[1] https://www.forbes.com/sites/paulroderickgregory/2012/01/25/...)
Up to a certain level you are taxed on what you EARN. Income tax is relatively progressive.
Beyond a certain point you cease to be taxed on what you earn. Instead you are taxed on what you SPEND. By this I mean, you have unrealized or non-repatriated money and you only realize those gains and pay taxes on what you need to cover your expenditure.
So if you gain $100m in a year but only spend $10m then you're only taxed on $10m and the other $90m probably grows tax free until you really need it. This might mean then that you're effectively paying a 4% total tax rate (40% of 10% of your income).
But it gets worse. Because of zero interest rates, there's no point in paying tax on that 10% either. Instead you borrow $10m at 1.5% interest secured by your unrealized gains. If your unrealized gains grow at more than your interest rate you're coming out ahead. The worst case is you're deferring your taxes for years. The best case is you're effectively deferring them forever, or at least until interest rates increase to the point where realizing the gains is cheaper than borrowing.
This is fucking spot on.
Well yeah, before that point it hasn’t been sold, so paying taxes on unrealized gains on what the house “should” be worth is bullshit.
What's the problem here? Income tax rates are moderately progressive. They'll pay a higher marginal tax rate and a moderately higher total tax rate in this year. That seems fine to me.
> or sells a house they held for 25 years which went up a bunch in value
This is what I have a problem with. This house has already had plenty of favourable tax treatment, which could include:
- Tax-deductible mortgage interest
- Gains on that property deferred for up to 25 years. To give you a comparison, zero coupon bonds don't get this favourable tax treatment;
- Possibly capped or even frozen property tax increases;
- Long-term capital gains are generally significantly lower than income taxes
Just how much tax subsidies does real estate need?
> I suspect this is a significant factor in social mobility.
Let me give you an example where this is definitely true. In Australia, pretty much every state charges stamp duty on the sale when you purchase property. It's typically in the 2-5% range. There are various exemptions and allowances for first home owners and the like (this varies from state to state).
This was all meant to go away 25 years ago when the Federal government replaced a bunch of taxes with a consumption tax (ie the GST) but it didn't happen, largely because the states were addicted to the income, which became hugely significant as property prices skyrocketed in the early 2000s.
The median price of a house in Sydney is now over A$1m. How do we expect anyone to have any kind of mobility when simply moving may result in a $50-100k+ tax?
Now the US has some of this. For example, to buy my one bedroom apartment in NYC I had to pay a "mansion tax" (that's literally what it's called) but at least it was only 1%.
My point is it could be much, much worse.