What kind of Socialism?

[EJ]

What kind of Socialism?

Have Real Estate industry subsidies been good for the country? No, they've been a disaster. It's time to roll them back.

Today I received the following email from a conservative friend who sent me the note to say she and her husband are reading my book and enjoying it, and what do I think of the following? Apparently this one is making the rounds today.

Another Obama Nightmare

Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it?

That’s $3,800 on a $100,000 home etc.

When did this happen? It’s in the healthcare bill. Just thought you should know.

SALES TAX TO GO INTO EFFECT 2013 (Part of HC Bill)

REAL ESTATE SALES TAX

So, this is "change you can believe in"?

Under the new health care bill - did you know that all real estate transactions will be subject to a 3.8% Sales Tax? The bulk of these new taxes don't kick in until 2013 (presumably after obama’s re-election). You can thank Nancy, Harry and Barack and your local Democrat Congressman for this one. If you sell your$400,000 home, there will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Is this Hope & Change great or what? Does this stuff makes your November and 2012 votes more important?

Oh, you weren't aware this was in the Obamacare bill? Guess what, you aren't alone. There are more than a few members of Congress that aren't aware of it either (result of clandestine midnight voting for huge bills they've never read). AND, there are a few other surprises lurking.

Why am I sending you this? The same reason I hope you forward this to every single person in your address book.

People have the right to know the truth because an election is coming in November!

I responded:

Glad you are enjoying the book. I'm glad you asked for my opinion on this new real estate tax but I'm not sure you're going to like my answer.

Once you get to the part of my book about how the Real Estate industry lobbied successfully for government subsidies for decades you’ll see why an real estate transaction tax is good for the economy -- if and only if at the same time corporate and personal income taxes are lowered.

Here’s the deal. Since the 1920s, the tax burden in the US has shifted from 80% on FIRE Economy industries and 20% on Productive Economy industries to the other way around. The tax cuts were only one of a long list of government subsidies to the Real Estate industry that has distorted our economy and pushed us to the edge of ruin. Another is the mortgage interest deduction, a tax on renters. Another is two now 100% nationalized banks, Fannie Mae and Freddie Mac that now buy 90% of all home mortgages in the secondary market.

That’s right. We have a 90% federal government owned mortgage market in the US of A, land of free markets and unfettered capitalism. We must re-privatize our mortgage market. A publicly owned housing market is simply un-American. But given the state of the US housing market and economy, what kind of interest rates will Fannie Mae and Freddie Mac, the issuers of Agency Bonds that back the mortgages, have to offer to entice private buyers of the Agency bonds they issue? Ten percent? Fifteen percent? Those higher rates will then work their way into mortgage interest rates, and that can't help the housing market.

One thing is for sure, the rate will have to be a whole lot higher than the yield on the bonds that current bonds holders are getting paid. Foreign central banks who hold Fannie and Freddie "Agency bonds" can do the math. For the past week have been dumping them like they were on fire. Since there are no private buyers, the Fed has been forced to buy them up.

Foreign central banks sell $57 billion worth of Agency bonds in a week...

...while the Fed buys them up to the tune of $2.6 trillion since January 2002
(Charts credit: Dan Norcini via JSMineset)

This is what government subsidies do. They create perverse incentives. They distort markets, in this case the housing market and the market for housing loans.

“Socialist” France and Germany don’t have any of these housing subsidies. In fact, no other country does. So what kind of "socialism" do we have here in the USA?

Socialism for banks and insurance companies.

Consider Obama’s so-called “Health Care Plan.” Out of five possible plans, that's the plan that the health insurance industry pushed through Congress. I call the “No Health Insurance Company Left Behind Plan” because it guarantees the health insurance industry 40 million new customers at taxpayer expense.

No wonder US salaries are uncompetitive. The same quality of housing and health care costs two to three times as much here as in the countries we compete with on world markets. This is why the US has lost its industrial base. You can’t live in the US off a globally competitive wage because housing, education, and health care expenses have been inflated by our FIRE industry subsidies.

Of course the real estate industry will yell and scream if Obama or anyone else tries to take their government subsidy away, just as the corn farmers did when McCain tried to eliminate the crazy and wasteful government subsidy of corn-based ethanol production. It costs two dollars to make one dollar's worth of ethanol, and takes more energy to produce a gallon of ethanol than a gallon of ethanol produces when it’s burned. It's nuts to make ethanol from corn. Ethanol belongs in martinis not cars, unless it’s produced with sugarcane in a tropical climate like in Brazil.

