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Taxing houses: more economic stupidity
Gerard Jackson
As if ordinary folk don’t have enough to put up with, the peculiar economic fallacy under the name of imputed rent is once again being bandied about. That journalists, even financial ones, have swallowed this fallacy should surprise no one — that many economists have also swallowed this atrocity says much (or is it little?) for the level of economic thought that generally passes for public debate here and abroad.
Economists who support this proposal are saying that home owners should pay a tax on their property as a portion of its imputed rent. Now imputed rent means what any homeowner would have had to pay for his property if he had rented it instead of buying it. Put another way, imputed rent is considered a form of forgone income; it is the income or rent that the homeowner forgoes by not renting out his property. Therefore, according to the received economic wisdom of some, the home owner is receiving tax-exempt income.
A simple example should make the whole thing clear. If a person deposits a $150,000 in an interest bearing account they will pay tax on the interest because it is treated as income. However, if the money is used to buy a house then these economists regard the benefit of not paying rent as a form of untaxed income. Hence, in their opinion, this alleged income should be taxed at the marginal rate. If the imputed rent is calculated, for instance, at $10,000 pa then this would be added to his normal income and taxed at the marginal rate, regardless of the fact that the property is already taxed by local authorities.
The fallacy in this approach should be glaringly obvious to anyone with some training in economics. The price of a house is the discounted sum of the value of its stream of future services. Therefore anyone who buys a house is simply paying the sum of its future discounted rents. Hence, to claim that the house owner is not paying rent is only true in the sense that he has either paid the rent in advance as a lump sum or is paying it in the form of a mortgage.
This money equals the capitalised value of the house. In other words, instead of paying for the future services of the house in the form of weekly or monthly payments called rent (these are time payments) he has purchased the sum of the value of these services in one go or as mortgage repayments.
To force people to pay a tax on imputed rent is simply to misunderstand what has really happened. It should now be plain that the price of any economic good (except the services of labour) is nothing more than the discounted sum of the value of its future services — and that the unit value of these services are rents. Therefore, buying a good is an act of buying the total stream of its discounted rents.
From what has been said, it is clear that to claim that home owners are living rent free is to commit an appalling economic error. Taken to its logical conclusion, these economists’ reasoning would also apply to all durable goods including cars, televisions, computers, furniture — that is, about every economic good you can think of. In reality, this confiscatory proposal is a sweeping wealth tax. No wonder so many people sneer at so-called rational economics (free market economics) when this kind of nonsense is seriously defended by economists are who paid to know much better.
It was the Austrian school that fully developed the idea of imputation and it is only Austrian analysis that has exposed the destructive use to which the concept has been put by so-called ‘progressive’ economists.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 17 July 2006