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Chapter 18: Problem 4

According to an article in the New York Times, some New Yorkers were deciding to buy existing condominiums (condos) rather than newly constructed condos. One reason given was that some buyers "seek to avoid the 1.825 percent transfer tax that buyers must pay on a brand-new condo. (In resales, the seller pays the tax.)" Analyze this reason for buying a resale rather than a new condo.

Short Answer

Expert verified
The 1.825% transfer tax on a new condo is a significant cost that buyers need to bear. If the price difference between the new and resale condos is less than this tax, it is financially more beneficial to buy a resale condo, as the seller bears the cost of the transfer tax in that case.

Step by step solution

01

Understanding the Scenario

In this case, it is given that the buyers opt for a resale condo since the transfer tax of 1.825% on a new condo is borne by the buyers. But in the case of resales, the transfer tax is paid by sellers.
02

Calculating the Tax Burden

Suppose the cost of a new condo is \(X\) dollars. The additional cost that the buyer needs to bear for a new condo due to transfer tax is \(0.01825*X\) dollars.
03

Analyzing the Financial Benefit

If the price difference between the new condo and the resale one is less than the transfer tax, i.e., if \(0.01825*X\) dollars, then economically, it makes sense for a buyer to go for the resale condo where the tax is paid by the seller. This saves them the extra cost of the transfer tax that would need to be paid if they bought a new condo.

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Most popular questions from this chapter

Draw a Lorenz curve showing the distribution of income for the five people in the following table. $$ \begin{array}{l|c} \text { Name } & \text { Annual Earnings } \\ \hline \text { Lena } & \$ 70,000 \\ \hline \text { David } & 60,000 \\ \hline \text { Steve } & 50,000 \\ \hline \text { Jerome } & 40,000 \\ \hline \text { Lori } & 30,000 \\ \hline \end{array} $$

What is the difference between a progressive tax and a regressive tax? Give an example of each.

(Related to the Chapter Opener on page 600 ) In 2017 , the Trump administration proposed changes to the federal tax code, including reducing the top corporate income tax rate from 35 percent to 15 percent. An article in the Wall Street Journal noted, "A tax overhaul could give companies more incentive to invest." a. What type of investments is the article referring to? Why would cutting the corporate income tax rate lead companies to engage in more investment? b. Some policymakers and economists are critical of cuts in the corporate income tax rate because they argue that such cuts increase income inequality. Does the incidence of the corporate income tax matter in evaluating this argument? Briefly explain.

An article in a Federal Reserve publication noted that "nearly all taxes create some market inefficiency in the form of deadweight loss." The article further noted that when something is taxed, the result is "an outcome in which both [buyers and sellers] would gain from more production." a. Briefly explain why taxes result in deadweight loss. b. If buyers and sellers would gain from more production of a good or service that is taxed, why doesn't more of the good or service get produced?"

Describe the main factors economists believe cause inequality of income.
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