Author: ft Editorial Staff

U.S. Monetary Policy: An Introduction, Part 3

How does monetary policy affect the U.S. economy? Editor’s note — The following is the third part in a four-part series. Special thanks to the editorial staff at the FRBSF Economic Letter for reprint permission. Reprinted from the Federal Reserve Bank of San Francisco Economic Letter 2004-03. The opinions expressed in this article do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, or of the Board of Governors of the Federal Reserve System. This is the third of four consecutive issues devoted to our updated and expanded Q&A on monetary policy: (1) “How is the Federal Reserve structured?” and “What are the tools of U.S. monetary policy?” (2) “What are the goals of U.S. monetary policy?” (3) “How does monetary policy affect the U.S. economy?” and (4) “How does the Fed decide the appropriate setting for the policy instrument?” The revised text will appear in a pamphlet soon. The point of implement policy through raising or lowering interest rates is to affect people’s and firms’ demand for goods and services. This section discusses how policy actions affect real interest rates, which in turn affect demand and ultimately output, employment, and inflation. What are real interest rates and why do they matter? For the most part, the demand for goods and services is not related to the market interest rates quoted in...

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The history of taxation in the United States

A brief look at our nation’s tax history. The Revolutionary War: an early aversion to taxes The colonial government of America as a whole did not require much revenue, but individual colonies raised funds for their own administrative purposes by imposing different types of taxes. The New England colonies brought in revenue through real estate taxes, excise taxes, and taxes based on occupation. The middle colonies levied a “head” or poll tax on each adult male. The southern colonies imposed taxes mostly on imports and exports. England began to levy taxes on the American colonies in order to pay the costs of its wars with France. The Stamp Act, passed by Parliament in 1765, was the first tax to be directly imposed on the colonies. Shortly thereafter, Parliament approved a tax on tea. The colonists were outraged and refused to comply with England’s taxes, because they had no representation in Parliament and felt that “taxation without representation is tyranny”. Thus began the American resistance to taxation and the cause for the Revolutionary War. The aftermath of the Revolutionary War When the Articles of Confederation were drawn up in 1781, the national government still had no power to levy taxes. Instead, the government had to rely on donations from the states for revenue. However, the founding fathers knew that the national government could not operate solely on donations, and thus,...

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Tax scams and schemes

The Internal Revenue Service (IRS) released a news alert at the beginning of March regarding the most common tax scams for taxpayers to avoid. The IRS intends to strictly enforce the law against those who perpetuate scams and taxpayers who make false claims in order to avoid paying taxes. The most common tax scams for 2004 are listed below. The misuse of trusts – The IRS warns taxpayers not to pay attention to promoters who promise tax benefits to those who transfer their assets into trust. Some of the promises made by promoters are a reduction in taxable income, deductions for personal expenses paid out of the trust, and the reduction of gift or estate taxes. These are empty promises. The IRS is currently investigating the abuse of trust arrangements to avoid paying taxes. The “claim of right“ doctrine – Promoters may advise taxpayers to deduct an amount equal to the sum of their wages under the claim that the deduction is “a necessary expense for the production of income” or compensation for services rendered. The deduction is not allowed under the law. Corporation Sole – The intent of the Corporation Sole statutes is to allow religious leaders, such as bishops or parsons, to incorporate and thus hold property and conduct business on behalf of their religious organization. The statutes also exempt nonprofit, religious organizations from paying federal income...

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The right of first refusal

This article presents a right of first refusal provision, distinguishing it from a purchase option and contingency waiver provision. A buyer’s preemptive right to purchase A buyer is interested in purchasing a parcel of real estate. The seller also owns an adjacent parcel, which the buyer is also interested in purchasing. The seller, however, is not willing to sell the adjacent parcel. The buyer’s offer to purchase one parcel provides for the seller to grant an option to purchase the adjacent parcel. The option to purchase gives the buyer an unconditional right to later buy the adjacent parcel at his discretion. Should the seller accept the offer, he will have no choice but to sell the adjacent property if the buyer decides to purchase the first parcel.   Should the seller decide to sell during the period of the right of first refusal, the buyer can then acquire the property. The seller is unwilling to leave the timing of the sale in the buyer’s control, or to set a certain date for exercise of a purchase option. The seller counteroffers to grant the buyer a right of first refusal for a five-year period, also called a preemptive right to purchase. Should the seller decide to sell the adjacent parcel during the period of the right of first refusal, the buyer can then acquire the property. If the seller decides...

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Installment sale continues after carryback extended

This article presents the tax reporting rules affecting the modification of a note held by a carryback seller and trust deed investor. No taxable disposition on modification A seller of real estate carries back a note and trust deed to provide the buyer with medium-term financing for a portion of the purchase price, called an installment sale by the IRS. The note contains a five-year due date with a final balloon payment due at the end of the fifth year.   Modification of the carryback note initiated by the seller is not a disposition of the note triggering the reporting of profits. The price received for the property sold is greater than the remaining cost basis in the property, and thus the price received contains a profit for the seller. Taxwise, the profit on the installment sale is: allocated partially to the principal amount of the carryback note under the IRS contract ratio, also called the profit-to-equity ratio; and reported when the owner receives payment on the principal balance, culminating with receipt of the final balloon payment. [Internal Revenue Code §453] As the due date approaches, the seller seeks to further defer reporting the profit in the balloon payment and paying taxes. The carryback seller asks the buyer to agree to an extension of the due date – a modification of the terms of the note. To induce the...

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Zestimates are great conversation starters with sellers and buyers. Zillow has done more for our bottom line than NAR ever has or will. Don’t fight the current of the river, learn to run with it. Disruption is inevitable in any industry that is fragmented or inefficient. Granted, it does feel like armchair experts and platforms are plentiful in real estate these days, but when the tide rolls out we will see the value proposition of the truest professionals in this industry shine once again.

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