Homebuilders and the FairTax(SM)
Overall compliance
costs of the current income tax system will be reduced. These costs, which
are estimated conservatively to be $225 billion,[1]
are partly borne by homebuilders (discussed below). All purchases by
homebuilders of building materials will be free of consumption tax. Business-to-business
sales are not taxed under the FairTax. Moreover, since all producers of
these materials will be operating free from income tax and with dramatically
lower compliance costs, material (wood, sheet rock, nails, etc.) prices
that now contain these costs will fall significantly. This will allow
homebuilders to sell their products at lower prices while maintaining
their current profit margins. Research by Dr. Dale Jorgenson, Chairman of the Department of Economics at Harvard University and one of the countrys leading economists, shows that producer costs in the construction industry will decrease in the first year by as much as 25 percent. Economic output in the construction industry during the first year of implementation of the FairTax is expected to increase by more than 50 percent. The huge boom in this industry will be due largely to a significant rise in the demand for all investment goods. Dr. Jorgensons research shows that these increases will continue well into the next quarter century with the 25-year outlook still showing a 13 percent increase in output.[2] As an immediate compliance
savings, there will no longer be any need for homebuilders and other employers
to maintain the distinction between employees and contract labor for tax
purposes. This will also result in a substantial labor cost savings, because
homebuilders and other employers will no longer need to collect payroll
taxes. Payroll taxes (including the employer portion and FUTA) will be
repealed. The repeal of this tax will also fuel the economy. Consumers
will have more money in their pockets and, therefore, more money to spend,
save or invest. The
Demand For New Homes Will Increase Second, discretionary income will increase. Consumers will see their paychecks increase by over $1.6 trillion because income and payroll taxes are eliminated (estimated for 2001). This increase in disposable income will help to generate both consumption and savings.
Interest Rates Will Drop To illustrate the
source of the reduction in interest rates, it is useful to examine the
bond market. Current taxable interest rates include a tax premium. The
cost of this premium can be determined by comparing the interest rates
on taxable bonds to the interest rates on tax-exempt municipal bonds of
comparable risk and term. The difference between the return on investment
of a taxable bond and that of a tax-free bond of comparable risk is about
30 percent. Interest rates will decline due to the elimination of this
tax premium because interest earnings will no longer be taxed. With lower interest rates, more consumers will qualify for new home purchases and will refinance to obtain equity from older homes.
Homeownership Under the FairTax Will Be More Affordable
Homebuilders Compliance Costs Will Be Lower The homebuilder (as
with other businesses who collect the FairTax) will receive an administration
fee of one-quarter of one percent for complying with the consumption tax. The firms
accounting, tax, and personnel (human resources) departments will shrink
dramatically. There will be:
[1] "Compliance Costs of Alternative Tax Systems II," Arthur P. Hall, Ph.D., Senior Economist, The Tax Foundation, Special Brief, House Ways & Means Committee Testimony, March 1996. [2] "The Economic Impact of Taxing Consumption," Dale W. Jorgenson, Ph.D., Harvard University, Testimony before the Ways and Means Committee, March 27, 1996. [3] Ibid. "The Economic Impact of Replacing Federal Income Taxes with a Sales Tax," Laurence J. Kotlikoff, April 15, 1993, Cato Institute Policy Analysis. [4] "Looking Back to Move Forward: What Tax Policy Costs Americans and the Economy," Gary Robbins, Aldona Robbins, Policy Report No. 127, September 1994, Taxation Analysis, The Institute for Policy Innovation. [5] "Effect of a Consumption Tax on the Rate of Interest," Dr. Martin Feldstein, Ph.D., Working Paper 5397, December 1995. See also, The Flat Tax, 2nd Edition 1995, Robert E. Hall and Alvin Rabushka, The Hoover Institution Press.
|