Land Value Taxation will solve many of the 21st century's most serious social, economic and environmental problems, and promote justice, fairness and sustainability. We CAN have a world in which all can prosper.
Progress and Poverty, by Henry George Here are links to online editions of George's landmark book, Progress & Poverty, including audio and a number of abridgments -- the shortest is 30 words! I commend this book to your attention, if you are concerned about economic justice, poverty, sprawl, energy use, pollution, wages, housing affordability. Its observations will change how you approach all these problems. A mind-opening experience!
Henry George: Progress and Poverty: An inquiry into the cause of industrial depressions and of increase of want with increase of wealth ... The Remedy This is perhaps the most important book ever written on the subjects of poverty, political economy, how we might live together in a society dedicated to the ideals Americans claim to believe are self-evident. It will provide you new lenses through which to view many of our most serious problems and how we might go about solving them: poverty, sprawl, long commutes, despoilation of the environment, housing affordability, wealth concentration, income concentration, concentration of power, low wages, etc. Read it online, or in hardcopy.
Bob Drake's abridgement of Henry George's original: Progress and Poverty: Why There Are Recessions and Poverty Amid Plenty -- And What To Do About It! This is a very readable thought-by-thought updating of Henry George's longer book, written in the language of a newsweekly. A fine way to get to know Henry George's ideas. Available online at progressandpoverty.org and http://www.henrygeorge.org/pcontents.htm
Where Else Might You Look?
Wealth and Want The URL comes from the subtitle to Progress & Poverty -- and the goal is widely shared prosperity in the 21st century. How do we get there from here? A roadmap and a reference source.
Reforming the Property Tax for the Common Good I'm a tax reform activist who seeks to promote fairness and reduce poverty. Let's start with the enabling legislation and state requirements for the property tax. There are opportunities for great good!
The widespread reduction in property tax yields created by the real estate bust is grim news for local governments because this tax remains their major revenue source. It is our contention that reforming the property tax can set communities on a path that generates jobs, reduces sprawl, expands affordable housing, and attacks a root cause of boom-and-bust cycles.
Traditional property tax incentives are upside-down. They impose higher taxes on owners who construct or improve homes and commercial structures. They reduce taxes for owners whose buildings deteriorate. Owners of boarded-up buildings and vacant lots typically pay lower taxes than owners of well-maintained properties.
The tax penalty on buildings is easily underestimated. Property tax rates, typically set at 1 or 2 percent of value, seem modest. Unlike a one-time sales tax, however, the tax is levied year after year. Over the life of a building, the building tax can be equivalent to a whopping 10 to 20 percent sales tax.1 This cost barrier explains why many developers launch major projects only after first obtaining property tax abatements.
Those are the opening paragraphs of a fine article, co-authored by Walt and Rick Rybeck. Walt is the author of a recent book, Re-solving the Economic Puzzle, available from amazon and schalkenbach.org. I commend both to your attention.
Has no one in California figured out that when the calf is deprived of mother's milk, starvation is inevitable?
It has taken 34 years, but it is coming about.
Feeding calves grain, or seaweed, or sunflower seeds isn't as smart as letting it consume its natural food.
Taxing wages, sales and buildings isn't as smart as collecting the lion's share -- calf's share, if you will -- of the land rent for public purposes.
Proposition 13 was designed to make sure that the cows' milk was kept for the Irvines, the big landowners, the commercial property owners, and the longtime homeowners, while providing a diminishing fifth of it to the calf and supplementing with grain, seaweed and sunflower seeds.
The calf's digestive system has blown up because it was deprived of its proper food, and "nourished" with stolen fake food.
Speaking of growth, how about abolishing taxes on income and capital, and replacing it with a flat, albeit hefty, tax on land (or rents more generally) - the Henry George argument of several ages ago?
No real estate bubbles...
A highly competitive tax system...
Less idle housing, urban sprawl, or massive ghettos due to sky-rocketing rents...
No. We'll be back in this position again in 20 years time, just as the US was in 1798, 1819, 1837, 1857, 1873, 1893, 1907, 1929, 1973, 1990, 2008 (i.e. depressions preceded by massive real estate bubbles OR speculation on natural resources (silver or copper)).
Man is a land animal as much as a fish is a water animal. Not only does man live on land but all of his wants are supplied by or from land. The earth is, literally, his mother. He will perish quickly if he has not access to the breast of his earth mother and will suffer and squall and become panicky if he has not free access to earth's breast and cannot obtain sufficient nutriment. His relation to land is fundamental and can be broken or disturbed only at great peril and loss to him and to society.
Production and consumption will always be in equilibrium and commerce and exchange will always flow smoothly, if all men at all times have equal and free access to nature's storehouse of wealth and if there are no dams -- tariff, -- etc. to interfere with the exchange of products. Free land and free trade are therefore, essential to economic justice; to give all an equal opportunity to produce goods and to exchange them without paying toll to anyone. When goods are produced and exchanged freely, it is reasonably certain that production and consumption will run so closely together that there can be no serious panics or long periods of depression. Serious maladjustment can and will occur only when production and exchange are interfered with and to the extent that they are interfered with.
The private ownership of land, that is, the taking of economic or land rent by private land owners, or landlords, most seriously interferes with some men's access to mother earth. Landlords are not only dogs in the manger; they are a class and about the only class, except the tariff beneficiaries, that consume without producing; that do not give a quid pro quo for what they get.
The capitalist supplies capital and is entitled to the interest that he gets. The laborer --wage, salary or fee earner -- produces goods or gives services and is entitled to what he gets in exchange. The landlord produces neither the land nor the land rent and is not, therefore, entitled to the rent that he takes. He is the only one who takes out of the economic pot without putting something into it. He is the only one who can and does live off the labor of others. He is the greatest of all economic leeches.
Professor Thorold Rogers said, in 1870:
"Every permanent improvement of the soil, every railroad and road, every bettering of the general condition of society, every facility given for production, every stimulus supplied to consumption, raises rent. The landowner sleeps, but thrives. He alone, among all the recipients in the distribution of products, owes everything to the labor of others, contributes nothing of his own. He inherits part of the fruits of present industry, and has appropriated the lion's share of accumulated intelligence."
If, as in ordinary times, the landlord takes only a moderate rent, that is, charges only the actual rental value of land to the capitalist and laborer who use land, production and consumption proceed normally, for society has fairly well adjusted itself to this unjust system. In times of great prosperity -- so-called -- when there is great speculation in land values and they rise rapidly, the landlords can and do take even more than the normal rental value of land; that is, more rent than is produced by society. Access to land then becomes so difficult and the prices that producers have to charge for food, clothing and shelter become so high that consumers are unable, after paying excessive rent, to purchase all of the goods produced. Hence, the glut in the market; the decline in the prices of commodities; the collapse of the over-extended credits; business failures; closed mills; idle labor and low wages. The business depression does not end until land values have declined to or below normal for the population. Soon thereafter business begins to revive, mills to open, unemployment to decrease, wages to advance and prosperity to return. Industry will continue on the up-grade until rents again become excessive. Most, if not all, periods of prosperity end with real estate booms. Even our present war prosperity will probably continue until there is a boom in city, farm, forest and mine land values.
Found in the files ... the phrase at the beginning of the 3rd paragraph caught my attention, and then the rest seemed worth sharing:
Thank you for letting me see Mr. ___'s thoughtful and thought-provoking paper on tax incidence.
I could go through this paper in detail, praising where I think it warranted and criticizing in other spots. However, it seems more constructive to offer, tentatively, a different set of parameters, which, for me at least, clarify the matter of incidence as no current author is doing. At least it will suggest a different viewpoint from which to analyze incidence.
In the first place, land values are the great catch-all of externalities, both positive ones and negative ones. To an extent, that is what Lowell [Harriss]'s conferences on "Subsidies and Other Government Spending: Effects, with Special Reference to Land Values" and the subsequent book "Government Spending & Land Values: Public Money and Private Gain" were all about.
In the second place, as his paper points out, taxes on land values are not shifted and taxes on improvements are shifted, and for the reasons he states: land is of fixed supply and improvements are not. This, ceteris paribus, is why they are built into price and paid for by the consumer in the one case and are reflected in a lower price in the other.
But there is a factor not cited in the paper, nor in the limited amount of the literature with which I am familiar: that is the current state of the economy -- whether we are in a boom or a bust. When the demand for office or residential space is lively, the lessor waits only for the expiration of the current lease (and only if he must!) to raise the tenant's rent; when the rental market is in the doldrums, he grins and bears it, or is foreclosed, or tears his building down, to escape taxes.
I think the idea of "backward shifting" is specious; I believe it is a conconction of dear old Harry Gunnison Brown's. It has certainly set thinking on incidence back generations, having muddied the waters of a simple phenomenon to the point where no one seems to know anything certain at this time.
Lastly, may I suggest that Mr. ___ dip into Homer Hoyt's "100 Years of Land Value in Chicago," Chapter 7, especially pp. 373-403, where Hoyt lists the order in which various phenomena occur from trough to trough. He counts twenty of them; the enclosed chart, based on Hoyt, expands the list to thirty, in the interest of elucidation. In this he will see how land values tend to lag on the upside somewhat at the beginning, then get out of hand completely, and finally again especially lagging on the downside. In this he may discover primary forces affecting the natural tendencies of incidence.
--at least, this is what I think I see in all this. Thanks again for the opportunity of studying this interesting paper.
--from a letter from Weld Carter to Arthur Becker
(professor of economics, University of Wisconsin-Milwaukee and
Mason Gaffney discusses them in his "The Great Crash of 2008" (see the LVTfan blogpost here).
and finally, Which Georgist first called LVT the "least bad" tax? contains a reference to Hoyt; this book was his PhD thesis at the University of Chicago, which Milton Friedman was likely aware of when he said, both in the 1970s and shortly before he died in 2006, that land value taxation was the "least bad" tax. (Incidently, that blogpost title does not refer to Friedman; it refers to Lowell Harriss, mentioned in Carter's letter.)
Finally, you might take a look at Carter's discussion of Hoyt in his Clarion Call.
Continuing through some old files, I came across this eloquent statement in the minutes of an executive committee meeting for the Robert Schalkenbach Foundation:
"Middle income homebuyers, especially, are having to pay a lot more for their homes because of the inflation in land prices. They are having to pay more for their financing, too, because financing also reflects land prices.
What land speculators can get for their land, they can get because of the enormous expenditures of tax money to make that land usable.
I do not think the American conscience is sufficiently sensitive to be aroused because land speculators get rich at the expense of the government, because the public has come to regard the government as a cow to be milked. It would, therefore, be unwise to place the emphasis on how speculators get rich at the government's expense. Rather ... we should emphasize that the homebuyers are the ones who have to pay, have to dig deep into their savings to pay speculators more for the land, not because the speculators did anything to earn a higher price, but because taxpayers spent millions to make it better."
-- Perry Prentice, 3/5/1965
California, with Prop 13, should take note. Anyone who wants a more stable economy should take note. Anyone who would like to see the cost of living for ordinary people be stabilized and reduced should take note.
could be the next country to go bust, if its headlong rush to build
ever-taller skyscrapers is a guide to its future economic health.
to a study by Barclays Capital, the mania for skyscrapers over the last
140 years is a sure indicator of an imminent crash.
It points out
that the construction boom that threw up New York's Chrysler and Empire
State buildings preceded the New York crash of 1929 and Great
More recently, Dubai built a forest of skyscraping
offices, hotels and apartment buildings, including the world's tallest,
the Burj Khalifa, before it got into terrible financial difficulties. In
2010 Dubai had to be bailed out by its neighbour, Abu Dhabi, to avoid
Bar Cap's report said: "Thankfully for the world
economy, there is not currently a skyscraper under construction that is
planned to overtake the height of the Burj Khalifa."