This real estate tax is all about interests. It’s not a Left versus Right, or Conservative versus Liberal, or Capitalism versus Socialism issue. For some reason the media frames issues of competing interests that way that way. We never get to the real question: Who is going to take a loss now that the housing bubble is over but the debt and lopsided economic incentives remain?

How will my friend respond to my note? I'll tell you how. On an ideological level, she'll like it. But on a personal level, she won't. You see, her father is in the real estate industry. As a matter of fact, most of us are in the real estate industry if we own a home. That's the problem. That's why we have such a hard time seeing the matter clearly.

The libertarian minded among us believe that government subsidies are bad, but ideology is no match for a subsidy that benefits us personally. The other guy's government subsidy is bad. Ours is good.

Putting personal interests aside, have Real Estate industry subsidies been good for the country? No, they've been a disaster. They created the nightmare economy we are in today. It's time to roll them back.

See also:

The committee to wreck the USA

Forget the Bush tax cuts. We need a $1 trillion per year post credit bubble debt cut, but we’re not going to get one. That’s why the gold price is going through the roof.

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[we_are_toast]

Re: What kind of Socialism?

Maybe you should have sent her this;

http://www.snopes.com/politics/taxes/realestate.asp

I don't seem to be able to cut and paste the report here, but according to snopes, like many of the other wild claims out there, it is false.

There is an attempt to deliberately distort a 3.8% Medicare tax on investments, as a real estate tax.
The FIRE bullhorns are blasting!

Nonetheless, your point is well taken.

[chr5648]

Re: What kind of Socialism?

if and only if at the same time corporate and personal income taxes are lowered.

Thats a BIG IF, its one thing to try to explain to the sheeple about FIRE and subsidies, its another to convince sheeple that transferring tax from one area to another will have benefits.

The other point of view is that, even if you do implement a real estate transaction tax, it doesn't mean the (politicians/voters who are on the dole) will allow taxes to be lowered or shifted from the income side.

[BK]

Re: What kind of Socialism?

How will this tax affect Gold sales - Gold is tax at the Collectible rate - does it get hit with the 3.8 Medicare Tax or is it excluded - assuming you hit the Income thresholds?
Any one know the answer?

[c1ue]

Re: What kind of Socialism?

There is an attempt to deliberately distort a 3.8% Medicare tax on investments, as a real estate tax.
The FIRE bullhorns are blasting!

Yes, and at the same time, no.

Yes, the tax is ostensibly Medicare related. And it is not a "sales tax" in the sense that it is the seller paying it, not the buyer.

No, because it is actually an extra capital gains tax. It taxes not just real estate, but dividends, interest, stock/bond/option sales, etc etc.

And this begs the question: why exactly is a health care bill meddling in capital gains taxes?

Creative accounting perhaps?

Because of course in reality it is exactly those who have higher incomes, who have capital gains.

If anything the real estate part of it is far less relevant - most high income families tend to spend more when selling a home because they buy a more expensive home. In this case there is no capital gains.

It DOES penalize those who are retiring and selling down, but again it is unclear how that will play out since the bar is defined by income. So all those retiring just won't sell the home until after their income falls.

But again, the real meat is the extra capital gains tax. A tax increase by any other name...

And making it a "Medicare" tax is especially pernicious.

Medicare taxes are the one tax for which practically no exclusions/deductions apply.

[we_are_toast]

Re: What kind of Socialism?

Yes, and at the same time, no.

Yes, the tax is ostensibly Medicare related. And it is not a "sales tax" in the sense that it is the seller paying it, not the buyer.

No, because it is actually an extra capital gains tax. It taxes not just real estate, but dividends, interest, stock/bond/option sales, etc etc.

And this begs the question: why exactly is a health care bill meddling in capital gains taxes?

Creative accounting perhaps?

Because of course in reality it is exactly those who have higher incomes, who have capital gains.

If anything the real estate part of it is far less relevant - most high income families tend to spend more when selling a home because they buy a more expensive home. In this case there is no capital gains.

It DOES penalize those who are retiring and selling down, but again it is unclear how that will play out since the bar is defined by income. So all those retiring just won't sell the home until after their income falls.

But again, the real meat is the extra capital gains tax. A tax increase by any other name...

And making it a "Medicare" tax is especially pernicious.

Medicare taxes are the one tax for which practically no exclusions/deductions apply.

There is an income threshold amount of $200,000 for single people, and $250,000 for married couples.

