A Sales Tax By Any Other Name

The Real Estate Espresso Podcast

A Sales Tax By Any Other Name

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A Sales Tax By Any Other Name

Welcome to the ~~Reel~~ 📝Real Estate Espresso ~~podcaster~~ 📝podcast, your morning shot on what’s new in the world of real estate investing. I’m your host, Victor ~~Menasse~~ 📝Menasce.

Most countries have a value-added tax of some kind that is computed on the basis of consumption of goods and services. For example, European countries have a very high value-added tax, typically in the range of 17 to 27% depending on the country. Most member states use standard rates between ~~19 1%~~ 📝19% and 25%. For example, Germany’s standard rate is 19%, France is 20%, Italy 22%, and Hungary 27%, the highest in the European Union, while reduced rates can apply for specific goods like food, books, medicines, depending on national policy.

Now, value-added tax is applicable to nearly all aspects of the value chain in Europe, covering the sale of goods and services at each step from manufacturing all the way to retail. Businesses generally ~~tax~~ 📝collect tax from consumers, they also pay the VAT on their own purchases, and they remit the difference to the tax authorities. Exports outside the ~~european union~~ 📝European Union are usually exempt, but most other business-to-business or business-to-consumer transactions within the country are subject to the tax unless specifically relieved by law or assigned a reduced rate.

A VAT is an integral part of pricing across manufacturing, wholesaling, retail, professional, and it ensures tax is levied at every stage of the value addition but credited against prior VAT payments to avoid double taxation.

Canada has a goods and ~service~ 📝services tax of 5% ~~charge~~ 📝charged by the federal government. Provinces also charge a sales tax. In some cases the two sales taxes are combined into a harmonized sales tax. Just like in the EU, the sales tax is charged at all stages in commerce, but the sales tax paid on the input costs are deductible from the amount collected and owing.

Are these taxes inflationary? I guess so, maybe. Do the sales taxes hurt the ability for people to afford basic necessities of life? Well, they can, and for that reason there is usually some exemptions. For example, in Canada, basic food is tax exempt. If it’s a prepared food, if there’s value added, like it’s a TV dinner, that will definitely have tax applied to it. Retail housing in Canada is tax exempt. In Europe, housing is also tax exempt from the VAT. Now, food in Europe is subject to a reduced tax rate, usually around ~~four percent~~ 📝4%.

So the question is, do sales taxes make it more difficult for investors to earn a profit? Well, the answer is yes, because a tax on new construction adds directly to the cost of construction. Creating new housing supply is extremely sensitive to the balance between cost and revenue. When the input costs rise, projects tip from being marginally viable to failing, and the net ~~results~~ 📝result is a loss of housing.

Older housing stock in the U.S. eventually becomes obsolete and too costly to maintain. These homes fall into disrepair and eventually disappear from the housing stock. Now, if the population is shrinking in that local market, I guess maybe in that sense it doesn’t matter, but if the market requires growth of housing supply, then any input cost increase will definitely hurt. We saw that with the meteoric rise in interest rates in the wake of the pandemic.

The addition of import tariffs, well, it’s just another tax. It is a sales tax, in this case levied on imports. Imagine if the federal government were to levy a sales tax on the American consumer as a whole just like the value-added tax in Europe or Canada. I expect there would be an outright revolt. Republicans and Democrats alike would be united against such a move. But a tax designed to make locally made goods appear more competitive sounds appealing, at least to a portion of the population. But make no mistake, this is a sales tax levied across a wide swath of the entire economy. It is just masquerading as something else.

The problem with this type of sales tax is that it is not discriminatory as to which sectors of the economy are impacted. A sales tax on imported oil raises the cost of fertilizer, which raises the cost of food. It raises the cost of transportation, which also raises the cost of food. Is food being taxed? Well, no, not directly, but the input costs are being taxed. If softwood is being taxed, then the cost of new housing is being directly impacted. If aluminum is being taxed, well then the Ford F-150 just became more expensive to produce. And if copper is being taxed, then the cost of new electric wiring in housing is going to skyrocket on top of the labour costs that are already going up because of the falling numbers of electricians in the industry.

It is pretty clear that the power of the purse rests with the Congress in the U.S. The executive branch of the government does not have the power to impose taxes. And we will see if the tariffs imposed by the President will survive the challenge that is before the Supreme Court, and hopefully the Supreme Court will rule on this soon. Even if the current levies are struck down by the Court, the administration may have the power to impose temporary levies of 15 ~~per cent~~ 📝percent for up to 150 days under the 1974 Trade Act, specifically designed to address trade imbalances. Now, that provision of the law has never been used before.

Supply chains can probably navigate their way around a five-month tariff to minimize the impact on their customers, but right now the Las Vegas oddsmakers are suggesting the chances are high that the tariffs will be overturned by the Supreme Court. If the reality hits home that these tariffs are a sales tax on consumption, I predict the new sales tax will be so unpopular that the population at large will prevent its long-term implementation.

As you think about that, have an awesome rest of your day, go make some great things happen, and we’ll talk to you again tomorrow.

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