BarCap said the "unhealthy correlation" between construction of the
world's tallest buildings and economic crashes was likely to ensnare
China, which is home to half of the world's skyscrapers currently under
The article ends with this:
A branch of economics founded by followers of US economist Henry George has charted property collapses over the last 100 years and found that booms create the conditions for a downturn around every 18 years.
Fred Harrison, a Georgist and research director of the Land Research Trust, wrote in his 1997 book The Chaos Makers that "by 2007 Britain and most of the other industrially advanced economies will be in the throes of frenzied activity in the land market … Land prices will be near their 18-year peak … on the verge of the collapse that will presage the global depression of 2010."
Traditional Henry George School classes, including Progress & Poverty,
help us comprehend how an economy based on justice would never crash
the way ours has over the past few years. But now that we’re in a mess,
how do we get out?
After the Crash
extends and applies Henry George’s analysis to the problem of today:
How to help the economy recover and improve opportunity for productive
work. The text is Mason Gaffney’s book
of the same name, a copy of which is included in the $25 registration
fee. Bob Jene is the instructor. Class meets Tuesdays, 6 PM, January
10 thru February 28, at 28 E. Jackson #1004. You can use this form to pre-register, or just show up.
There's a website for this book here, which includes the preface to the book (a useful document in its own right), and a link to an interview with the author, Mason Gaffney.
If you are anywhere in the Chicago metro area, go take this course!
Today's economic problems aren't new. America's economy crashed in 1819, 1837, 1857, 1873, 1893, 1907, 1920, 1930, 1955, 1973, 1981, 1990, 2001, 2008.... each crash different in detail, but similar overall: People willing and able to work could not find the opportunity they needed and were thus thrown into poverty. And even in good times, millions of willing American workers remain unemployed. The cause of economic difficulty is no mystery. Nor is the remedy. Philosophers, and even some economists, have understood for decades what opportunity really is and how it can be assured for all. One of the greatest writers on this subject was Henry George, and his book,Progress & Poverty, provides an excellent framework for understanding the problems we face today.
This is from the announcement of a 5-Saturday course which uses "Progress and Poverty" as its textbook, offered at the Blue Island Public Library, starting at the end of January. It is being offered by Chuck Metalitz and David Harrell of the Henry George School of Chicago.
The page continues,
Course Outline We start with a discussion of the problem: Why has our nation, despite its enormous productive power, failed to provide to everyone the opportunity to earn a living wage? And why does our economy crash periodically, causing even more poverty and economic misery? We evaluate current explanations, and find them unsatisfactory. Using the tools of classical economic analysis, we determine the fundamental natural laws which limit how much people can earn, and see how progress can actually worsen poverty. Does that mean technological progress must be stopped? Of course not. Reasoning from morality as much as practicality, Henry George proposes a pro-liberty, anti-privilege public policy which can end poverty while increasing the general level of prosperity. We discuss and evaluate this proposal, in theory and in practice, for the 21st century. The main text we use is Henry George's original Progress & Poverty. For several years after its original publication in 1879, this book was an American best-seller. Although the original 19th-century text is a classic, many of our students choose instead to read an edition “abridged for modern readers.” You will be amazed how George's analysis is spot-on to 21st-century issues. Supplementary notes are also provided to clarify and update as needed. And the instructor will thoroughly discuss all the important points in the class. What you will learn
You will learn a method of reasoning that is useful in understanding all sorts of community problems.
You will know the mechanism by which poverty tends to worsen as the economy progresses, and why programs aimed at alleviating poverty are unlikely to succeed.
You will see the inherent contradictions which cause most “economic development” programs to fail.
You will understand the fundamental cause of the ongoing financial crises.
You will know why similar crises occur repeatedly, every decade or two.
You will recognize that honest and efficient government, improved public education, and many other desirable reforms cannot by themselves bring prosperity nor end poverty.
You will have a better understanding of the economic system under which we live.
You will know how Liberty and Justice are essential elements of any system which works for everybody.
You will have understand and have evaluated for yourself a method of method of public finance which many claim would end poverty and prevent financial collapses.
What you won't learn
You won't learn any sure-fire method for getting rich. However, you will gain knowledge which may help you prosper personally.
You won't learn a magic formula for peace and prosperity. But you will have a better understanding of concepts which are essential for making peace and prosperity possible.
If you're in or near Chicago, check out the class. (You'll also find classes in NYC.) Otherwise, you might explore these ideas on your own.
Progress & Povertyat the Henry George School Where adults learn how the economy really works Henry George School of Chicago 28 E Jackson Blvd #1004; Chicago 60604hgchicago.org 312/362-9302 Anti-privilege, pro-liberty education since 1934
The newest issue of Progress, an Australian Georgist publication, is online here. The motto is "Sharing the Earth So All May Prosper."
There is a lot of good material, and I'll share some of the things that caught my eye.
An article about a film entitled "Real Estate 4 Ransom" which I commend to your attention, wherever you live. (I'll keep you posted on the film itself.)
“Economist James Galbraith has noted that only 12 out of 15,000 economists in the US noticed the US$8 trillion dollar housing bubble” (page 6)
We propose a change in the tax mix so that future infrastructure pays for itself by expanding the tax base without increasing the tax burden. (page 9)
Infrastructure adds enormous value to land in prime locations according to proximity and serviceability. Land Value Capture (LVC) is a simple technique to recycle the publicly funded windfall gains that accrue to land owners. Importantly, these windfalls are captured over the life-cycle of the infrastructure, such that one generation is not hit with the total infrastructure costs (ie as per the current preference for Developer charges). (page 10)
Windfall gains from infrastructure add up to several times the cost of the infrastructure to surrounding properties. We propose that a sufficient contribution from this windfall be recycled back to the government so that other infrastructure projects can be funded without substantially burdening one generation over another. At present land speculators baulk at paying barely 10% of the land bounty (windfall gain) back to the community via government’s Land Tax, Council Rates, Stamp Duties and Capital Gains. (Page 11)
“Henry George did more than draw ‘the deadly parallel of riches and misery.’ He recast the science of political economy by working out the natural laws of the distribution of wealth. He destroyed the current academic theory of wages and capital. He amplified and extended Ricardo's law of rent. He dug to the root of the wealth distribution.” (John Dewey, quoted on page 22)
If you could choose the sort of society that you were to be born into, would you choose one in which the distribution of wealth is guaranteed to be equal? (page 28 -- and don't miss the illustration cartoon on "trickle-down economics"!!)
The world faces a series of worsening crises, climate instability, rising energy costs, economic apartheid, and erosion of democratic institutions. What is required is not a set of technical instruments that try to resolve these, one at a time. We need a new social philosophy that addresses all these crises simultaneously. (page 38)
All 17th century authors took it for granted that God had given the earth to all people in common, not just to those who had claimed title to a part of it. Starting with that premise, the difficulty lay in justifying private ownership of nature. They saw that private property in land or ocean or other gifts of nature was an obvious usurpation of the rights of the rest of humanity. Private ownership was deemed a necessary evil to achieve more productive use of nature, but it was clearly an evil, never an institution that was good in itself. (page 39)
The idea of charging a fee for the use of nature and sharing the revenue equally might seem like a proposal that would not be threatening to powerful interests, but it is. The wealthy at present take a disproportionate share of the common stock of resources, both renewable and non-renewable, and they aim to keep it that way. (page 40)
“Ironically, what comes closest to being sacred in modern societies are individual rights, private property, and personal freedom.” (page 41)
“It seems that most people are concerned only with the future of their own children, not with the next generation as a whole.” (page 43)
A lot of good material -- and I've barely mentioned the graphics!
The tax plan being promoted by one of the presidential candidates, Herman Cain, seeks to impose a federal personal and corporate tax rate of 9% and a national sales tax of 9%. The word for "no" in German is "nein." Since the 9-9-9 plan would be neither equitable nor efficient, we can respond in German, "nein, nein, nein!"
The first "nein" is on the 9% business flat-rate income tax. This would impose a tax on gross income minus purchases from US firms, investment in capital goods, and exports. That would be much better for enterprise than the current top income tax rate of 35%. However, recognizing that any taxes on production has an excess burden, the best tax rate of all would be a flat zero.
The second "nein" is on a personal income tax rate of 9% on gross income minus charitable donations. The plan complicates this with special tax rates in "empowerment zones." Such enterprise zones often just shift business away from other areas, and then the land rent in the zone goes up to soak up the locational advantage, so the ultimate gainers are the landowners, especially those who are politically well connected and are able to buy up land in the zones prior to being established.
The poorest workers pay little or no income tax today, or even get cash under the "earned income tax credit". The flat-rate 9% tax would make the poor pay higher taxes. Again, a 9% tax is better for most taxpayers than the current tax rates that go up to 35%, and a flat tax that eliminates real estate deductions and exemptions is also better, but best of all would be a flat wage and profits tax of 0%.
The worst part of the 9-9-9 plan is the 9% national sales tax. While to some extent the effect of the sales tax would be offset by the reduction of income taxes, still, sales taxes get added to the cost of production to increase the price of goods. For companies that were making little profit, they would have paid little income tax, so the tax could end up raising their prices by more than the current tax system. If they employ low-wage labor, those workers would have been paying little or no income tax, and would now have to pay the higher nine-percent income tax, which would further increase costs to those enterprises. The 9-9-9 plan would dramatically increase income inequality at a time when inequality has already been rising rapidly.
The 9-9-9 plan is supposed to be revenue-neutral, but analysts have found that it would generate less revenue than the current system, so the 9-9-9 numbers would probably be raised to 10-10-10 or higher. Once a national sales tax or value added tax is in place, the tax rates could be raised, as they have been in Europe.
It has been pointed out that the tax plan being promoted by Herman Cain is the same as the tax structure in the 2003 video game "SimCity 4". This video game simulates a city, and the default tax rate is 9-9-9. According to some analysts, in this simulation game, the 9% tax rates were not enough to finance the desired public goods.
The favoring of one tax plan implies the rejection of the other systems. The advocacy of a national sales tax implies the rejection of alternatives such as a national land-value tax. So we can ask why a candidate is rejecting a tax on land value in favor of a tax on produced goods.
Herman Cain is correct in saying that the natural state of the economy is prosperity, and that freedom promotes prosperity. He is right in saying that government must get out of the way of production. He is right in saying that production drives the economy. But he does not go to the logical conclusion of the free-market argument: marginal tax rates of zero. To best promote employment, investment, and growth, place no tax on additional production, trade, or consumption.
A land-value tax would best let the economy rise to its natural rate of prosperity. LVT would be levied on the economic rent of all land. Taxing land value is equivalent to taxing its economic rent, also referred to as ground rent or geo-rent. LVT would be based on the most productive use of a plot of land, regardless of current use, and regardless of current rental payments. Thus if a plot of land were not being used as productively as possible, the tax would push landowners to make the best possible use of their lands, or else pay the same as those who do.
LVT would promote equity and greater equality of income and wealth, because it would equalize the benefits from land, and equalize the gains from economic progress as captured by higher rent.
The prices of goods, including wages and interest rates, provide information about their scarcity relative to the desire for those items. Taxes both on production and on goods twist, distort, and skew these numbers, so that the economy is operating on false signals. LVT does not change the market rent, and rather than acting as a tax, it acts to remove a subsidy. Land value gets subsidized as the public goods provided by government, but not paid for by landowners, pumps up rent and land value. If this rent is not collected for public revenue, then it is a gigantic subsidy to land ownership. Thus taxes on goods and on income from production and not on land value end up subsidizing land value and shifting wealth from the poor to the rich.
