Taxes

[mike777]

lol....for me 20% is not near enough return to be a landlord..so if you want me to eat property taxes...I sell and move out of calif..wait....I DID

 

 

:)

[Echognome]

I'm still a little perplexed about an earlier comment that said property taxes are also regressive.

 

Would it help if I said that property tax affects both property owners and renters (who get taxes passed off to them)?

Not really. Residential leases are 'gross', so the landlord pays for property taxes, maintenance, and insurance. In contrast, many commercial properties are 'triple-net', where these expenses are a direct pass-thru to the tenant.

 

Matt, if you are talking in the abstract in that somehow these expenses are passed along to renters, I still don't agree.

 

Here's an illustration. (Note: I am speaking from a California perspective that limits property tax increases to 2% a year and only reasseses upon transfers. Other states have different methods of reassessment).

 

Apartment building "A" rents for $1,000 per unit per month. It has 20 units and was sold to the current owner 20 years ago for say $1,000,000. Increases in rents have far outpaced 2% (currently rents in our area are escalating at 5% per year), so A owner pays about $14,800 per year in property taxes on a basic 1% rate.

 

Apartment "B" was just sold. It rents for the same $1,000 / month. Gross Income is $240,000 per year, and expenses are $5,000 per month. At a 6% cap rate, the project sold for $2,300,000, and thats what the new tax basis is. At 1%, his taxes are $23,000 per year.

 

So, "A" makes $8,000 more per year than "B". The rents they charge are a function of the market, not what the property taxes are. If the taxes were truly a pass-thru, then the rents would be different.

I'm making a simple argument and one you may or may not agree to.

 

A landlord bases his rent on market forces, sure. But as for all the landlords in the markets, their price is a function of their cost. Their cost includes taxes (along with some utilities, maintenance, building insurance, mortgage etc.). How much of that cost that passes along to consumers is dependent upon the elasticities of demand (basically on market forces). I'm simply saying that if you increase landlords' costs then their prices will reflect that cost and thus affect renters. It may be "sticky" because of leases, rent control, etc. But nonetheless the costs will eventually go through. I do not believe this to be controversial.

[helene_t]

I'm still a little perplexed about an earlier comment that said property taxes are also regressive.

 

Would it help if I said that property tax affects both property owners and renters (who get taxes passed off to them)?

Two points:

 

1) I was told when I studied economics (just a minor, or GDBA as it's called there) in Copenhagen back in the 80'es that housing is a luxury commodity, i.e. taxing on housing is progressive. This may be different in the U.S. than in Denmark (I doubt that) or it may be different now from in the 80's (I doubt that as well). Of course it's complicated to measure because taxable income as well as housing expences can be measured in different ways. The rent that I pay is kept artificially high by some regulations/subsidies and artificially low by others and out of equilibrium due to a f...d up property market and the actual rent that I pay is lower due to VAT exemption and I also receive compensation from my employer or from the social office, and my taxable income would (technically) have been different if my house was financed in a different way, and some of my housing expenses may or may not be considered housing expenses depending on the mode of payment. And if I owned my house part of my mortgages would effectively be saving rather than expenses etc.......

 

2) Landlords cannot just pass taxes on to renters. The rent is dertermined by supply and demand and supply of real estate cannot ajust to prices (expect in the case of reclaiming land from the sea). Taxes depreciate the value of the propoerty, so the next owner will pay lower mortgages as a compensation for the taxes. But maybe government regulations allow landlords to increase rents when they are bellow market equilibrium. And taxes on the value of new buildings will lead to less new buildings and therefore less supply -> higher rents in the long run.

[pbleighton]

"Yes sigh it is true...I have no idea why you guys keep thinking I make this stuff up."

 

Because you do :)

 

Peter

[hrothgar]

"Yes sigh it is true...I have no idea why you guys keep thinking I make this stuff up."

 

Because you do :)

 

Peter

Actually, more often than not Mike, simply recycles talking points from different parts of the far right blogsphere.

 

All his talk about victory, Cambodia, the Middle East are transparantly forwarded with nary a bit of critical thinking.

