patrick.net

I vote that we abolish all internal taxes and only tax imports. :twisted:

skibum,

as I understand it, most Chinese 1st gen prefer new houses, so the natural inclination is to update the house instead of keeping its current "splendor". However, PA has a rather strict set of building codes, which to a certain extent stipulate that even a new house is to be erected, there won't be much allowance on extra footage on the same lot. Clearly the eichlers or modest modern stucco homes won't enjoy the honor of listing themselves on the city's preserved list, still, given the constraints of sq footage, a more reasonable venue for balancing desired lifestyle against city's overbearing supervision is to update and add space, instead of a tear-down and rebuild.

Mountain View perhaps has the most lenient building codes among the lovingly coined "fortress cities". So I would expect far more tear-down-rebuild in MV neighborhoods than PA.

Fair points Jimbo, but none of my posts are complaining about taxes. I don't really disagree with anything you are saying here. Do go back and check though, I have been pretty clear that I favor a simplified progressive tax rate system. I believe income tax is the fairest way to do this. I never voiced an opinion about capital gains rates, in fact in the original concept of income tax in this country capital gains were basically the only form of 'income' because salaries were considered an exchange of labor for pay, not real income. I don't see any reason to treat capital gains differently than ordinary income.

I also favor tariffs to offset the domestic tax base. I believe this will enhance entry level job opportunities as well as recoup the lost value add income tax from overseas outsourcing.

The zeal with which immigrants pursue housing, particular that of those coming from India and China, has more to do with their frame of reference. India was a semi-socialist, planned economy for many years, just like China. For anyone from India and China below the age of 35, they grew up having no memories of real estate distress, because real estate market hardly existed 20 something years ago. We are talking about at least 2 generations who along the property tide as their homelands opened up.

Recently, Shanghai apartments reached new high. A 100 sqm (roughly a bit larger than 1000 sqft) apartment in desirable parts of Shanghai sell for $300-400K, USD, the land is leased on a 70-year basis, and the monthly due is about $100. Now compare this to 1000 sqft condo in Cupertino selling for $750K, which one looks like a better deal??

In the high end segment, Los Altos Hills looks like a steal. Recently villas in Shanghai also hit all-time high, a 500sqm house/villa with less than 1/4 acre land in the nearby suburbs are sold for $5-6M USD, again, the land is on leased basis for 70 years, and you have to put up with the heavily polluted air and food. Your $5M certainly goes much further in Los Altos Hills.

The zeal with which immigrants pursue housing, particular that of those coming from India and China, has more to do with their frame of reference. India was a semi-soci--alist, planned economy for many years, just like China. For anyone from India and China below the age of 35, they grew up having no memories of real estate distress, because real estate market hardly existed 20 something years ago. We are talking about at least 2 generations who along the property tide as their homelands opened up.

Recently, Shanghai apartments reached new high. A 100 sqm (roughly a bit larger than 1000 sqft) apartment in desirable parts of Shanghai sell for $300-400K, USD, the land is leased on a 70-year basis, and the monthly due is about $100. Now compare this to 1000 sqft condo in Cupertino selling for $750K, which one looks like a better deal??

In the high end segment, Los Altos Hills looks like a steal. Recently villas in Shanghai also hit all-time high, a 500sqm house/villa with less than 1/4 acre land in the nearby suburbs are sold for $5-6M USD, again, the land is on leased basis for 70 years, and you have to put up with the heavily polluted air and food. Your $5M certainly goes much further in Los Altos Hills.

Jimbo, the difference in our estimates is FICA which if you are self employed is 15%, if you work for someone it is 8%. So unless you don't consider FICA a tax, and that is a legitimate point of view, it's either 48% or 55% pick your poison.

My using sales tax, and other taxes like property taxes were just extras to show that it doesn't even stop after the tax return. Think about the 3 layers of taxes on your gas, and how many layers of taxes are on a hotel room, or a rental car. Property tax can easily be 5% of your income. You have to give the government credit for being creative at how much it does tax us with people like Suzie Orman boasting how historically low our taxes are.

I vote that we abolish all internal taxes and only tax imports.

Why? That will slow international trade and that will be a net loss for the US economy.

I favor user fees instead of taxes. I understand that some public services are difficult to charge. In that case, I recommend a mild sales tax, a flat tax, or a slight regressive tax schedule.

I denouce all forms of progressive taxation. Productivity should not be penalized.