Thus if the 9-9-9 plan increases wealth, the gains would go to the rich at further expense to the poor. The worst part of the plan is its continuation of the massive subsidy to land value, and even if the plan generates more growth, the benefit will ultimately go to higher rent and land value, generating an even greater real estate boom to be followed by another big crash.
So let's say in German: Nein! Nein! Nein! Let's also say Zero, Zero, Zero! Zero tax on wages, zero tax on goods, zero subsidy to land value. The tax emperor appears to be dressed to the nines, but like in the story of the naked emperor, the cloth is imaginary. -- Fred Foldvary
Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
Amid all the talk of rebalancing the economy, there is little mention of the most powerful lever the government could pull to generate growth, which involves a switch from taxing income to taxing wealth.
It is a subject that tends to get little coverage, mainly because its supporters are considered on the fringes of the political spectrum. Ultra-lefties support wealth taxes for obvious reasons. Ultra-capitalists support them because they understand that allowing the rich to ring-fence much of the nation's assets and protect the mechanisms that allow values to increase without any serious government interference robs their children, and everyone else's, of any incentive to work harder.
What they are all talking about is the adoption of a land value tax. Purists would abolish all current taxes and replace them with an LVT that asked for a payment in line with the value of land under ownership.
Someone earning £40,000 a year would stop paying around £7,000 in income tax, £1,000 to £2,000 in VAT, £1,600 council tax and any of the transaction charges that fill the exchequer's coffers. No more capital gains tax or stamp duty on property sales or the sale of shares. Instead they would pay a fixed annual sum, to be paid monthly, on the value of their land, which could have a wide range, depending on how much the land is worth.
Move out of town and work locally, and your overall tax bill could be a fraction of its current total. Buy an expensive piece of real estate in the city centre and you would probably pay more.
Under the proper working of the council tax, increases in property values, as opposed to land values, lead to higher taxes, which is a disincentive to carry out those improvements in the first place.
Mark Wadsworth is an economist, blogger, sometime Tory Bow Group adviser and campaigner for land value taxes. He recently told Economic Voice website: "I'm an economist not a politician, and I can only repeat what all the great economists have said down the centuries: taxes on land values are the least bad taxes because they do not depress or distort economic activity, ie wealth creation. Land value tax is easy to assess, cheap to collect and impossible to evade.
"Not only that, LVT is an entirely voluntary tax: you decide how much you are willing to pay and you choose a house or a flat within that price range. Only, instead of handing over all the rent or purchase price to the current owner, the location value would go to the government."
What he means by this last sentence is that property prices would necessarily settle at a lower level because a buyer will deduct the location value, knowing they must send it to the exchequer in the form of a tax.
Yes! Think about the ramifications of this: as a buyer, you'd be paying the seller only for the value of the house itself, not the site on which it sits, which he did not create. A, say, 10% downpayment would be affordable to many more people, and, because one would not need to borrow from a mortgage lender to pay off the seller, that credit would be available for other purposes --- entrepreneurs could invest in the goods that would make their business work better.
The article goes on to report that the OECD wants to keep the VAT too, apparently in an attempt to influence consumer behavior -- I assume by discouraging it.
What we tax, we get less of. What do we want less of? Land speculation, or jobs?
Who chooses? Whose interests do they have at heart?
Well, from time to time, we hear that Americans aren't saving enough, and sometimes columnists ask for suggestions of how we might increase America's savings rate.
Moody's has provided the answer: cut federal income taxes on the highest income people, and they will save a significant portion of it. (The question arose because some say that in order to facilitate job creation, we ought to avoid increasing federal income taxes on the portion of taxable income over $250,000 per year.)
If the goal is to produce savings at the median, or at the 25th or 75th percentiles, or at the 10th or 90th percentiles, reducing taxes on the highest-income 2% or so is not going to serve the purpose. But it will satisfy the "increase America's saving rate" goal.
Before we went into this recent "bust" portion of our 18-year boom-bust cycle, a shocking proportion of Americans lacked sufficient savings to provide even a poverty-line existence for their families for as short a period as 3 months. (Edward Wolff of NYU wrote the study on this.) Most of us live paycheck to paycheck.
The notion of saving for a "rainy day," or even of saving to buy one's next car for cash, seems quaint and of-another-era, with so many of us paying more than 40% of our income for housing. (Yet we don't complain about owing our soul to the company store. Now it is the FIRE sector we owe.) And look at the measures we've used to substitute for people's inability to save a 20% down payment on a starter home!
But the best-off among us -- both those who have large amounts of wealth and many of those who receive high wages or high profits on their "labor" (even if their labor consists of reaping that which other people sowed, they do regard it as labor, and sometimes the IRS does, too -- unless they run hedge funds, in which case it gets treated just as if they'd actually invested their own capital in a way a corporation could use to enhance its operations!) -- can and do save and invest. And clearly this is an aspect of the wedge driven through society which Henry George described 130 years ago, driving some up and the vast majority down.
The wealthiest among us own, and take opportunities increase their holdings of, the corporations -- public and private -- which hold our best land (urban, oil-laden, etc.) and our non-renewable and/or otherwise finite natural resources. (See "stock ownership" in the tag cloud at left for the data.) We praise them as if they are somehow self-made, and let them parade about as such, and we gratefully accept their charity -- tulips and swimming holes on Park Avenue -- as if it made up for what they and their ancestors stole from us and ours, and what their children will reap from the labor of our children. We don't see the structures by which they do it -- we're so used to them that they are, like the air we breathe, invisible to us. But 120 years ago, most Americans did understand them. (Explore the free NYT archives, 1880 to 1900, for the name of Henry George, and do some reading. I suspect even the American history and American Studies majors will be surprised.)
The first-time home buyer's tax credit has put many people into homes with virtually no skin in the game.
In fact, an examination of the numbers shows that the government was actually paying people to buy houses. When the tax credit was implemented, the average home price in the U.S. was $178,000. Mortgages were primarily provided through the F.H.A. at that time, which required a maximum of a 3.5 percent down payment. Therefore, on the average home, a down payment of about $6,200 was required. The first-time home buyer's tax credit was $8,000. The result was that buyers were handed a deed to a house and a check for $1,800. We have seen that movie already and know how it ends.
Based upon this tax credit program, which steals transaction volume from subsequent periods, was it any surprise that home sales plunged 27 percent after the expiration of the program?
I'd not seen the math before, but I think he's quite right in his observation. And every one of the sellers was enabled to go on about his life, armed with home equity or at least freed of his debt, perhaps to buy a move-up house in a better location.
Later in the article, he continues,
GIVEN THESE CONDITIONS, economists have projected a growing
likelihood of a double dip in the national housing market. A double dip
would have negative implications for our commercial real estate market.
Let's connect the dots.
We have previously discussed the importance of
employment on commercial real estate fundamentals. Small businesses are
the leading contributor to job creation and growth in the U.S. The fact
is that home equity withdrawal and credit card borrowing are the primary
financing sources for the majority of small businesses. Given new
regulation in the credit card industry, which was ironically initiated
to "protect" consumers, credit availability has shrunk and that which is
available is more expensive than it was. Therefore, small business has
restricted access to this form of financing. This places even more
importance on home equity.
To the extent that home equity grows, it provides
existing and potential small-business owners with a source of financing
for job creation. Additionally, home equity creates a "wealth effect"
that stimulates personal consumption. With consumer spending making up
nearly 70 percent of our gross domestic product, this has important
implications for our economy at large. Second-quarter 2010 G.D.P. growth
was adjusted downward from an initial estimate of 2.4 percent to just
1.6 percent. This is far below the 6 to 8 percent growth rate normally
seen at this point in a recovery. An increase in consumer spending would
lead to healthy G.D.P. growth.
Do we really want to repeat this boom-bust cycle business again? Do we have a reason to think that "this time it will be different" somehow?
Seems to me that we'd be better off if we followed Mason Gaffney's advice in "How to Thaw Credit, Now and Forever." While you're at it, take a look at "The Great Crash of 2008" and "After the Crash: Designing a Depression-free Economy. All are available at http://www.masongaffney.org/.
Or maybe you'd like to see us repeat this last few years again. I know: you'll be smart, and know when to get out of the "housing" -- land -- market, and make out just fine, won't you? It is just the other poor suckers who will suffer next time, right?
If you want to enable and encourage those potential small-business owners, the best thing you -- WE! -- can do is implement policies which bring DOWN the selling price of land and reduce the disincentives to development of well-located sites to something approaching their highest and best use.
The folks who consider their best hopes to be from reaping the appreciation in land values -- be it as real estate brokers, mortgage brokers, title insurance brokers, speculators, "investors," "capital" gains takers -- as well as the credit card companies financing business startups at 22% annual interest -- will not like this much. But they're much less concerned about US as a society than they are about what might be great for their sector. Yes, they have a lot of influence over policy. And until a significant minority of us come to understand the economics of land, and how it can be used as a force for the common good rather than for private gain, they will continue to spend enough to influence our votes, and tell us it is in OUR best interests. Ever heard of hiding behind the widows' skirts? This is a fine example.
The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.
Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
It seems as if the suggestion is that we ought to let the housing market crash, and then hope that we will pick up again where we left off, and experience this boom-bust cycle again.
There doesn't seem to be much discussion of the factors that produce the boom-bust cycle, or of the notion that we can actually prevent the next boom-bust cycle through wise policy.
What policy? A tax shift. Shift taxes off wages (starting at the bottom); off sales (starting with essential items); off buildings of all kinds and equipment. What's left to tax?
That which we should have been taxing all along: the value of land. Henry George (b. Philadelphia, 1839; died NYC, 1897) introduced the idea in his 1879 book, Progress and Poverty, which remains 130 years later the best selling book ever on political economy. It sold over 6 million copies by 1900, and George, Thomas Edison and Mark Twain were perhaps the three best-known public figures of their day. George's "remedy" came to be known as the "Single Tax." It was a recipe for small government -- right-sized government, funded by the only legitimate revenue source: value created by nature and by the community. Land, to the classical economists -- Adam Smith, David Ricardo, John Stuart Mill, Henry George, etc. -- was distinctly different from capital. (The neoclassical economists -- and those who only know their sort of economics -- can't seem to see the difference, and conflate them, leading to all sorts of stupid -- and unnecessary -- messes!) Land includes not just the value of locations (on earth, in water, in space) but also electromagnetic spectrum, water rights, non-renewable natural resource values, pollution "rights," and lots of other like things. (Mason Gaffney provides some excellent lists.) Those locations include urban land, land made valuable by favorable climate, water supply, access to ports, to transportation systems, to desirable views, to vibrant cities with jobs, cultural amenities, educational opportunities; geosynchronous orbits; congestion charges; parking privileges, etc. Those of us who claim title to a piece of land ought to be required to compensate the community in proportion to the value of that land, for the right to exclude others from it. That compensation should be paid month in and month out, to the community.
Our current system is perverse. We must purchase the rights to the land from the previous holder at whatever price the market will bear, or what the seller's circumstances require him to accept. Rich landholders can hold out for higher asking prices; poorer ones may be forced to accept lower prices. Few of us enter the market with more than a few percent of the asking price in hand; we mortgage our future earnings in order to pay the seller's asking price.
