Friday, December 10, 2010

How The "Tax Cuts" Affect Real Estate Development


The current news frenzy concerns the pending legislation to extend the current marginal tax rates for two more years. Is this a silver bullet for the real estate development industry? From a sound economic perspective, it is a good move in a time of high unemployment, stagnant wages for those who are employed, and a very slow and feeble recovery from recession. But you wouldn’t know it from the war of words that surrounds the extension.
·        Is it a tax cut for the rich? No, it isn’t a “tax cut” at all. It simply is the extension, for a period of two more years, of the same marginal tax rates we have had for a decade. It’s neither a cut nor an increase for anyone – rich or otherwise.
·        Is it a special break for the rich and privileged? No, as Ben Franklin famously observed more than two hundred years ago: “a penny saved is a penny earned” regardless what your income bracket is.
·        Does it increase America’s dangerous deficit spending? Yes, for two reasons. One, the continuation of the existing tax rates is not accompanied by mandated and itemized reductions in government spending which is the root cause of the deficit. Somebody wasn’t paying attention when the nation spoke in last month’s elections. Second, there is the inevitable pork packaged in with the legislation extending the current tax rates. This is merely more deficit spending, which effectively increases the size of the national debt, but is not a result of extending the current tax rates.
·        Will it help the recovery in the real estate development industry? Probably not. There are a couple of reasons at play here. First, the cause of the slowness of economic recovery overall, and in the development industry in particular, is uncertainty over the nation’s economic future. Extending the so-called Bush tax rates for a mere two years doesn’t do much to alleviate this concern. Only permanent adoption of these rates would accomplish that. Second, as mentioned above, the continual increasing of the nation’s debt through deficit spending further undermines the value of the dollar, and that makes economic recovery impossible.
The Left’s opposes the extension of existing tax rates, rather than increasing them substantially, and screams that this is increasing the deficit. In reality what increases the deficit is creating programs that require spending more money than is available. The Left created these big spending programs on the hope that it could raise taxes to cover them. But the electorate rose up and said, “No, hell no!”.
Here is the danger of spending money on the come. Suppose a real estate salesperson has a prospect who indicates an interest in making an offer on a parcel of property. The salesperson anticipates receiving a sizeable commission on the sale, and buys a brand new luxury automobile. The offer is never made, or, if made, is rejected by the property owner. No sale materializes; thus, no commission is earned and paid. Bottom line: The salesperson does not receive additional income, but now has considerably more debt. This is basic economics to a real estate developer (and most members of the electorate), but seems to be unfathomable by many in Congress.

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