consumption_tax https://en.wikipedia.org/wiki/Consumption_tax A property tax takes effect without sales occurring, without the property being used, etc. There is no act of consumption to tax, other than simply existing. And before anyone argues that the use of the land is the consumption, that would only make sense if the value of the house wasn't taken into account as part of the property tax. If property taxes were only levied at the time of sale (e.g. stamp duty in Australia), then it would be fair to call it a consumption tax.

harryh 7y ago
It's not exactly the same as a sales tax that is paid all at once, but it's basically the same as the size of the tax scales with the size of the consumption rather than the size of one's wealth.
FabHK 7y ago
Consumption is not buying a house, the consumption is living in it.
- hueving 7y ago
  The tax is not based on living in it. Nor is it based on the space it consumes.
  - FabHK 7y ago
    No. And if you buy an apple pie, you pay the sales tax on it, even if you give it to your kids to eat. And the sales tax is based on the price of the apple pie, not how many apples it contains. It is still a consumption tax. If you rent the house out to others, presumably you'll pass on the consumption tax (or not, it doesn't matter).

ars 7y ago

Property taxes are neither wealth or consumption taxes. Those are not the only two options. You could just as easily charge the mortgage holder the property tax, and that mortgage holder will then charge the that amount as an extra fee on the mortgage. What does that do to your argument? Seem to me Property tax is basically a toll. Just like you pay a toll to use a road, you pay a toll to use a house.

harryh 7y ago
What does that do to your argument? It does nothing to my argument. Because the tax incidence would all still be on the consumer of the property. Just like with a rental property: the cost of the property tax is passed on to the renter.

dorfsmay 7y ago

Consumption tax are paid once. Property tax are every year! If you put that money in the bank, you'd only pay taxes on the cap gain, not on the capital itself.

FabHK 7y ago
Consumption taxes are paid every time you consume something. You buy an ice cream and eat it, you paid VAT on it. Now with a house, the consumption is living in it, and while you own the house, you pay for that consumption at some rate. A bigger, more expensive house corresponds to more consumption, and thus you pay more tax on it. Consumption of a house is basically the product of house value and time, and that's what you pay tax on.
- dorfsmay 7y ago
  What if you're into houses, you don't have a car, don't have a computer, you spend all your money on a nice house. Why should you pay more local taxes than people who pay one-time taxes on stuff (computers, music, clothing#? If we believe rich people should pay more taxes (higher percentage), then we have already established a system for this. Why not making local taxes a fraction of income taxes? Why are lower class people who's only capital is their house taxed on their capital, while rich people who own bonds and stock not get taxed on THEIR capital?