In most coastal cities, that price is predominately for the location, not for the building itself. A May, 2006, Federal Reserve Board study found that land represented, on average, 51% of the value of single family housing in the top 46 metro markets in 2004; in the San Francisco metro, land represented 88.5% of the value, and in no metro in California did it represent less than 62%. Boston metro was around 75%, NYC metro was about 70% (I'm doing this from memory), Oklahoma City about 20%; Buffalo about 28%. Extrapolating from some of their tables, I found that the average value of a single-family structure across the 46 metros was about $112,000, with a range from perhaps $88,000 in the lowest metro to a high of perhaps $130,000 in the highest. The range of average land values across the 46 metros, though, was much wider, from perhaps $25,000 to $750,000!
Suppose we did let the housing market crash, and then shifted over to George's proposal, collecting our tax revenue first from land rent, and only after we'd collected the lion's share of the land rent, tapping other less desirable revenue sources such as wages, sales and buildings. What would happen?
The selling price of housing would drop to approximately the depreciated value of the structure in which one would live. A large new house would be more valuable than an older house of the same size. A large house would cost more than a smaller one. But one would not pay the seller for value that related to the location of the home.
One would pay, month in and month out, the rental value of the land on which the house sits. Fabulous locations would require high monthly payments; less fabulous ones would have lower monthly payments. Small lots would pay less than larger lots nearby. Owners of condos in a 20-story building would share the cost of the land rent for the site, perhaps in proportion to the quality of their location within the building (fabulous views would pay more than ordinary ones; larger footprints and/or more floors occupied would pay in proportion to their share of the total space).
That monthly payment would go to one's community, and would replace one's property tax, sales taxes, wage taxes. A portion of the payment would be forwarded to one's state, and at the state level, a portion would be forwarded to the federal government.
The selling price of housing would drop, requiring one to borrow far less. The difference would be quite pronounced in San Francisco, Boston, NYC, etc. One's monthly mortgage payment would be significantly lower.
Housing would no longer be an investment, in the sense that one expected to sell a property for more than one paid for it.
Housing would be more liquid; one could own a home, but have a reasonable expectation of being able to sell it if one wanted to move elsewhere.
The credit not used to purchase homes would be available for businesses. Businesses, too, would not be "investing" in land, but would have capital available to invest in equipment and to pay better wages to their employees.
Land which under our current system is both well-located and underused would either be redeveloped by its owners, or come onto the market so that someone else could put it to use. There would be no incentive to keep it underused, as there is today. The redevelopment process itself would create jobs in construction-related businesses, and the resulting buildings would either provide housing or commercial venues -- or both: whatever the market was asking for. And that housing would be at a wide range of points on the income spectrum and the ages-and-stages spectrum: young people starting out, families, retirees, singles, couples -- not just the luxury market. And those newly-created homes would be closer in to the jobs which would support them, rather than separated by long commutes and drive-till-you-qualify.
Land made valuable by public investment in infrastructure and services would provide a continuous revenue stream to the community, providing funding for next year's services, instead of funding for self-selected individuals' retirement.
So if one can't hope to get rich from the appreciation of the land under one's home, how is one to have security? How does one participate in the economy? By investing in businesses that serve customer desires. And when one's housing plus taxes are lower, one has more left over for that. When there is enough housing for all, one isn't paying so much of one's income for it. When no one expects to grow wealthy automatically, people can dream up the business which they will enjoy working in. And with so many businesses competing for workers, wages will tend to rise. With so many businesses competing for customers, services will improve, and specialization increase.
Back to the title of the article: "Grim Housing Choice: Help Today's Owners or Future Buyers?" Maybe economics doesn't HAVE to be the dismal science. Maybe our choices are not so grim after all. Maybe we can put ourselves on a firmer footing, without the boom-bust cycles we've been experiencing so regularly. (See Mason Gaffney's recent book, After the Crash: Designing a Depression-free Economy. And while you're on that site, you might read "The Great Crash of 2008" and "How to Thaw Credit Now and Forever.") Maybe we can leave our children a society in which all can prosper.
Not too much to ask for, is it?
Or shall we leave them a society in which 10% of us are receiving 48% of the income, and 10% of us possessing 71.5% of the net worth.
I came across a pamphlet published in 1949 by a foundation on whose board I sit, and while there are some things that I might emphasize differently 70 years later, I thought it worth sharing. It speaks to a category I've just added to the "cloud" at left: Natural Public Revenue.
Today we see some additional privileges which corporations (and individuals) are taking advantage of -- the privilege of polluting the world's finite supply of air and water beyond its carrying capacity and ability to heal itself; the privilege of claiming as their own the supply of various other natural resources: e.g., oil, natural gas, lithium, copper. The privatization by corporations of what ought to be revenue sources for common spending should not go unremarked. And trivializing monopoly, as I think the author does, seems odd in light of what we've seen in the intervening years.
Earned Income: Public and Private by Joseph S. Thompson President, Pacific Electric Manufacturing Corp.
THE FATES of America and Europe are inextricably one. A depression here could ruin us and would ruin Europe. We dread a depression; yet we have done nothing salient or radical to prevent it. The Soviet Politburo eagerly predicts and awaits it.
The basic reason why there are depressions and why prosperity is not normal, general, and constant is that we do not distinguish between TRIBUTE TO PRIVILEGE and RECOMPENSE TO SERVICE, and are indifferent to their diametrically opposite effects.
The fault is not in our political system, the freest and best yet devised. It is not in our industrial system which, based on service, saved the world from German domination and will continue to serve us well unless stifled by "Planned Economy," as planned economy has stifled industry elsewhere.
But when we study our taxation system we find a cancerous growth, developed in the last few years, that threatens to destroy all that makes America great, fostering privilege and hampering industry and service. We take for granted the principles underlying our present taxation system; yet adherence to those principles means national disaster.
The full breadth and importance of Chief Justice Marshall's statement that "The power to tax is the power to destroy" seems never to have been wholly grasped or emphatically enough expressed. Taxation destroys good things as well as bad. The power to tax is the power to control a destructive force and, when used, becomes equivalent to a fine. A fine represses, and a tax represses. Simple reasoning develops the fact that a tax is automatically and undeniably a fine. It is an arbitrary seizure of private earnings or acquirements, based on arbitrary opinion, and the fact that the money is used for public purposes does not justify its imposition.
But since money is required for public purposes, how else is it to be provided? The answer is simple: through earned public income.
We are all familiar with earned private income, earned through labor, service, or investment, but few have inquired as to whether there might be a true, just earned public income -- an income that we all, as the public, create and earn jointly as a common wealth just as the individual creates and earns his income as private wealth -- an income that can be measured by fact and not by opinion, forming the basis for, and fixing the limit of, responsible public budgeting -- A PUBLIC INCOME PUBLICLY EARNED AND TO PUBLICLY COLLECTED.
Those who have inquired have been answered by the Physiocrats, by Thomas Carlyle, by Patrick Dove, by Herbert Spencer, by John Stuart Mill, and, in full and complete analysis, by Henry George in his great book, Progress and Poverty. These men have shown that the public income is closely measured by, and reflected in, and therefore should logically, justly, and intelligently be, the rental value of the land.
The rental value of the land, which is the amount that individuals will pay for its exclusive use, if collected or "taxed" by the public, would provide and define the rightful earned income of the public, to which the budget should conform.
Land costs nothing in human effort or creativeness and gets its value only from the presence of people; so, land rental value might better be called location value; and since location value means land in a desirable place among people, land value and location value are really people value. The landlord's title to the land is a legally created privilege. It represents no contribution on his part but gives him an unearned tribute (and it is unearned even though it was bought with money that was earned). Solely by their presence the people create this value, and it is theirs. The people should collect it and nothing else. Arbitrary assessment might have to be resorted to in time of emergency, but, as it is now understood and imposed, taxation should be reserved as a regulative or repressive curb on acts counter to the public interest.
It sounds like quibbling to speak of abolishing taxes while advocating the public collection of land rent; and, since the assessor would define and impose it, and the tax collector would collect it, it does look like a tax on land. But it is not a tax on land. It is payment for the privilege of an advantageous location among people.
It is easy to "capitalize" such an amount. Figure the capital that would earn interest equal to the rent offered. The value of the land is thus set by the rent. Assess it at that value, tax it at the current interest rate, and the public would then collect the value it creates. Taxes would no longer raise the cost of living.
The public collection of land rental simply means a charge by the public for a choice location in the midst of the public. The parking meter is a perfect example of this principle. If you want to use a desirable part of a public street, you pay the current value into a public fund. The parking meter principle should apply to all land. The simple mechanism to correct our revenue system would use present methods, equipment, and personnel, arriving by the test of the market at the desirability of all parcels and periodically adjusting appraisal and taxation to absorb the rent offered by the occupants. There is nothing of arbitrary opinion in this, nor would the rent be created by enactment. It would be a straight business matter, and little change would be needed in our laws.
Our failure to discern the difference between PRIVILEGE and SERVICE is stupid enough in its direct impact on our revenue policy, but it also creates a by-product, land speculation, which terribly hinders our progress and security. There is nothing spectacular about the land speculator. Quietly and conservatively he comes into possession of the title deed to a location, an area, for the purpose of (1) using it, (2) charging someone else for its use, or (3) selling his title at an increased price. If he uses it, he retains a public revenue. If he charges others for its use, he collects a public revenue. IN NEITHER CASE IS HIS MONEY USEFULLY INVESTED, and in both he hopes that the third purpose will be served. He hopes that more people will need the land, increasing its rental value.
When he buys it for the third purpose, straight speculation, to sell it later at a higher price, he becomes an obstructionist. He serves no good purpose. He does nothing useful. He is a legalized holdup man. He makes building, living, and working more expensive.
He could say to himself and to the community, "Someone will need this location in the near future; the growing population will make it more and more desirable; so, since the people will not collect what they create here, I will. I will get in this someone's way and prevent him from using this place until he pays me to get out of his way. I will not have to perform any service for him; the people will do that. He will not even get 'value received' from me because as soon as he begins to use the place, the people will fine him with 'taxes' for improving it. They fine anyone who builds a home or brings a business or service to their community. But they will not fine me; they are already letting me usurp a part of their wealth. I levy a tribute on progress. I capitalize other men's energies. The more they fine those who produce or render service, the more unearned value I gain." This is the unconscious soliloquy of the land speculator.
You may question this sweeping and positive singling out of land rents. What about Corporations? Monopolies? Bonds and Stocks? Capital?
Corporations are formed to perform service or to exploit through privilege, or frequently, to combine the two. To the extent that they perform service, they should retain their earnings, however great. To the extent that they exploit through privilege, they should not be supported by the law.
Monopolies, other than land, are simply opportunities for someone to get a little more than he deserves for what he gives, until competition or buyer resistance checks him.
Bonds and stocks are simply evidence of ownership in corporations that may be good and useful or evil and leechlike. Remove privilege, and they will adjust with the change.
Capital is a tool, and the man who creates it should retain what he earns from its use. The difference which sharply and cleanly separates land rental from payment for the use of buildings, tools, stocks in trade -- in short, from capital -- is that land costs nothing in human effort. Everything else is humanly produced. Money invested in the privilege of exacting tribute in the form of land rent is not capital. It is not usefully invested. "Capital is wealth used to create more wealth."
Resentment against big corporations is purely habit or label thinking. Most corporations spend fabulous sums in research seeking new products, processes, and economies, and you buy from them, not because you have to, but because you want their product. You can buy something else or do without. But you DO HAVE to have a little space on earth. That is a monopoly you cannot escape.
It would seem to be beyond dispute that the threat of depression would be remotely distant if the imbalance of our stupid taxation and the stifling barrier to our progress, land speculation, were both removed by recognition of this simple fact: THE RENTAL WHICH USERS WILL PAY FOR LAND IS THE TRUE EARNED PUBLIC INCOME. IT IS A VALUE CREATED BY THE PUBLIC. TAXATION OF INDUSTRY AND THE HOME IS UNJUST, ARBITRARY, AND DESTRUCTIVE. IT SEIZES PRIVATE PROPERTY.
