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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Jim McMannis who wrote (12846)	8/21/2003 7:10:14 PM
From: gpowell	Read Replies (2) \| Respond to of 306849

It's generally accepted economic principle that tax cuts inflate the areas they are applied to. Let’s see if that is generally true. Assume the price of a gallon of gas is $1.00 and that $0.20 of that price is due to tax at the point of sale. This would imply the marginal revenue to the producer is $0.80 and further that his marginal cost is $0.80. Let’s lower the tax to $0.10. The marginal cost remains the same, but now the marginal revenue is $0.90 - at the original quantity supplied. A rational firm will increase the quantity supplied and assuming a downward sloping demand curve price will drop below $0.90. So a $0.10 reduction in the tax produces a greater than $0.10 reduction in price. Exactly how much it drops depends on the specifics of the demand curve and the firm’s variable cost function. It’s generally true for most goods that tax cuts result in a decrease in price greater than the tax cut and an increase in the quantity supplied. Now for an asset a tax cut that results in a yield increase will increase its demand relative to other assets until the yields equate. I’ve already mentioned this several times on this thread. It’s not a major consideration when buying and selling residential real estate.