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Tax Example Challenged

July 28, 1985

In "Tax Plan Would Seriously Depress Housing, Commercial Real Estate" (Viewpoints, July 14) Stan Ross contends that the after-tax cost of purchasing a home will rise significantly if the Reagan Administration's recent tax proposal is adopted. While this is true for individuals in the highest federal tax bracket under the current law, this may not be the case for individuals in lower tax brackets.

In his example, Ross assumes that an individual in the highest federal tax bracket under current law, that is, the 50% bracket, would purchase an $80,000 house.

While this is possible, I do not believe it is realistic considering the 50% tax bracket equates to taxable income, after other deductions and exemptions, in excess of $175,000 for joint returns filed for 1986, the year the proposal would become effective.

Instead, I believe the purchasers' of an $80,000 home would have much less taxable income and therefore, a much lower marginal federal tax rate under current law. As Ross' article indicates, the lower the marginal tax rate is, the greater the after-tax cost of purchasing a home.

Using a general rule of thumb for conventional mortgage lending, annual payment of principal, interest, taxes and insurance should not exceed 33% of the borrower's gross income. Ross' stated principal and interest payments of $686 per month, property taxes of $200 per month and an assumption for insurance of $20 per month would provide gross income of $32,945.

After deductions for mortgage interest, property taxes and personal exemptions, this would result in taxable income of $25,041 under the proposed law and $24,151 under current law.

The marginal tax rates applicable to such taxable income for 1986 would be 25% (proposed) and 22% (current). These rates would result in tax savings of $165 per month under the proposed law and $189 per month under the current law. Thus, the after-tax cost of purchasing a home would not be significantly greater for people in lower tax brackets under the Reagan Administration's proposal.

However, it is interesting to note that under either the proposed law or the current law, the after-tax cost of purchasing a home is significantly greater than the cost of renting, given Ross' stated monthly rental payment of $650, for individuals in lower tax brackets. This would seem to indicate that the purchase of a home is based on elements other than pure tax and economic considerations, since in either case it may be more economical to rent.

In addition, since the cost of renting is less than buying, this would seem to provide for a continued strong demand for rental units, which developers and builders would seek to fulfill, regardless of the availability of tax-exempt financing.

Thus, while the Reagan Administration's tax proposal may not, in and of itself, seriously depress housing, the public's perception of the proposal may. Indeed, as Ross suggests, "the social and economic consequences of current proposals must be carefully examined."

STEPHEN W. TULCUS

Glendale

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