When we learn this and adopt it for ourselves, we will be fitted to lead the world to prosperous peace.
"For decades, poverty reduction and development programs have failed to
confront the different forms of power and the structural violence that
hold more than two-thirds of the world in dire straits. Our chosen economic
model has created a global situation in which today less than 25% of the
world's population uses more than 80% of the planet's resources while
creating 70% of its pollution."
So how do we reduce our demand for non-renewable natural resources? (I don't see much long-term upside in increasing the supply of energy by using more of our soil -- or water or fuel -- to provide biofuel, though it may be a boon in dealing with the supply problem short-term.)
The right question, I submit, is how we do we adjust our incentives to produce a reduction in demand for oil, coal, natural gas, so as to leave a decent quantity of each for all the future generations and for the people of other nations. (And, not so incidently, to reduce the pollution we produce which now shows signs of exceeding the ecosystem's ability to carry it.)
What is it that we do now that we can do differently?
Well, we can adopt measures that encourage people to
live closer to their work
use public transportation more
use cars less
live in modern homes constructed with energy-conserving technologies and design
We can adopt measures which make it affordable to live closer to their work -- if they choose that. I'm not talking about subsidies, incidently. More precisely, I'm not talking about adding subsidies.
Some will say, as George H. W. Bush did in 1992 at the Earth Summit, that "The American way of life is not negotiable."
Dick Cheney is quoted (May, 2001) as saying that "Conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy." As irritating as I found most of his pronouncements to be, I can see a germ of truth in this one.
I have friends who seek to reduce their water usage in order to save the environment. They save the water in which they wash vegetables, and measure their use by the cupful. It seems to me that while their efforts are admirable, in the absence of changes to the incentives which permit some people or other entities to continue to use water heedlessly to water lawns and rinse driveways, their efforts are pointless and maybe even counterproductive. (Problem? What problem? Why do we large users need to change our ways?) WE HAVE TO CORRECT THE INCENTIVES!
It seems to me that a carbon tax is a step in the right direction. Establish it, announce it, implement it on some predictable schedule. Industry will adjust. Individuals will adjust. And make sure that carbon tax applies to energy used in global commerce and travel, as well as domestically.
But the single reform which I think will make the biggest difference is a tax shift. If we were to shift our taxes off buildings, and onto land value, here's what we could expect to happen:
Urban land which now sits vacant or underused would be put to something approaching its highest and best use. That might be more housing, or more commercial venues, or some combination thereof.
Developers of well-located land would be competing with each other to provide what the market wants, be it housing or more grocery stores or more shops, or more office space. Landlords competing for tenants would lower their asking rents and tune their offerings to meet the demand, at all levels on the income spectrum, not just the high end.
The density this redevelopment would create would provide the platform for better public transportation -- more frequent buses, more subways, more commuter options.
People who would prefer to live closer to their work or to the cultural or other amenities which larger cities can offer would be able to find housing they can afford. Those who want to live in the suburbs on the 1-acre lot with the picket fence would have less competition for such homes, and be able to afford to buy one closer to the center of things for less of their income or a shorter mortgage.
I attend a liberal suburban church where every week the Prayers of the People include this statement: "The world now has the means to end extreme poverty. We pray that we have the will."
We need to act locally -- through basic tax reform -- to shift the incentives which currently nudge us toward using cars more, polluting more, living in older houses which consume more energy and create more pollution -- and rewarding land speculators more than we encourage the sorts of entrepreneurs who create jobs.
IT is ALL INTER-RELATED. But relatively few of us see the connectedness yet.
I wonder to what extent this is a matter of people drawing down their holdings in order to live on them.
From the FRB's Survey of Consumer Finances, here's the distribution of stock ownership in 2007 (Total value: $4.598 trillion):
Top 1%: 51.9%
Next 4%: 30.5%
Next 5%: 8.0%
Next 40%: 9.0%
Bottom 50%: 0.6%
And here's the distribution of mutual fund ownership (outside of retirement assets). This includes stock and bond and REIT funds, but does not include money-market funds. (Total value: $4.093 trillion.)
Note: this understates the holdings of the top 1%, since the Fortune 400 families are excluded from the SCF. See Ponds & Streams.
Here are some excerpts from the NYT article. I wonder how "small investor" is defined. Does it mean all individuals, as opposed to foundations, pension funds, university endowments and the like? Does it mean those in the bottom 95% of the Net Worth distribution, who own just 40% of the value held by households?
Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.
If that pace continues, more money will be pulled out of these mutual
funds in 2010 than in any year since the 1980s, with the exception of
2008, when the global financial crisis peaked.
Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.
One of the phenomena of the last several decades has been the rise of
the individual investor. As Americans have become more responsible for
their own retirement, they have poured money into stocks with such faith
that half of the country’s households now own shares directly or
through mutual funds, which are by far the most popular way Americans
invest in stocks. So the turnabout is striking. ...
To be sure, a lot of money is still flowing into the stock market from
small investors, pension funds and other big institutional investors.
But ordinary investors are reallocating their 401(k) retirement plans, according to Hewitt Associates, a consulting firm that tracks pension plans.
Until two years ago, 70 percent of the money in 401(k) accounts it
tracks was invested in stock funds; that proportion fell to 49 percent
by the start of 2009 as people rebalanced their portfolios toward bond
investments following the financial crisis in the fall of 2008. It is
now back at 57 percent, but almost all of that can be attributed to the
rising price of stocks in recent years. People are still staying with
Another force at work is the aging of the baby-boomer generation. As
they approach retirement, Americans are shifting some of their
investments away from stocks to provide regular guaranteed income for
the years when they are no longer working.
And the flight from stocks may also be driven by households that are no
longer able to tap into home equity for cash and may simply need the
money to pay for ordinary expenses. ...
Fidelity reported that hardship withdrawals and loans from 401(k) accounts in their custody are up. But as one commenter pointed out,
Hardship withdrawals are truly an indication of economic distress.
I don't think so. When buying a new car to replace my 10+ year old car,
I took out a 401(k) loan instead of going to the bank. I'd rather pay
interest to myself and guarantee myself a 4.5% (or so) return on the
401(k) funds I took out.
I'll bet you that lots of people are
resorting to 401(k) loans for similar reasons, and that the growth in
loans has something to do with the difficulty in getting any kind of
His strategy makes sense to me. 4.5% is a whole lot more than money markets are paying, and less than one pays for a car loan.
Fidelity also reported that the average 401(k) in their custody was worth $61,800. It would be interesting to know the median value. I'm guessing it might be about 75% of the average.
Here is an excerpt from an article in the NYT of 8/12/2010. I am sharing it here for several reasons:
It demonstrates how ignorant most of us are about land economics;
It demonstrates how important this ignorance has been, and how expensive it has been to ordinary people.
Here's the NYT excerpt:
Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.
Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”
Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.
“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”
But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.
“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”
Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next. “I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”
Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”
How soon will we forget the learning experience we've just undergone as a nation, as an economy, as a society? When will we start to make sure that ordinary people understand the importance of land, and the workings of the market in land, and, most important, how this force can be turned to public good?
Those who are familiar with the ideas of Henry George know this, and most others are operating in ignorance. I do not say this as an accusation; I say it in sadness. Fortunately, ignorance can be remedied.
And if enough of us studied the topic, perhaps we would reach the conclusion that this is a fine time to enact Henry George's wise remedy, so that this will never happen again.
Where might one study this? If you're in NYC or Chicago or Philadelphia, classes are available at the Henry George School of Social Science. Otherwise, you might explore the online course offerings at the Henry George Institute or start reading on your own. Start with Progress and Poverty, in a modern abridgment or one of the essays in George's book Social Problems.
A few more lifts from the same article:
“No one had ever seen a national real estate bubble,” said Keith
Leggett, a senior economist with the American Bankers Association. “We
would love to change history so more conservative underwriting practices
were put in place.”
Since the lender made a bad loan, Mr. Hairston argues, a 10 percent
settlement would be reasonable. “It’s not the homeowner’s fault that the
value of the collateral drops,” he said.
It might be relevant to note that it isn't the homeowner's fault when the value of the collateral rises, either. He didn't create that value; it is due to the increase in the value of the land, which is a result of the activity of the community, not of the landholder or his tenant.
A lot of people have grown wealthy on our ignorance. The FIRE sector loved it, and there are those who are ready for a repeat of the upside of the bubble. Like Aleve, it works for them!
Doing some housecleaning, I came across the May, 2006, issue of Harper's Magazine, whose cover story was entitled "The Road to Serfdom: An Illustrated Guide to the Coming Real Estate Collapse." On the promotional half-cover, the headline said "THE HOUSE TRAP: How the MORTGAGE BUBBLE Will Bankrupt Americans -- in 20 East Steps."
I looked online, and found a copy of the article in PDF format here, which permits me to throw away my hardcopy.
Never before have so many Americans gone so deeply into debt so willingly. Housing prices have swollen to the point that we’ve taken to calling a mortgage — by far the largest debt most of us will ever incur — an “investment.” Sure, the thinking goes, $100,000 borrowed today will cost more than $200,000 to pay back over the next thirty years, but land, which they are not making any more of, will appreciate even faster. In the odd logic of the real estate bubble, debt has come to equal wealth.
And not only wealth but freedom — an even stranger paradox. After all, debt throughout most of history has been little more than a slight variation on slavery. Debtors were medieval peons or Indians bonded to Spanish plantations or the sharecropping children of slaves in the postbellum South. Few Americans today would volunteer for such an arrangement, and therefore would-be lords and barons have been forced to develop more sophisticated enticements.
The solution they found is brilliant, and although it is complex, it can be reduced to a single word — rent. Not the rent that apartment dwellers pay the landlord but economic rent, which is the profit one earns simply by owning something. Economic rent can take the form of licensing fees for the radio spectrum, interest on a savings account, dividends from a stock, or the capital gain from selling a home or vacant lot. The distinguishing characteristic of economic rent is that earning it requires no effort whatsoever. Indeed, the regular rent tenants pay landlords becomes economic rent only after subtracting whatever amount the landlord actually spent to keep the place standing.
Most members of the rentier class are very rich. One might like to join that class. And so our paradox (seemingly) is resolved. With the real estate boom, the great mass of Americans can take on colossal debt today and realize colossal capital gains — and the concomitant rentier life of leisure — tomorrow.
If you have the wherewithal to fill out a mortgage application, then you need never work again. What could be more inviting — or, for that matter, more egalitarian?
That’s the pitch, anyway. The reality is that, although home ownership may be a wise choice for many people, this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage, a lifetime spent working to pay off debt on an asset of rapidly dwindling value.
Most everyone involved in the real estate bubble thus far has made at least a few dollars. But that is about to change. The bubble will burst, and when it does, the people who thought they would be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom.
From there, Hudson proceeds to list the 20 steps, each illustrated with a graphic. I encourage you to look up the original; the graphics are generally quite helpful to making the point -- but the text is valuable here.
It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.
I am sometimes amazed by the extent to which people who I wouldn't expect to speak to the issues that matter to ordinary people actually publish something relevant. David Stockman said something I didn't expect to hear from something in his party.
The four deformations:
IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.
More fundamentally, Mr. McConnell’s stand puts the lie to the Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.
This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one.
The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. ...
The second unhappy change in the American economy has been the extraordinary growth of our public debt. ...
The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. ... But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. ...
The fourth destructive change has been the hollowing out of the larger American economy.