The HCR bill has costs associated with it. There were many revenue enhancements associated with it to cover the costs. Although I wasn't a big fan of the bill, I'm glad they were responsible enough to try and pay for the costs. It should be no secret that the Obama Administration wants to recover the tax breaks upper income people have been receiving over the last several decades.

[Jay]

Re: What kind of Socialism?

This real estate tax is all about interests. It’s not a Left versus Right, or Conservative versus Liberal, or Capitalism versus Socialism issue. For some reason the media frames issues of competing interests that way that way. We never get to the real question: Who is going to take a loss now that the housing bubble is over but the debt and lopsided economic incentives remain?

Another more direct way to say this is that we are witnessing a brewing class war. Rich vs. poor. Creditor vs. debtor. Up vs. down. That "some reason" is about class, power and wealth. I'm not sure why you don't come out and say it. You are forward in most things, certainly in taking on the financial interests.

[goadam1]

Re: What kind of Socialism?

I expect to many more tax hikes that are not income tax related for high earners. As a high earner, I'm pretty accepting of a rise in the capital gains tax and income tax. But I'm starting to think there is very little limit to just how much of the bill will be stuck to those earning $250,000 and above (rich in some places but not NY). I suppose they will make social security tax unlimited on income, raise medicare, tax the crap out of "collectibles" and fiddle with ira rules.

[Chomsky]

Re: What kind of Socialism?

Thanks EJ.

Your two charts are the same -- surely an editorial mistake.

[Jay]

Re: What kind of Socialism?

I expect to many more tax hikes that are not income tax related for high earners. As a high earner, I'm pretty accepting of a rise in the capital gains tax and income tax. But I'm starting to think there is very little limit to just how much of the bill will be stuck to those earning $250,000 and above (rich in some places but not NY). I suppose they will make social security tax unlimited on income, raise medicare, tax the crap out of "collectibles" and fiddle with ira rules.

American society will be forced at some point to decide, do we continue to play by the rules or enter the black market, at least partially. If you have a good gig already, within in the system, it will be easy to play within the rules or even subvert them without issue. If you are outside, the black market becomes more attractive every day. Just like it does in any banana republic with illogical rules, riddled with corruption.

[BiscayneSunrise]

Re: What kind of Socialism?

Well, Considering that homeowners get a 250,000 (single) or 500,000 (married) capital gains tax exemption on the sale of a primary residence, they shouldn't squeal too much over a measly 3.8% sales tax. However, it is probably the first shot fired at the favorable tax treatment of housing.

[medved]

Re: What kind of Socialism?

American society will be forced at some point to decide, do we continue to play by the rules or enter the black market, at least partially. If you have a good gig already, within in the system, it will be easy to play within the rules or even subvert them without issue. If you are outside, the black market becomes more attractive every day. Just like it does in any banana republic with illogical rules, riddled with corruption.

I don't see, why it is even a question. In a few years dogoodniks will drive taxes to the level where cheating on taxes is more important than making profits. Besides, many otherwise unprofitable businesses will be run by the gov't.

At this point a lot of economic activity will move to the black market. This will equally apply to selling produce, clothes and gold. You will have a choice of buying cheap (subsidized) and rotten gov't potatoes or expensive and decent private ones. It will be the real socialism, not the fancy one the liberal nuts usually imagine.

[Raz]

Re: What kind of Socialism?

I don't see, why it is even a question. In a few years dogoodniks will drive taxes to the level where cheating on taxes is more important than making profits. Besides, many otherwise unprofitable businesses will be run by the gov't.

At this point a lot of economic activity will move to the black market. This will equally apply to selling produce, clothes and gold. You will have a choice of buying cheap (subsidized) and rotten gov't potatoes or expensive and decent private ones. It will be the real socialism, not the fancy one the liberal nuts usually imagine.

Thank you. Apparently you or your family have had personal experience in living under subsidized poverty (Socialism).

When their ideology fails they simply say that enough effort, money, regulation, etc. wasn't expended in order to "make it work".

[chr5648]

Re: What kind of Socialism?

I have a better analogy for why people would not want this tax increase.

A few years ago corzine the governor of nj and his regime raised the sales tax from 6 to 7%. The regime and corzine mentioned it will only be there for 2-3 years to shore up the budget. But, its still here and even christie wouldn't dare cut revenues to the state.

It comes back to the principle if you give a criminal a finger, they'll take the hand.

[Jay]

Re: What kind of Socialism?

I don't see, why it is even a question.

Because I was trying not to polarize the issue too much and at least keep some hope alive. But I agree with you 100%.