Sorry Malcolm, it just doesn't work out that way. Here is the real taxes on an income of $90k with nothing but the personal deduction:

IRS (from the tax tables): 19539
CA State (as above) : 8258
FICA (6.2% of salary): 5580
Medicare (1.45%): 1305

Now your employer also has to pay FICA and Medicare at the same rate, so it is fair to consider that as a tax on your employment, but even adding that in twice, I get

19539 + 8258 + 5580 + 5580 + 1305 + 1303 = 41567 in total taxes.

Okay, I have to admit that is 46% overall, 8% of which is paid by your employer. That is more than 40%, but still not 55%. And this is someone who is not filing for the standard deduction (even though they should!), has no 401(k), no mortgage deduction, nada.

This is pretty much the max possible, because above this there is no payroll tax, though it is partially offset by a bump up to 28% at $74k.

I don't think anyone actually pays this rate though, since anyone sane would grab as many deductions as they could. I know I am getting hit by the AMT and my overall tax rate is something like 35%.

Malcolm Says:
You’re killing me.
But I’ll help you do the same as the gurus. For every dollar you send me for the next 20 years, I will send you back 50 cents.

because of the capital gain in the property over 20 years -- supposedly at 10% a year -- exactly the same as buying and then selling yahoo shares for the capital gain and not for the dividend.

or make that GOOG shares

Yup, the only way it works is for the end harvest to not only be a larger gain than all of the combind losses but it also has to outweigh the opportunity costs on the principal fo the whole time. Historically houses don't go up 10% a year, since that would mean they would double in value every 7.5 years.

I'm not sure still what the problem is. I think you are more irritated by low gains rates since in your scenario you have to have a huge gain at the end for it to work. If it doesn't work and the house also goes down in value, the house ends up becoming a large loss for the bank when the investor walks away from it.

Peter P Says:
July 8th, 2007 at 12:40 am
"I vote that we abolish all internal taxes and only tax imports.
Why? That will slow international trade and that will be a net loss for the US economy.
I favor user fees instead of taxes. I understand that some public services are difficult to charge. In that case, I recommend a mild sales tax, a flat tax, or a slight regressive tax schedule.
I denouce all forms of progressive taxation. Productivity should not be penalized."

Why? If you tax consumption a guy like me would pay the same taxes as a poor person. What is wrong with taxing income verses consumption apart from simplicity?

Jimbo, all I can say is I originally said 50% you're at 46% you're not itemizing, but also not including the other hidden taxes so call it a wash. I really am not seeing a huge difference to split hairs over. Thanks for crunching the numbers for the official total I will use for discussion since I am in agreement with you.

I did want to say also that your point about a percentage of a percentage was valid. When you itemize your state withholding comes off as a deduction so if it is 9% that means your Federal tax is on 91% of your taxable income.

OO,

A part of the problem with Shanghai and Beijing real estate is that the upper middle class locals have no other place to save their money. Most of my relatives have already took out the money from the Chinese stockmarket (some of it put in more than a decade ago) because the bubble is so obvious. For them, housing looks like a good bet - barring a monstrous financial crisis, they're likely to at least keep up with inflation without paying more taxes.

Also, I don't think Shanghai real estate overall is that expensive. You're quoting the very high end that caters largely to expats and overseas people who don't know better. My parents recently heard of a 160 sq. meter listing near Remin Park going for 2M RMB. We were tempted, but we don't have any effective way to manage it as a rental and I think there's a good chance for a major financial crisis around 2010.

Most of my relatives have already took out the money from the Chinese stockmarket (some of it put in more than a decade ago) because the bubble is so obvious. For them, housing looks like a good bet - barring a monstrous financial crisis, they’re likely to at least keep up with inflation without paying more taxes.

astrid,
That's an interesting anecdote, as I recall several recent financial news pieces (WSJ, Bloomberg) and their analyses of the Chinese stock market bubble. Their conclusions were that Chinese have been saving less and less recently, and much of that money is going INTO the stock market. I wonder if your relatives are a bit more savvy, or if the news analysis is off.

PArenter,

Thanks for the explanation of the Chindian Lemmings/mob. I guess its their numbers and their sheer otherness that attracts attention.

skibum,

It's the very stupid money that's going into the Chinese stockmarket now, from the housecleaners and the pensioners. The smart(er) money is either in a holding pattern or on the way out.

Don't forget American mutual funds. They're eager to get a share of that white hot growth in India and China. But don't worry, they can mitigate the risk by mixing in some high-yield CDOs and MBS tranches.

Brand,

American mutual funds and American investors cannot invest in the Chinese domestic stockmarket. There might be a bubble in China stocks that Americans can buy, but the bubble is a lot smaller.