The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing — as suggested by last week’s news that the national economy grew at an anemic annual rate of 2.4 percent in the second quarter. Under these circumstances, it’s a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach — balanced budgets, sound money and financial discipline — is needed more than ever.
When are we going to turn our attention to creating a stable economy in which all of us can prosper -- those who do the basic work which needs to be done but doesn't required extended specialized training or long experience, as well as those whose education or training equips them for more specialized jobs? We will continue to need farm workers, and janitors, and fast food workers, and dozens of other occupations, and it seems to me that we ought to favor a structure which makes a decent life possible for them as well as the more trained and educated. When 1%, 5%, of us get such a large portion of the products of the total labor in this land, something is wrong. The amount that is left to be divided among the other 99% or 95% is insufficient to properly compensate everyone for their labor. A few are reaping what they didn't sow, and we maintain the impolite fiction that they somehow earned it.
And there ARE answers. There ARE solutions. I happen to think that the best solutions -- probably the only solutions, but I'll leave it to you to propose something better -- are likely to come from the thought associated with Henry George. He was not original; he's part of a long continuum of people over many centuries who saw things similarly. But he was perhaps the most eloquent, and, in his first book, Progress and Poverty, very methodical and thorough in laying out his analysis. We, as 21st century people of good will, would do well to understand his analysis and argument, and see for ourselves whether we have a better answer to offer.
I'm going to take the liberty of quoting someone else's blog post in full. (I don't know the author, though I suspect we might know some of the same people.) This makes some points which overlap with something I posted a few days ago (see the post on Joe Stiglitz's talk in Queensland) about the financial economy.
George Osborne has invited the public’s views on what might be done to help the country out of its current financial crisis. It is to be hoped that he will seriously consider all that is suggested; he needs to be looking out for ideas that are different from those that have hampered genuinely sustainable economic development for decades. He would do well to bend his eye in the direction of the taxation system; not to see if a little tweak here and there might increase revenue without too much pain but to look at the fundamentals.
We do not design road vehicles with unround wheels but we have an economy with comparably unsuitable features. The only circular motion is in those ideas that set off in promising directions, only to return to their starting point.
In 2007 we suffered a financial earthquake. It would be foolish in the extreme to rebuild our economy upon the same foundations whose weakness led to the catastrophe. The banks were blamed and they were certainly very irresponsible. So too were the government(s) who failed to impose sufficiently robust regulations on them, to prevent them from their own stupidity. It is said that the banks could not be allowed to fail because they are vital to the economy. The logical argument following from that is that the banks should be nationalised or at least kept under close regulation, however much they howl about it.
It is openly admitted that there is a financial economy and a real economy. Something is wrong there. Without a real economy there would be no need for banks.
The banks’ blunders, serious though they were, could hardly have happened were it not for the existence of a market in land values, popularly and grossly inaccurately referred to as the property market. In the same way that land itself is fundamental to our very being, so the operation of the land values market is the basis of our economy. Every economic activity involves land (that is, all natural resources) directly or indirectly.
If conventional thinking on economics continues to determine policy, we shall be in the doldrums for years. There is an alternative: Land Value Taxation (LVT). This has the twin merits of requiring all occupiers of land to pay an annual fee (tax, if you like) for their security of tenure, and at the same time, raising revenue for government.
Shifting taxes off enterprise and effort onto LVT would improve Gross Domestic Product (GDP) by a very substantial margin. If we were to opt for LVT now, we could pass through the doldrums rather more quickly. That ought to appeal to our coalition government, which must need all the help it can find to keep the cynical, prowling media off its back. The government needs to show that its coalition works and LVT is the tool to prove it.
Many people in the UK will already be suffering varying degrees of financial ‘discomfort’ through no fault of their own as a result of 2007. Quite clearly some new thinking is called for in the unprecedented situation that has been foisted upon us. Faith in and respect for government has diminished to a frightening extent over the past two or three decades. The standard of political leadership must to be raised, to restore confidence in the institutions that have so much control over our lives. A constructive dialogue between government and people, by whatever channels, could be a good starting point.
We in the US "would do well to bend [our] eye in the direction of the taxation system; not to see if a little tweak here and there might increase revenue without too much pain but to look at the fundamentals."
The Tax Foundation recently published a study which apparently seeks to comfort those of us who are concerned about the concentration of income in the US -- what they call "the rising gap between the rich and poor." It suggests that "snapshots of income inequality" should be considered in light of "the mobility of people up and down the income ladder."
The first graph is from Piketty and Saez, and shows the percentage of income going to the top 1% of income recipients. It shows the 1980 share as 10% and the 2007 share approaching 23.5%. The text mentions that the share of income received by the top 10% has risen from 34.6% in 1980 to 49.7% in 2007, also sourced to P&S.
The paper then goes on to show, from IRS data, the extent to which people moved from one income quintile to another between 1999 and 2007:
Table 1 More than 50 Percent of Taxpayers Moved Out of the Bottom Quintile Between 1999 and 2007
2007 Income Quintile/Percentile
Note: Computations by author from the 1999-2007 SOI Individual Tax Panel.
They cite the good news that only 43% of those in the bottom income quintile in 1999 remained in that quintile in 2007. A similar percentage of those who were in the top 1% in 1999 were again in the top 1% in 2007. Less than 10% of the 1999 Top 1%'ers had fallen out of the top quintile 8 years later. It was far more likely that a top-quintile taxpayer would remain in the top quintile -- 62% -- than anyone else remain where they were.
(Might I be forgiven for wishing that the study showed what percentage of income over the 9 years went to the people in each quantile in 1999, and then again for each quantile in 2007? One might come away with a different understanding.)
The remaining tables/figures show, for three different measures of income, how many taxpayers were "millionaires" for 1, 2, 3, 4, 5, 6, 7, 8 or all 9 years. (The appendix shows that the top 1% began at $339,600 in 1999, and $549,200 in 2007.)
Working with Gross Income, 675,000 tax payers had income over $1,000,000 during at least one year between 1999 and 2007. Of those, half were in that category for just one year, and only 6% -- 38,000 taxpayers -- were in the $1,000,000+ category for all 9 years. This is apparently intended to demonstrate that many more of us have one fabulous year than have consistent reported income at that level, and that this must mean that there is opportunity for all.
Narrowing the definition of income to exclude capital gains, a similar table shows that 431,000 taxpayers fell into the $1,000,000+ category at least once, of whom 175,000 were only once. So 36% of those who were "income millionaires" by the Gross Income definition were not "IM's" when capital gains were excluded.
Excluding (instead) "Business Income," the ever-an-income-millionaire universe drops to 555,000 taxpayers, and 55% of them were one-year-only income millionaires.
It would be interesting to see the aggregate income during the 9 years for each group. The author clearly has the data.
Appendix B Persistence/Transience of Millionaires:
Data Underlying Figures 2, 3 and 4
Number of Years a Millionaire
Gross Income Excluding Capital Gains
Gross Income Excluding Business Income
Source: Computations by author from the 1999-2007 SOI Individual Tax Panel.
I suppose their conclusion is that since so many more people have one year of $1,000,000+ income than have 9 years of it, we ought not to worry about the actual distribution of income, which, as I've previously reported, is as follows:
Top income decile:
47.19% of the
Second income decile:
13.77% of the
60.96% of the
highest income quintile:
18.18% of the
Middle income quintile:
of the before-tax income
highest income quintile:
6.72% of the
2.92% of the
[Source: SCF Chartbook, page 7 and my calculations]
Moving from the bottom quintile to the fourth highest quintile may be considered mobility by the Tax Foundation. But when the top quintile receives 61% of the income, and 62% of those who were in the top quintile in 1999 are again in it in 2007, even a lot of mobility doesn't get one very far, in terms of economic security or return on one's labor.
Look at it this way:
67.6% of those in the lowest quintile in 1999 are still in the bottom 40% in 2007
Of those in the second quintile in 1999, 66.9% are still in the bottom 40% in 2007. More have moved down a quintile than have moved up a quintile (and almost as many have moved down as have moved up in total: 32.2% down, 33.1% up).
Of those in the middle quintile in 1999, more have fallen into the bottom 40% than have moved into the top 40% in 2009
Of those in the fourth quintile in 1999, only 56% are in the top 40% in
2007. More have moved down a quintile than have moved up a quintile
(25.7% vs 18.3%).
Of those in the top quintile in 1999, 85.8% are in the top 40% in 2007
Of those in the top 10% in 1999, only 23% are in the bottom 80% in 2007
Of those in the top 5% in 1999, only 15% are in the bottom 80% in 2007
Of those in the top 1% in 1999, only 10% are in the bottom 80% in 2007.
This is structural. We have permitted the creation and maintenance of income- and wealth-funneling machines.
You can read more about the nature of the machine, and how to harness it to make things better, in Henry George's books, including Progress and Poverty, and Social Problems (the latter is a book of essays, and the link will take you to some material which will help you choose one of interest). Certain things in society rightly belong to all of us, and our failure to treat them accordingly is at the root of our income- and wealth concentration problems (and many others, including sprawl, joblessness, boom-bust cycles, pollution -- and I think most of us would be happy to see that there is a solution to any one of these, much less something that will lead to a solution of all of them).
Income mobility in a society where so few of us control so much is a salable proposition only to the gullible. If every one of us could spend 3 months of our lives in the top 0.25% of income recipients, then maybe our top-20%-gets-61%, top-1%-gets-23% might be consistent with our ideals of equal liberty. Maybe, kinda sorta.
Tax Foundation, look into the wisdom of Henry George. Unless, of course, your funders' interests are not the interests of ordinary Americans.
But where does that dynastic plutocracy begin? There is an astronomical gap between Mr. Buffett’s fortune, which Forbes estimated at $47 billion, and two retirees in Marin County, California, whose life’s work might have allowed them to leave their heirs $3.5 million in assets, mostly in the value of a house.
Oh, I was so pleased to read someone expressing it so clearly. Tell me about that house in Marin County. Let's see. Let's say our retirees bought it in, say, 1980, for, say $200,000. They probably put down 10% or 20% in those days (borrowing standards were a little different then). Let's say that they had a mortgage for, say $160,000, at 8%. They finished paying it off last year. The monthly mortgage payment was $1,174. Over the course of 30 years, they paid off $160,000 of principle, and paid the lender about $266,000 in interest. To rise from the $200,000 purchase price to today's value of $2 million, the average annual appreciation was about 8.3%. Obviously, some years it was more, some less. But 8.3% is an average.
What the paragraph quoted doesn't explain is how our hard-working retirees caused their property to appreciate by 8.3% per year over 30 years.
The reality is that houses depreciate. What rises in value is the land, and it rises for reasons which have nothing to do with the individual landholders, or even all the landholders in aggregate. Land appreciates as a result of the presence and growth of population and a healthy economy; as a result of the public provision of goods and services which people value and which make a community or state a better place to live. Advances in technology can also contribute to increases in land value -- consider elevators in cities, air conditioning in the American south, fiberglass boats in waterfront communities.
Our retirees experienced an 8.0% average annual growth in the value of their residence. Paying off their mortgage raised their equity by the $160,000 they originally borrowed. Appreciation, provided by their community and their nation, provided $1,800,000 -- over 10 times as much! Their hard work paid the mortgage, but their community contributed FAR more.
But, you might argue, they did pay property taxes all those years. Yes. Under Proposition 13, their property tax is based on 1% of the assessed value of the property, and the assessed value of the property can only rise by 2% per year, no matter how much the market value has risen. Voters can approve additional payments in the form of parcel taxes, which might bring taxes up to perhaps 1.25% of the assessed value of the property.
