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Property Tax Rates Are Higher for the Poor

How can taxes on property be higher for the poor if they do not even own their homes? It's really very simple, as you will see. It is also another example of how money is transferred from the poor and middle class to the wealthy.

A basic principle of economics is that all costs are passed on to the final consumer of a product or service. It has to be this way, of course. No one goes into business to lose money, so the costs have to be fully factored into prices. Providing real estate rentals is no different than any other business in this respect. If costs rise for the investor, rents must rise as well.

Let's look at an example. Suppose an investor buys a small house for $80,000 and rents it out for $600 per month. He is breaking even and wants to continue to do so (of annually course most would like to actually have cash flow, but we'll keep it simple for now). Over the course of a few years his property taxes are raised from $600 to $1,200 per a tax calculator and estimator.

What do you think will happen? Will he just choose to start losing $50 per month, or will he raise the rent to at least $650? Of course he will do the latter. So who really pays that property tax? Isn't it clear as can be that renters actually pay all costs as part of their rent?

Let me clarify this, and address the obvious objection that they don't pay the taxes directly. Whether they pay "directly" isn't relevant. If instead of a personal income tax, your employer paid a large tax on your income and had to pay lower wages to do that, would you really say that you pay no taxes just because you didn't write the check? There are many ways to hide who really pays.

Let me clarify this further, since I know I will get further objections. Imagine if only rental real estate was taxed. The rates would be very high to generate the revenue needed. Now nobody pays taxes except property investors, right? Of course, they might have to triple the rent they charge in order to pay them, and someone has to pay that rent. Now, if the owners were still making money or at least breaking even (if not there would be no investors and no rentals), and the poor renters are paying three times as much for rent, who is really paying those property taxes?

Renters Really Pay The Property Taxes

Now, this isn't shocking. After all, renters live in in rented properties, and someone has to pay the taxes, right? However, the tax rates for rental real estate are typically much higher than for owner-occupied real estate. They are twice as high in many areas, due to special "homestead" rates for owner occupied homes, rules that limit how fast taxes can rise for owner occupied homes, and other special treatments. Where we live in Colorado, for example, senior citizens pay only 50% of the normal rate - but only those who own of course. Renters pay whatever the landlord or investor pays and passes on in rent.

Which people are most likely to be renters? The poor and lower-middle class naturally. So they get to pay twice the rate for property taxes while receiving the same services that those taxes provide. Is this fair? I certainly don't think so.

Of course, communities still have to pay for their schools, police, roads and more, so if renters didn't get taxed at a higher rate, the rates on wealthier home owners would have to be raised. Ironically some of those would be the owners of the rental houses and apartment buildings - the investors people now think are paying those higher taxes on their investments. They aren't. There simply isn't a dollar in property taxes or other costs that doesn't eventually get passed on to the final consumer: the tenant.

When renters have to pay more and others get to pay less as a result, this is effectively a transfer of money from the poor to the middle class and wealthy home owners. How much are we talking about? It is hard to compute, but I'll go out on a limb here.

First, there is about $15 trillion in real estate in the country as of late 2008. I could not find many of the other relevant numbers, but I'll guess that no more than 20% of this is rented, and maybe a third of that is lower-income rentals. That would mean about a trillion dollars in real estate is rented by those who are poor to lower middle class.

Conservatively figuring that real estate taxes amount to 1% of value (it is certainly much higher in many areas) and rental properties are charged 2%, that amounts to about $10 billion dollars in excess taxation imposed on those renters.

Unjustly high property tax rates take perhaps $10 billion from the poor and lower middle class (my own crude estimate based on wehat data I could find online). Again, if rates were the same for all, the wealthier residents would have to pay more in order to have all the public services these taxes support. So though we can hide how these things work, when we look at who actually pays in the end, it becomes clear that this is essentially a transfer of money from the poor to the wealthy.

Read the whole series:
The Redistribution of Wealth to the Wealthy


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Property Tax Rates