It’s the very stupid money that’s going into the Chinese stockmarket now, from the housecleaners and the pensioners. The smart(er) money is either in a holding pattern or on the way out.

If that's truly the case, then the financial analysts are off the mark, and China may be much later in the bubble stage than many think. Seems to me that this will come to a head after the Olympics and its associated giddiness dies down, but that's just my guess.

Malcolm said:

What is wrong with taxing income versus consumption apart from simplicity?

If taxation is applied to discourage specific behavior, as it seems to me it sometimes is, then Peter P's preferences encourage initiative and thrift.

If, on the other hand, it's shaped by a social model seeking to distribute wealth (or poverty), as it seems to me it also sometimes is, then you tax income and subsidize consumption. Which is where we are now.

astrid,

I am not quoting the super high-end price of apartments in Shanghai. I am quoting apartments with comparable finishes as the newly erected condos in the Bay Area, granite counter-top, hardwood floor, marble bathroom, etc.

As you know, most apartments sold in Shanghai are "maopei", which means bare-strip cement structure with no interior finish at all. If you desire the finish as stated above, a 100 sqm condo in the "upper corner" in Shanghai is selling for at least 3.5M RMB ($460K). I am quoting 100 sqm because apartments in Shanghai only have a yield of 75% in terms of carpet space, so when they advertise 150 sqm, the real comparable for carpeted space here is only about 112.5 sqm.

Therefore, the Condotino condos actually look like a much better deal than the Shanghai condos, which is much much higher density, and doesn't come with a guaranteed seat in the good school district, a big consideration for Chinese parents. Private international school tuition in Shanghai costs more than the US in absolute terms, and there is a much longer waiting list.

Taxation of income is always regressive in terms of incentive, assuming a free market for wages.

In other words, unless the government is setting wages *all* across the spectrum, then wages are based upon market factors. But extracting taxes "progressively" (or even flat as I'll point out in a moment), causes a decreasing slope of incentive to earn each marginal dollar. Even if taxes are fixed as a percentage of income, he who earns more will pay more. Past a point, that high income earner has paid more in taxes than can be reasonably apportioned to him. At this point, his extra efforts (luck, fortune, whatever) are enjoyed increasingly not by him but by those who did not earn marginal dollars, and thus pay incremental taxes. In such a scheme, even a "flat" tax is regressive.

The only fair way to properly levy taxes on income would be to change the slope downwards (pro-income tax people would call this "regressive"), in fact making income taxation progressive in terms of incentive. Therefore, the high earners would keep most of their marginal dollars.

Of course, this will never happen. It doesn't "feel" fair, and we love our class warfare.

So a consumption taxation regime system places the marginality squarely with the consumer. If a poor guy wants to squander his meager income on high-tax items, then that's his choice. If Mr. Moneybags wants to only buy bread and butter, then he can get away paying few taxes. In reality, this won't happen very often because of the very reason high earners try to earn a lot. They want to spend it on stuff. Stuff that gets taxed upon purchase.

But for this to work *all* income taxation has to be eliminated, without exception. No capital gains taxes. No income taxes. No state, county, or local taxes on incomes. We can still tax property, car licenses, bridge crossings. But no one is allowed to pronounce "you earned too much money, I shall therefore take it and give it to someone else".

All this may come to pass after the last living Boomer has died, been buried, been exhumed, had a leaden tipped wooden stake driven through their shriveled heart, decapitated, cremated, and then reburied.

Malcolm Says:
Yup, the only way it works is for the end harvest to not only be a larger gain than all of the combind losses but it also has to outweigh the opportunity costs on the principal fo the whole time. Historically houses don’t go up 10% a year, since that would mean they would double in value every 7.5 years.

I’m not sure still what the problem is. I think you are more irritated by low gains rates since in your scenario you have to have a huge gain at the end for it to work. If it doesn’t work and the house also goes down in value, the house ends up becoming a large loss for the bank when the investor walks away from it.

Malcolm, you don't seem to have got the gist of my post at all. There is no real rationality behind the stampede towards over-priced property with a poor cash return -- it is based on wishful thinking, the content of RE seminars and sales pitches by developers, tracking secular trends over the last 3 decades or so and cherry-picking the best figures, etc. I'm not saying property goes up 10% every year, the gurus and salesmen say it. This is the whole point of the post. You seem to think the world follows your logic, and you view the world through the prism of your logic, rather than seeing the world as it really is, irrational exuberance, unenlightened selfish individualism and all. The fact is that many people have been influenced to buy investment property even though it is heavily cash-flow negative at the outset, in the hope of making capital gains. One commentator has indicated there could be billions of dollars lost by these purchasing mistakes over time, and people are too embarassed to talk about their losses...