At 1.25%, over those 30 years, our hardworking Marin retirees have paid in $109,514 in property taxes. The rest of their "hard-earned" appreciation comes from
the scarcity of housing close to California's cities, compared to the number of people who would like to live close in;
spending supported by taxes on sales and wages -- which come not only from their own pockets but from the pockets of the 50% of California residents who are renters because they can't afford to buy;
federal dollars spent on California infrastructure
effects created by changes in mortgage interest rates and mortgage lending policies, including loan-to-value ratios, underwriting standards related to income ratios, etc.
Does it seem churlish to collect back a portion of the value we-the-people have created once per generation? We'd be much wiser to collect it year-in and year-out, in the form of a tax on the value of the land itself, and let our workers keep their wages and not pay taxes on their purchases or homes.
Does it seem churlish that the Marin retirees' children should not be entitled to keep all that value we-the-people created just as if the retirees had created it themselves? After all, other people's children, including those of tenants, don't get to keep that value, but they've contributed to creating it.
A 15% capital gains tax on the $1,800,000 somehow seems an insufficient share for the commons. Even a 50% estate tax seems a bit insufficient, too.
This is trickle-up economics at work, and saying that some of it trickles to people we might consider middle class doesn't change the fact that some grow wealthy in their sleep, while others simply grow poor despite working hard for decades. The two situations are not unrelated. (And a $3.5 million estate doesn't fall into most definitions of middle class in America.)
This article, by David Cay Johnston, is at least a few months old, and I didn't see it when it first came out. I did see a blog post which referred to it, and quoted some passages of it. Here are the ones which caught my eye then:
Without a doubt, the much lower tax rates at the top encouraged people
to realize more income in the tax system. And if the only measure is
that some people made more, then this would be a good.
But let’s ask the question that the
classical economists would have asked back when they were known as
moral philosophers and their leaders spoke of policies that benefited
the majority. Let’s go back to a time before Vilfredo Pareto’s
observations began what is the overwhelmingly dominant orthodoxy today,
neoclassical economics with its focus on gain.
What is the social utility of creating a society whose rules generate a
doubling of output per person but provide those at the top with 37
times the gain of the vast majority? ...
Is a ratio of gain of 37 to 1 from the top to the vast majority
beneficial? Is it optimal? Does it provide the development, support,
and initiative to maximize the nation’s gain? Are we to think that the
gains of the top 398 or 400 taxpayers are proportionate to their
economic contributions? Does anyone really think that heavily
leveraged, offshore hedge fund investments are creating wealth, rather
than just exploiting rules to concentrate wealth, while shifting risks
to everyone else?
Under the overwhelmingly dominant economic theory of today, this is all
good. Pareto argued that if no one was harmed, then all gain was good.
Carried to an extreme, neoclassical economics would say that if the
bottom 99.9999997 percent had the same income in 1961 and 2006, and all
of the gain went to the one other person in America, that would be a
Is our tax system helping us create wealth and build a
stable society? Or is it breeding deep problems by redistributing
benefits to the top while maintaining burdens for the rest of Americans?
Think about that in terms of this stunning fact teased from the
latest Federal Reserve data by Barry Bosworth and Rosanna Smart for the
Brookings Institution: The average net worth of middle-income families
with children whose head is age 50 or younger, is smaller today than it
was in 1983.
But the original has some other important things to say. It begins,
Imagine that all you had to live on was the amount of tax you saved in
your best year because of the many tax rate cuts Congress has put in
place since 1964, when President Johnson signed into law the Kennedy tax
For most Americans, living off income tax savings would mean starvation.
Their income tax savings have been minor, and when looked at over a
long period, say since 1961, increases in payroll taxes have more than
offset their slight income tax reductions.
But for the very few who have gained the most from living in the United
States, the story is quite different. Their tax savings alone from a
single year, invested to earn just 5 percent annually, would be enough
to provide a lifetime income at nearly twice the income threshold for
being in the top tenth of 1 percent.
That's a remarkable decrease for some very privileged folks! Johnston goes on to compare what has happened with incomes at the very top of the scale between 1961 and 2006 with what has transpired for the bottom 90% of us. The bottom 90% saw real income rise from $22,366 to $31,642 (both in 2006 dollars). At the 90th percentile, wages rose from $60,404 to $104,440. DCJ goes on to make some points which Elizabeth Warren and Amelia Tyagi made in "The Two Income Trap:"
That tiny increase in pay does not represent a real increase in wages,
only total income. That is because in the middle of that 45-year era, a
profound transformation took place in America.
In 1961 most families lived on one income, maybe supplemented by some
part-time work by the wife for what was quaintly known back then as "pin
money." Now two-income households are the norm.
The overall wealth of America grew and grew during this era. GDP,
adjusted for inflation and increased population, was up 227 percent. But
wages and fringe benefits did not grow with the economy. For most
workers, they fell. Wages peaked way back in 1972-1973, were on a mostly
flat trajectory for more than two decades, rose briefly in the late
1990s, and then fell sharply in the new century. Airline pilots have
seen their 1990s income cut by more than half; some union factory
workers have seen their pay slashed by two-thirds. Millions are out of
work, and the jobs they once held are gone and are not coming back. And
even if the Great Recession is coming to an end, we face years of jobs
growing more slowly than the working-age population, which could
radically transform America's culture, work ethic, and sense of
In 2006 families worked on average about 900 more hours than families
did in the 1960s and early 1970s. That is a roughly 45 percent increase
in hours worked accompanied by a 41 percent increase in total income.
For many, the reality is that two jobs produce the same or a smaller
after-tax income than just one job did three and four decades ago.
Compare that to the top 400 taxpayers:
The average income for the top 400 taxpayers rose over the 45 years from
$13.7 million to $263.3 million. That is 19.3 times more.
The income tax bill went up too, but only 7.8 times as much because tax
rates plunged. Income tax rates at the top fell 60 percent, three times
the percentage rate drop for the vast majority. And at the top, the
savings were not offset by higher payroll taxes, which are insignificant
to top taxpayers.
The average income tax rate for those at the top in 1961 was 42.4
percent. By 2006 it was down to 17.17 percent. Add on payroll taxes, and
the 2006 rate is 17.2 percent, the same as rounding the income tax
Readers of this site will know that I have no use for income taxes. But until we shift to smart and just taxes, a sharply progressive income tax seems to me to be a better-than-nothing way to fund our common spending.
Johnson ends with this:
Is our tax system helping us create wealth and build a stable society?
Or is it breeding deep problems by redistributing benefits to the top
while maintaining burdens for the rest of Americans?
Think about that in terms of this stunning fact teased from the latest
Federal Reserve data by Barry Bosworth and Rosanna Smart for the
Brookings Institution: The average net worth of middle-income families,
with children, whose head is age 50 or younger, is smaller today than it
was in 1983.
In my humble opinion, DCJ isn't looking quite deep enough. Our tax system -- federal, state and local combined -- is permitting those who own our most valuable common assets (land value and nonrenewable natural resources) to privatize their value, year after year, generation after generation -- and grow hugely wealthy and powerful -- and then merely taxing some of the income from them.
The alternative? Tax the annual value of those resources -- which are rightly COMMON property, provided by the Creator and by the presence of all of us and the spending/investment of the entire Community, not by individuals or corporations -- heavily (say, 90% or 95% of the annual value) and reduce or even eliminate -- starting at the bottom -- the wage and interest and sales taxes and taxes on manmade improvements to land. Think about the ramifications of that reform. They're profound, and point in the direction of a healthier, more stable and more just economy. Will the revenue generated be sufficient to fund all of today's public spending? Probably not. But
1. that's no reason not to shift our taxes off bad taxes onto good ones; and
2. we may find that with good taxes, things change enough that we no longer need to spend large amounts on the social safety net, because a vibrant economy with opportunities for all and a somewhat more equal distribution of income and of wealth and power permits the vast majority of us to be self-sufficient and prosperous.
The bottom 70% or so of us CAN'T save. Large shares of our incomes are devoted to housing and transportation, and to all sorts of FIXED costs. We can't increase our spending on other goods, and we can't save. We have to fix that. We have to do things which distribute the value of that which SHOULD be common, and end the privatization of value which ought to be common.
More about what our best and brightest have been doing. Are you old enough to remember the days when our b&b went into research, medicine, or engineering, or other roles in which they could put their talents to use for the benefit of their fellow human beings? Krugman writes,
Sure enough, last week the Securities and Exchange Commission accused
the Gucci-loafer guys at Goldman of engaging in what amounts to
I’m using the term looting in the sense defined by the economists
George Akerlof and Paul Romer in a 1993 paper titled “Looting: The
Economic Underworld of Bankruptcy for Profit.” That paper, written in
the aftermath of the savings-and-loan crisis of the Reagan years,
argued that many of the losses in that crisis were the result of
Was the same true of the current financial crisis?
Most discussion of the role
of fraud in the crisis has focused on two forms of deception: predatory
lending and misrepresentation of risks. Clearly, some borrowers
were lured into taking out complex, expensive loans they didn’t
understand — a process facilitated by Bush-era federal regulators, who
both failed to curb abusive lending and prevented states from taking
action on their own. And for the most part, subprime lenders didn’t
hold on to the loans they made. Instead, they sold off the loans to
investors, in some cases surely knowing that the potential for future
losses was greater than the people buying those loans (or securities
backed by the loans) realized.
What we’re now seeing are accusations of a third form of fraud.
We’ve known for some time
that Goldman Sachs and other firms marketed mortgage-backed securities
even as they sought to make profits by betting that such securities
would plunge in value. This practice, however, while arguably
reprehensible, wasn’t illegal. But now the S.E.C. is charging that
Goldman created and marketed securities that were deliberately designed
to fail, so that an important client could make money off that failure.
That’s what I would call looting.
Krugman concludes with,
The main moral you should draw from the charges against Goldman,
though, doesn’t involve the fine print of reform; it involves the
urgent need to change Wall Street. Listening to financial-industry
lobbyists and the Republican politicians who have been huddling with
them, you’d think that everything will be fine as long as the federal
government promises not to do any more bailouts. But that’s totally
wrong — and not just because no such promise would be credible.
For the fact is that much of the financial industry has become a racket
— a game in which a handful of people are lavishly paid to mislead and
exploit consumers and investors. And if we don’t lower the boom on
these practices, the racket will just go on.
Perhaps if we make financial engineering less lucrative, some of the next generation of smart kids will find other ways to apply their talents. They might even be able to grow the pie, instead of merely gobbling larger shares for themselves.
How does wealth concentrate? Let us count the ways ... Tell us again about the wonders of trickle-down economics, folks. The trickle flows the other way: to the shareholders of our natural resources companies and the FIRE sector -- Finance, Insurance and Real Estate. This article from the Washington Post gives some useful data. $1 per gallon, going into the pockets of the oil companies and the too-big-to-fail speculating banks, and particularly their top "hired help," who are highly compensated whether or not their shareholders also make out well.
The Goldman Sachs scandal has done the unthinkable: It's made it possible that legislation reining in Wall Street's casino may actually be enacted.
The odds against real reform are still steep. Wall Street remains the most deep-pocketed lobby in the land. And the problem isn't just Republican opposition. "A lot of our members up here just want a bill passed," says one Democratic legislator. "They don't think that people are watching that closely. But this matters immensely to people. This is a which-side-are-you-on moment."
The clearest way for senators to demonstrate that they're not on Wall Street's side would be to support the bill that Arkansas Democrat Blanche Lincoln plans to bring before the Senate Agriculture Committee on Thursday. Going well beyond the bill that the House passed and the legislation that came out of Connecticut Democrat Chris Dodd's Senate Banking Committee, Lincoln's bill aims squarely at the big banks' most highly leveraged, profitable and risky-to-the-rest-of-us business: their trade in derivatives. (The Ag committee has jurisdiction because derivatives historically were used to trade commodities.)
