Tax and More Taxes on Real Estate

By Lawrence

imageVancouver Canada has chosen to tax houses that are deemed vacant. London Britain has chosen to increase tax on foreigners who purchased properties there. Ontario Canada chose to increase minimum down payment percent for more expensive houses. There are more such taxes and constraints introduced around the world. Many people think that these are such great ideas to improve the supply of housing for people who need affordable housing. The reality, however, is far more complicated and the unintended consequences can be far reaching.

More Taxes Never Put Money into the Pockets of the Local People

Contrary to what the politicians telling the people, tax increases almost never help resolving the budget issues of any government. The more money a government gets to collect, the more money the government will eventually spend. There is never an end to this downward spiral once deficit budget was chosen. So whatever politicians promise, no matter how sincere they are, there is absolutely nothing they can do to reverse the inevitable.

The same holds true for tax increase that is supposed to stop people from engaging in activities hurting the general public. The excuse itself, like tax on tobacco or additional tax on the buying and selling of properties, does nothing to curb the underlying activity since the fundamental reasons for these activities have not changed. All these additional taxes or tax hikes do, is to give the government more money to spend on the wrong things.

More Constraints on the Real Estate Markets Never Cool Them Down

One of the craziest laws proposed on real estate was coming from none other than the City of Toronto many years ago. The proposal was to allow homeless people to live in buildings that are supposedly vacant. The idea actually gathered quite a lot of support from the left leaning community. Back then, the homeless people issue was growing out of hand in Toronto. Many people simply wanted the homeless people to disappear on the street. It was not empathy whatsoever to help the homeless people.

Lately, the concept of foreigners being guilty of pushing real estate prices higher has gained traction everywhere in the world. This, again, is just another example of branding a complex issue into naive black or white thinking. As oppose to embrace complexity, majority of people choose to use problematic narratives to enable them to stay ignorant. The real underlying reason for many asset classes going up in price in terms of the local currency is the result of the extremely low interest rate policy of these countries. This fundamental driver unleashed all the evil consequences that we are seeing around the world from asset inflation to instability in many countries that in turn give rise to terrorism.

Maybe, these unintended consequences are not that difficult to anticipate as many people figured that out years ago. For taxes on real estate, it is obvious that it will force people to choose to live or invest elsewhere. It will also reduce the competitiveness of a city relative to the nearby counties. Hence, instead of getting more revenue as the politicians expected, the net outcome is always negative in terms of overall income for these cities. The dire consequence is the reduced ability of these municipal governments to borrow money as their financial strength in securing revenue is greatly diminished.

The Source of the Next Global Crisis: Municipal Debts

As many countries can no longer get enough income through taxation to cover their expenses, these countries have now resort to introducing  more form of taxes by many creative excuses. The core reason for which taxes on the people are not generating enough income for the governments is that the governments are simply too big in terms of economic footprint relative to the size of the economy of these countries. While the private sector of the whole world has been in nimble with real wages not growing for the past ten years for many countries, the governments of these countries keep growing at a very fast pace. As there is never enough tax income to satisfy these big governments, they borrow more and more through the issuing of government bonds.

The soaring of debts in many countries confirms this global problem. What we do not know, however, is the limitation of the investors to be willing to lend to these governments. When investors become sick and tired of negative returns from near zero interest rate government bonds, the music chair game of debt driven financing of these government entities will end abruptly and destructively.

It is not likely the biggest countries in the world will default their debts against their creditors because these countries can print money to pay for the debts and their interests. On the other hand, we cannot say the same for the regional governments and the municipal governments. The particularly troublesome ones are the big cities with huge infrastructure cost like Toronto in Canada, Chicago in United States, etc. When these cities no longer able to borrow, they will have to default on the debts they issued. Basic services will disappear. Upon restructuring, local real estates will be targeted as cities do not have power to tax people’s income.

Of course, we all hope that this day is not going to happen to the city we live in but that is just wishful thinking.


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