You don't get a 'huge gain at the end', there is supposed to be some sort of steady gain outstripping inflation, as per my post text. The fact that the economic fundamental of wages and salaries would suggest that this is not sustainable for very long doesn't seem to occur to the people stampeding into property purchases. As for the dot com boom/bust, with its crazy P-to-E ratios. In turn, the real estate industry then tries to keep the party going when it appears capital gains are not going to occur by raising rents, if that is possible in an oversupplied market.

The observations I have made represent about half the rationale of this web site. I'm not sure why you keep quibbling with everyone over every little thing.

OO,

True enough, you will pay a premium for a good finish and for an upper floor apartment with views (corner doesn't seem to be a big problem, all the new Shanghai construction seems to be provide a largely N-S plan). And yes, about 20% will be unusable public space (though I've seen some novel colonization efforts to reclaim public space). I'm thinking in terms of local purchasing power, in which case they would buy something like that 2M RMB place, spend 500K RMB finishing it up, and end up with a pretty decent 120 sq meter place in downtown Shanghai. That's insanely expensive when you look at the average local salary, but only about half of the price you indicated. One could spend a lot more, especially if one feel compelled to live in an American style McMansion in a close-in Shanghai suburb, but there's no need to.

Comparing downtown Shanghai to Cupertino is not really a very illuminating comparison. The lifestyles and locations are so different that they don't really compare at all even if the prices are similar. The downtown Shanghai buyer (even one looking at maopei second hand places) is at the top of the heap in the center of a major metropolitan area. The Cupertino condo buyer is at the bottom of the local homeowner heap and at the periphery of a the Bay Area. Cupertino is certainly preferable in many ways to even the cream of Shanghai's RE crop, but same could be said for London or New York or even SF.

As for the schooling issue. You're looking at it from an ex-pat perspective. I agree with you that I would not send my hypothetical children to any PRC school. However, my cousins have received pretty good education in China's grade schools. Indeed, to survive China's university system, one almost have to go through the grind of the grade school system first!

Randy: You think that only Boomers would object? How about all the poor, huddled masses yearning to be free? Or yearning to get more stuff for free, as it were. The rich get taxed more because they must have done something unfair to earn that extra money, right? It's not personal initiative, intelligence, skill or anything of that nature. Definitely not because they don't waste four hours a day watching NASCAR and drinking PBR. Let's face it, in a republican democracy the majority will carry, except for some basic rights.

The worst thing we've done in this country is allow people to feel entitled. Poor people should be instilled with work ethic; intelligent, industrious and eventually wealthy people should be instilled with a sense of philanthropy and civic duty. Generosity should be a cultural value, not a government mandate... but I digress.

Randy: How would you explain the huge amounts of income being earned if it really is a dissincentive to earn marginal income? Aside from the fact that there are a percentage of the population who are naturally high achievers or passionate about building a large company up from the ground, I would dare say that to the rich the marginal dollar is not as valuable as a lower income person. Meaning; that your first dollar you earn goes to rent or food, one of those basic necessities, once you pass the subsistance level the money is more disposable, moving all the way up to the money to burn crowd. With that said, that is why I believe a progressive income tax is the fairest way to collect money to pay the bills. (Obviously aside from duties, and foreign paid taxes) Your illustration works the other way, if we take the budget and divide it by the whole population, a good chunk of people would end up paying everthing they have plus needing a loan to pay their taxes. Take 2.9 trillion and divide by 300 million people and I think you get around $10,000 for each man, woman, child. Obviously children can't contribute nor can the elderly, so some who have it do need to pay a higher percent.

Back in 1990 G Bush Ist, signed the luxury tax on cars above 30K and the initial result was a disaster. Unlike Peter, I don't want to slow consumption because it works well as a pull system to force efficiency in production to where you can have your taxes, and eat your cake too.

http://www.taxpolicycenter.org/budget/current/presidents_budget.cfm

Different Sean, no disrespect but your assertion is not a little thing to quibble about. The recent trend has been for high gains that's why the gurus say what they say, and can say it with a straight face. I don't presume to dictate to people where to invest their money. It is you and a few others who are taking a recent phenomenon and distorting it to be the norm and wanting to basically levy a new tax on all homeowners with mortgages because of a number of bandwagon idiots. You also fail to see another fact that an idiot throwing his money away normally as someone a little brighter making money, and paying taxes. I am still not convinced that your point of view has a net loss to the tax rolls. In the end it is a free market system and people can pay what they want for whatever they want.

