Federal Taxation of a Good: Houses and Vehicles

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Table of Contents

Introduction
Main body
References

Introduction

The auto industry is one of the main tax payers in the USA influenced by economic changes and demand. The articles, “House Cuts Business SUV Tax Deduction” by Durbin and “Motor Vehicle Leasing and Vicarious Liability-An Update for Lessors describe the main trends in taxation and application of current principles and rules to the automotive industry. The administrative convenience and relative certainty of collection of taxes imposed on business is also a compelling practical consideration which has moved legislatures to rely on business taxes. This is especially clear in the case of sales and use taxes where the tax is supposedly only nominally imposed on business as a means of collecting the tax from the purchasers.

Main body

The article “Motor Vehicle Leasing and Vicarious Liability-An Update for Lessors” describes the case of North America where taxes are paid by the buyer. The tax burden is too heavy for many car owners. In case of car accident, all expenses are paid by the car owner. There is, however, a problem encountered in state and local taxation of business which is not encountered at the federal level. This category of goods is under local taxation. This is the vexing problem of how to tax interstate business. The problem is now under investigation by a subcommittee of the House Judiciary Committee and one can hope that a solution will be forthcoming. In any event the problem is too big to explore here. “By enacting the Graves Amendment, Congress has prohibited vicarious liability against these owners and preempted the laws in states, such as New York, that previously permitted it” (Motor Vehicle Leasing, 2006, p.1). This situation allows more people to buy cars on credit and pay monthly payment regularly. The author admits that if current laws are changed and new sales plans are introduced it would have a negative impact on demand and the economy of the region. In spite of the seriousness of this problem, however, I doubt that it will ever be possible to persuade the states and local governments to abandon taxation plans. It is not always clear whether the various tax proposals to spur economic growth are conceived of as a use of the tax system to encourage economic growth, or as a removal of the discouragement that the tax system offers to economic growth, which could best be removed by abandoning the tax on business. The case of Automobile Leasing shows that low taxes leads to lower prices and increased demand for the vehicles. The need for more realistic and liberal depreciation to encourage capital investment has been well stated so many times in recent years that there is no need to do more than summarize the principal arguments. Faster depreciation permits a faster recovery of a capital investment in depreciable property. If the floor is imposed in this business, it will have a negative impact on the industry and reduce sales. If the price ceiling is imposed, it will help more buyers to purchase new cars and pay all liabilities.

The second article “House Cuts Business SUV Tax Deduction” describes the luxury sport utility Vehicles depreciation rules and recent changes in taxation. The taxes are imposed on the car owner. In this category, there are some problems of classification and depreciation principles imposed on different vehicles. Under these provisions, any gain recognized on the disposition of most kinds of depreciable personal property would be taxed at ordinary income rates to the extent of any depreciation deductions previously allowed Standing alone, these provisions certainly do not appear to stimulate new investment nor to promote economic growth. On the contrary, they will discourage a taxpayer from disposing of equipment that is obsolete or unnecessary in the taxpayer’s business but which may have utility to others. ?, House and Senate lawmakers approved the $25,000 limit and extended it to 2007 as part of the tax reform bill” (Durbin, 2004).

Increased taxes do not have a great impact on demand among wealthy people but they have a negative impact on middle class buyers. It has been observed that the gain on disposition of depreciable property is frequently the result of factors other than excessive depreciation. For example, the gain may be attributable to inflation, to increased costs of replacement, to change in location, or other special factors which make the property more desirable. In the case of depreciable personality, the factors of inflation and choice location are less likely to lead to a market value in excess of depreciated cost than in the case of real estate. In this category, taxes do not have a great impact on price and quality. “The American International Automobile Dealers, which represents 10,000 auto dealers, defended the $100,000 tax break as a way to generate economic growth” (Durbin 2004). In many instances, however, these special considerations can, and will, result in a gain on the disposition of such property. Increased replacement costs will sometimes result in the old property having a higher market value than its depreciated original cost would indicate. If price selling is imposed, it will lead to increased sales of luxury cars by middle class consumers. If the floor is imposed, it can lead to increased burden on automakers and increased prices for the luxury sport utility vehicles. The luxury sport market will not benefit from price ceiling floor or floor because of unique identities and brand images created by luxury automakers. The taxpayer would then be permitted to show that price level increases or other increases of property values were the cause of the gain. If the taxpayer could rebut the presumption, the gain would be taxable at capital gains rates rather than at ordinary income rates.

References

Durbin, D-A. House Cuts Business SUV Tax Deduction. (2004). NBC News.
Motor Vehicle Leasing and Vicarious Liability-An Update for Lessors. (2006).

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Federal Taxation of a Good: Houses and Vehicles

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