[helene_t]

Not sure how widespread the assertion that companies should only maximize shareholder's proftit is. I've certainly heard it from economists that I don't consider far right. The logic is that other interests groups (employees, suppliers, customers) can vote with their feet if they don't like the line of the management. The shareholders are bound to the company - they can sell their shares, but if the management don't act in their interests, share prices will reflect that.

[mike777]

http://www.econlib.org/library/Enc/Profits.html

 

 

http://www.k-state.edu/economics/ramesh/E520CHP7.HTM

 

 

http://alpha.fdu.edu/~sollars/Lecture%20five%202001.htm

 

Perhaps if I try and rephrase the debate: Does mazimizing the geometric mean almost certainly lead to a better outcome, then the expected value utility of its outcomes exceeds that of of any other rule, in the long run. Paul Samuelson( a guy from MIT I think but again my memory can be foggy) would say no, this is a false collollary of saying that acting to maximize the geometric mean at every step will, if the period is "sufficiently long" "almost certainly" results in higher terminal wealth and terminal utility than from any other decision rule.

 

As I said this is an ongoing debate but that is the classical, accepted viewpoint. I have no idea what a blogsphere or whatever is I do not read blogs except for bridge and one on science. You guys just want to attack but never with any facts, even when I make a simple claim like 50% of all americans do not pay taxes(think of children and the very old) you and show you proof, you misread the proof and think it says only 41% of all americans pay taxes or on the millions killed Cambodiaor one million killed and other horrors in Vietnam you misread the proof, I give up. B) God bless you all.

[hrothgar]

Mike

 

It might be useful to spend some time framing this debate.

 

I am not claiming that profit maximization / maximizing shareholder value is not an acceptable goal for management. I don't think that there is anything wrong with a company that explictly decides to pursue profit maximization as its be all / end all.

 

However, I think that it is a mistake to believe that all companies should be required to embrace this same philosophy. I can point to large numbers of companies that are explictly committed to social responsibility in one form or another. "The Body Shop" is probably the classic example. (Its the one that's used in the HBS case study). Whole Foods ("Whole Paycheck") and Starbucks are other well known examples of a large national chain with a similar philosophy. What is important about these companies is that the management is very open and upfront about its governing philosophy. They directly acknowledge that their company is committed to certain forms of social activism and allow potential investors to make an informed decision. I don't think that the management of these companies should be forced to abandon their principles because some economist thinks that profit maximization is "better".

 

Its important to recognize Economist's models are driven by utility maximization which is not necessarily the same as revenue maximization. There are a lot of people out there who are willing to sacrifice a percentage point off their expected return in order to feel better about themselves.

 

Here's one last important point to consider: Starbucks, Whole Foods, the Body Shop, and any number of other similar companies are publically traded entities. Lets consider the full ramifactions of perfect markets. If socially responsible operating principles lead to unacceptably low returns these companies would be vulnerable to hostile takeovers. Someone would swoop in, take the company private, eliminate the whole "social responsibility" crap, and then sell off the company at a profit. These types of things happen all the time in the business world. I don't know of any significant examples where a corporate raider started targetting "socially responsible" companies.

[pbleighton]

"you misread the proof and think it says only 41% of all americans pay taxes"

 

That's what the link you provided said.

 

As for children not paying taxes, give me a break.

 

Peter

[Impact]

What is often described as "return to shareholders" is actually short-term return as opposed to maximising longterm return.

 

Short-term return also tends to impose a conflict between management which organises bonuses/golden handshakes etc on shareprice spikes as opposed to sustainable performance.

 

We have seen such conflict produce "creative accountancy" (and even without the nefarious inference) there are on-going issues and debatable classifications which can make all the difference to management rewards.

 

There are no easy answers - but part of the solution is to have active non-executive directors who are attuned to considering the necessary conflict and making those determinations.

 

Obviously, there is a huge difference between privately owned corporations and those listed corporations - if for no other reason the immediate accountability of management to shareholders who are not so much represented on a Board, but actually ARE the Board.

 

It is a difficult position where the Board is composed largely of appointees of institutions which will have different criteria: generally not to rock the boat but as professional investors on occasion the need to sell at a profit or to claim a larger dividend to offset other factors.

 

Diligence by directors and concern for the true "best interests of te company" (whatever that phrase may mean) is the sole defence of the small shareholder - and too little defence it has proven to be all too often.

 

regards