"The observations I have made represent about half the rationale of this web site. I’m not sure why you keep quibbling with everyone over every little thing."

I haven't posted anything for a few weeks, and yesterday I posted only a few things, not the other way around. If you really feel that way, point out a couple of things so that I know what is irritating you. I feel like everytime I say anything (not even controversial to most) every little detail has to be drawn out when I prefer the larger concepts. You do need to understand that most people don't share your point of view that investors, dumb as they can be, are somehow a drain on the economy. I suspect that's what your point is, and I'm sorry if disagreeing with something that is that radical and foreign to me bothers you.

Bruce Says:
July 8th, 2007 at 2:32 pm
Malcolm said:
"What is wrong with taxing income versus consumption apart from simplicity?
If taxation is applied to discourage specific behavior, as it seems to me it sometimes is, then Peter P’s preferences encourage initiative and thrift.
If, on the other hand, it’s shaped by a social model seeking to distribute wealth (or poverty), as it seems to me it also sometimes is, then you tax income and subsidize consumption. Which is where we are now."

The goal of a tax system should be to get a desired amount of money into the treasury. It should not be a behavior modification tool unless to offset speicific social costs. I worry that the basic concept of a free society is becoming more and more antiquated.

The current system does not subsidize consumption. And it is not good for the poor.

In the end all taxes are paid by the consumer, because all taxes are incorporated into the price of the goods we buy. When a corporation pays income tax, that tax is part of their cost of doing business. They seek an after-tax return. If the tax rate is higher then the price charged for the goods must be higher.

The workers pay income taxes, and those taxes come from the compensation paid by the employer. The gross salary including taxes is incorporated into the price of the goods for sale.

So the truth is that the taxes are all paid by all consumers. Higher income taxes just get passed through. The poor pay a heavy burden with our current system because the income taxes are included in the prices they pay. With a luxury focused VAT or sales tax the taxes could be shifted to the rich.

Taxing the rich is not about some issue of fairness or morality. You can make an argument for that if you like. But then you miss the point.

Why tax the rich? Because that is where the money is!

Malcolm, it's very hard to dissect what you're saying, because I haven't said any of the things you are claiming I have, and therefore there's nothing for me to clarify. You don't seem to have read my posts in the last 2 threads closely, and you seem to be taking the content of excerpted articles I've posted and attributing them to me (although I largely agree with the sentiment in them), but you also seem to misunderstand the points that are being made. There is no new tax, as you claim, they are reducing taxes, and so on. There were about 5 straw men in each of your posts which just leaves me bewildered, and unwilling to touch them for sheer workload reasons.

We have in no way even begun to touch on the realities and problems of the housing affordability crisis in your responses.

Not that any one cares, but here's an update on my search for a rental: Not Going well.

Maybe I'm just spoiled by living in Mountain View and Sunnyvale, but man o man the quality of rental stock simply blows in the Peninsula. Pricey, very shoddy, terrible parking, some have laundry rooms that look like they're from the Hannibal Lecter/Saw series. Or next to Caltrain.

My favorite are the 700 sqft places that tell you they're 900 sqft on the phone. Sheesh.

These rental places are so bad, heck I'm thinking of buying in this bubble just to not have to rent in some of these awful places.

That's the only reason I put forth for taxing the rich. Not to punish or control, because that is where the money is. It's kind of hard to tax the poor. Send out the Sheriff of Notingham.

Let's not forget it's the rich who control how much the poor get by wage setting. The rich also control how much the rich get...

I have no argument with Zephyr's comments.

My perspective is certainly not to shield the rich from paying taxes. But rather to set up a system whereby the really do pay unavoidable taxes that are levied upon clearly luxury, exceptional or fairly substitutable products.

And why the focus on "the rich"? Working class people waste their money too. Why should we subsidize them for buying X-Box gaming systems, Ben & Jerry's cookie dough ice cream, or high-class bio-dynamically NO GMO milk? If Nascar Ned wants to buy a PS3 or get his wife an iPhone then it *should* cost him exactly the same amount as it does me. Income taxation subsidizes his behavior and penalizes mine.

Malcolm, the reason people still earn a lot of money is because they don't tax 100% of it. But the higher the tax on the rich's income, the larger the chasm between the rich and the next class, because the rich will just sequester more of their wealth to retain the same relative status. All you're doing is shutting off the conveyor belt to the rich. Why do you think there is already a huge gap in the income distribution between $150K and $400K, then a larger one to +$1mm? After the 80s tax reforms there incomes largely smoothed out, but with ever creeping taxes has come enormous stratification.

*their