By Amy Erixon (Toronto)
Great article in NY Times this week by David Leonhardt called “Why Taxes will Rise in the End”. Bottom line, he states, is there is no such thing as a free lunch. Americans want to protect social security and medicare, two of the three great, looming unfunded government liabilities, yet they stubbornly refuse to pay for it. Can’t have it both ways.
Developed societies around the globe are facing the same political issues: slow-growth economic consequences of financial system de-leveraging and relentless demographics of aging populations. At a time governments should be addressing coherent energy, infrastructure investment and job creation strategies to preserve standards of living in light of rapidly shifting global economic and political realities, they are instead trying to figure out any way to avoid the political heavy lifting of prioritizing spending, rationing public largess and distributing the burden to pay for it. This debate will only get harder as the preponderance of voters moves toward retirement.
In thinking about implications for real estate investors, property tax burdens are an obvious concern. In the US, where avoiding ones share of the tax burden has become the national sport this is one of the causes of job migration from downtown to suburban bedroom communities. A second area likely to be impacted are tax free rollover schemes as well as long term capital gains treatment, duration and marginal tax rates on these profits.
The federal government has already started to examine tax treaties as a way to achieve the multiple objectives of increasing revenues and steering foreign investors from equities into debt products that can help reduce the swollen Fed balance sheet. This is clearly low hanging fruit for the political crowd, since by definition foreign institutions are not voters.
As liquidity returns to the property markets it is important not to lose sight of the fact that tax policy will have a meaningful effect on returns, hold duration and composition of buyer/renter population. At the regional and intra-regional level tax policy will also have an impact on real and relative job growth which translates into rental rate growth and long term property valuations.
In the end, governments can only get the money from the people who have it. And the reality is, long-standing public sector income redistribution schemes cannot be phased out overnight.