Question

1. Many tax reform proposals suggest moving to a flat tax system, one that eliminates progressive tax brackets. One proposal would be that everyone pays (say) 25% of their income. Keeping the rest of the tax code intact, how would this change the market for luxury vs. lower priced homes?

2. I have the choice of two mortgages, one with a low rate and 2 points, and one with a high rate and no points. Why might my choice be based on whether I work for a local company or an international company (assuming pay, benefits, etc. are similar)?

3. On which type of building are capital gains more likely, one with a 3% cap rate or one with a 9% cap rate?

4. Agree or disagree: Lenders bear interest rate risk only if interest rates go down.

Answer 1

1)                                 A flat tax rate system refers to a taxation system in which all the taxpayers of an economy are being charged with the same amount of tax irrespective of the income bracket of the individual. In this particular system, no deductions or exemptions are allowed. It thus provides the taxpayers an incentive to earn more as the taxation burden is reduced for the higher income individuals. But this system is disadvantageous to the lower income people as their tax rates would be increased by a little. It is a form of regressive taxation system wherein the higher income individuals are paying comparatively lower taxes. A progressive taxation is contrary to the same as it imposes higher taxes on higher income individuals and lower tax rates on lower income individuals.

                                    In the given case, it is assumed that a 25% flat tax is being imposed in an economy. With the given consideration, the following would be the effects on the market for luxury and lower priced homes

· A flat rate taxation system is always an advantage to the higher income individuals as the corresponding tax amount would get reduced

· This would help to attract more investment patterns which would mean that the spending in the economy would get improved

· The real estate sector would have serious effects with improved spending patterns in the economy

· With improved spending in the economy, the value of assets would be comparatively reduced as the money flow is higher in the market.

· As more amount of money is available for spending this would mean that the demand for luxury homes is expected to increase in the real estate market

· With increased spending in the economy, lower priced homes would be having lessee demand in the market

· Thus, the standard of living would be improved in an economy with a flat rate system which makes the above possible