Lincoln's legislation would require the firms that buy and sell derivatives -- 95 percent of such deals in the United States, according to the Comptroller of the Currency, are done by Goldman, Morgan Stanley, J.P. Morgan Chase, Bank of America and Citibank -- to do their trading openly on exchanges and to post some actual money behind their trades. Today, the market is unregulated. But if Lincoln's legislation passes, no longer would deals with the potential to threaten the nation's economic stability be invisible to regulatory agencies; no longer would businesses seeking to buy derivatives have to accept banks' terms with no ability to shop around or even ascertain the going price for such contracts. No longer would trades with foreign entities be exempt from regulation. And no longer would banks that our government backs up with deposit insurance and access to the Federal Reserve's discounted interest rates be able to put taxpayers on the hook for their speculative bets: They could either continue as derivative-trading casinos or as governmentally insured banks, but not both. In fact, Lincoln's bill goes a good deal of the way toward meeting Paul Volcker's proposal to remove banks' proprietary trading from the umbrella of federal protection.
On Tuesday, leaders of industries that actually need to lock in prices on real commodities -- in particular, oil -- went to the Senate to endorse Lincoln's bill. "In 2008," said James May, president of the Air Transport Association of America, "we burned the same amount of fuel we burned in 2003, but we paid $42 billion more." The difference, he said, was the result of the vast increase in oil speculation carried on through derivatives. Over the past half-decade, for instance, the largest holder of home heating oil often has not been an energy company but, rather, Morgan Stanley.Such speculation, estimated Sean Cota of the Petroleum Marketers Association of America, has increased the cost of gas at the pump by about a dollar a gallon.
"We need predictability in prices," Cota said Tuesday. "The banks want volatility. . . . Old-fashioned bonds built Hoover Dam, but they were paid off over many years. The banks are only interested in trades that pay off in the next 30 seconds. . . . They have no concern for the future of the larger economy."
Just another wealth-concentrating machine. A $1 per gallon "tax" going to line the pockets of our smart and privileged, out of the pockets of ordinary working people. And, by the way, any of those smart folks who die this year will be able to leave their estates to their heirs untouched by even "death taxes."
There is no such thing as a free lunch. Their windfall comes out of the pockets of the rest of us, not out of thin air.
Aren't markets wonderful? I am reminded of the statement about neoclassical economists being rich peoples' useful idiots.
I don't know when I've seen a collection of letters to the editor that covered the waterfront so well.
Published: April 6, 2010
To the Editor:
Re “I Saw the Crisis Coming. Why Didn’t the Fed?,” by Michael J. Burry (Op-Ed, April 4):
Indeed, there were many people besides Mr. Burry who saw the economic crisis coming. I recall reading several economists’ warnings in articles and blog posts.
The former Fed chairman Alan Greenspan’s arrogant denial of these voices reveals how much economic theory has become an article of faith rather than an analytical instrument. The nation remains at peril as long as free-market ideologues trim the facts to fit their preconceptions.
Kevin R. McNamara, Houston, April 4, 2010 •
To the Editor:
Michael J. Burry asks how Alan Greenspan missed the rampant abuses and ludicrous underwriting practices in the mortgage market. This is an echo of the “failure of intelligence” in the Iraq war, and countless other examples of government officials abandoning critical thought and backing indefensible policies.
Our legislators and regulators are not stupid or incompetent. Rather, the problem is that they respond to the demands of well-financed special interests, regularly putting aside the common good to facilitate private gain. When things inevitably go awry, the public is treated to a “special investigation” that ends by letting the responsible parties off the hook with the conclusion that no one could have predicted the sadly all too predictable outcome.
Dedham, Mass., April 5, 2010
The writer manages family-owned commercial real estate.
To the Editor:
There are many who blame the citizenry for getting subprime mortgages, but people trusted what they were told, and there was an adage, “you’ll never have money if you don’t own a home.”
There are those who blame people who got in over their heads for racking up credit card debt when there was no option if they wanted to buy food or to pay the gas and electric bill.
Yes, some game the system, but some, like a woman I met, cried because she had two kids to support and three jobs and no health insurance.
Aside from this, the cost of living has outstripped Main Street’s ability to maintain a solid standard of living, and that’s been going on since the Reagan years without being addressed. Now we’ve added outsourcing and vast unemployment to the picture.
Washington should talk to the people on their own turf. Alan Greenspan wasn’t the only one who wasn’t listening. Having some heart as well as serious thought: addressing issues is the only game in town if we’re going to fix our ills.
Bergenfield, N.J., April 4, 2010
To the Editor:
Re “Hedge Fund Pay Roars Back” (Business Day, April 1):
It is immoral and un-American for the top 25 hedge fund managers to pull in a collective $25.3 billion in one year. That these billions are presumably not even treated as income for tax purposes but are counted as capital gains and taxed at lower rates is unconscionable.
Can we have true democracy and promise for the future when there is such outrageous wealth and desperate poverty side by side in a country that purports to be egalitarian?
Everyone knows that a billionaire has instant access to and influence on any elected official from the president on down to city council members. The poor have little power, especially now as they struggle with lost jobs and fewer public resources.
The United States needs tight regulation of the entire financial industry and a progressive income tax that hits hard at the rich.
Berkeley, Calif., April 4, 2010 •
To the Editor:
The top 25 hedge fund managers took home an average of $1 billion each last year (Business Day, April 1). The same day I read that the global community has pledged $9.9 billion over the next three years for disaster relief in Haiti (“Billions of Dollars Are Pledged for Haiti, but Skepticism Remains” news article, April 1).
When I started reading this piece, from The Single Tax Review of 1914, I thought it was going to be a retelling of The Savannah, one of many memorable passages in Henry George's book, Progress and Poverty. But it turned out to be something a little different, and struck me as very topical nearly 100 years later, as we see joblessness and tremendous concentration of wealth in America, this "smartest" of countries, with supposedly expert economists trying to steer us back into something resembling prosperity. Wages tending to a minimum, and jobs disappearing. Individuals and large shareholders in companies who claim ownership of our best land and our natural resources growing rich, while the rest of us struggle to sip from the trickle-down we are told will be ours if we consent to this structure. Those who have read P&P know why the flow is in the other direction.
IT'S MINE—ALL MINE.
(For the Review.)
By BENJAMIN F. LINDAS.
The sun had just slipped
behind a few wisps of clouds that hung above the western horizon, as a
'prairie schooner' came to a stop in the fertile bottom lands on the
banks of a mighty river of the mid-west. A few trees growing in
scattered clusters were all that broke the monotony of the plains that
stretched in every direction as far as eye could see. The only
vegetation was a high, thick, tangled grass that grew in luxuriant
abundance from the rich black soil.
"Guess we had better stop here," said the driver, a
harsh-voiced squatty man of middle age, whose shifty gray eyes peered
out from under his heavy brows. "Soil looks good—no pestering
neighbors," and he tugged at the heavy mustache that hid his tightly
"All right," was the
tired response from his wife, who was slightly younger than her husband,
with traces of beauty still visible in the clear-cut profile and large,
dark, but now lusterless eyes. "But it's dreadfully lonesome, Jim."
The man was busy
unhitching the horses and made no response. He was a man of few words;
morose, hot-tempered and selfish. He had, by the strictest kind of
economy and frugality hoarded together a few hundred dollars, and,
ignorant though he was, he had left the little village in which he had
been reared in answer to an inner voice that kept prompting him to "Get
some land! Get some land!"
Glenn Beck, a cable TV personality, urged Christians to leave their churches if the words "social justice" were used. He is quoted as saying,
I'm begging you, your right to religion and freedom to exercise religion
and read all of the passages of the Bible as you want to read them and
as your church wants to preach them . . . are going to come under the
ropes in the next year. If it lasts that long it will be the next year. I
beg you, look for the words 'social justice' or 'economic justice' on
your church Web site. If you find it, run as fast as you can. Social
justice and economic justice, they are code words. Now, am I advising
people to leave their church? Yes.
This makes me think about some of what went on in Alabama a few years ago -- the notion that churches should be dispensers of charity, and that they should not be campaigning for social justice because if there were social justice, there would be no need for charity!
As I read some of the comments on a NYT blog,
"Lord, when was it that we saw you hungry and gave you food, or thirsty
and gave you something to drink? And when was it that we saw you a
stranger and welcomed you, or naked and gave you clothing? And when was
it that we saw you sick or in prison and visited you?' And the king will
answer them, 'Truly I tell you, just as you did it to one of the least
of these who are members of my family, you did it to me." (Matthew 25)
I am led to wonder whether people understand the difference between charity and justice. To me, Matthew 25 merely describes charity. Helping an individual in difficult circumstances, without seeking to correct the structures which put him into those circumstances and will put the next person in those circumstances. If he is hungry because he has no job and no skills, feeding him will keep him alive another day, and training him will aid him if a job is available -- but if there is no available land for him to labor on, you've not moved a step toward justice. Welcome, and clothing, and visits are all wonderful -- but they don't change the structure which makes it impossible for some people to provide for their own needs and the needs of their families.
Susan Pace Hamill, the University of Alabama law professor who has made extensive studies of Alabama's tax system and the federal tax system and is now running for the state legislature in Alabama, said of the churches a few years ago -- I'm paraphrasing -- that even if they deserve an "A" for charity, if they earn an "F" in justice, that does not come out to a "C"; it is failure. If I recall correctly, the Alabama chapter of the Christian Coalition was opposed to tax reform (reducing sales taxes on groceries, raising the state income tax threshold to approximately the poverty line -- no one was even talking about reforming the perversely low property tax) on the basis that churches would no longer have as many objects for their charity if Alabama moved in the direction of economic justice. They'd be depriving the churches of poor people to serve!
I wonder whether Mr. Beck considers our current society to already be perfectly socially just and economically just, and, if not, what entity(s) he considers should seek to move us in that direction if he specifically excludes the Christian churches from having a concern for these issues.
To me, social justice and economic justice start with treating that which nature -- God, if you prefer -- provides, and that which the community creates -- as our common treasure, and treating that which individuals and organizations create as their private treasure. Glenn Beck, Dick Armey and Grover Norquist may be very focused on that second portion, but if they fail to get the first half right -- first! -- they will not create a stable -- or just -- economy or society.
While the working paper is focused on modeling what has happened to various parts of our population since the 2007 SCF (this is not an analysis of the return to the 2007 panelists in 2009, which will be out later in the year), what I'm presenting here is actual SCF data. It comes from Tables 5 and 7.
1. Percent of households
2. Percent of
households holding mortgage debt:
Median ratio of debt to income:
4. Percent of HH with debt payments >40% of income
Households by Income Percentile:
Percent of households holding debt:
2. Percent of households holding mortgage debt:
3. Median ratio of debt to income:
4. Debt payments >40% of income
Age of Head:
Percent of households holding debt:
45 to 64 years
2. Percent of households holding mortgage debt:
45 to 64 years
3. Median ratio of debt to income:
45 to 64
4. Debt payments >40% of income
45 to 64 years
Do you notice the trend? An increasing proportion of us are helping to make the FIRE sector -- the shareholders in the finance, insurance and real estate businesses -- wealthy.
Nearly half of retirees have debt, up 1/3 from 1989, and median debt has n tripled. Nearly 3 in 10 retirees have mortgages, and 15% of retirees (or is that of the retirees with debt?) have over 40% of their income devoted to debt payments.
Among our young people -- <45 years of age, 85% have debt, and at the median, their debt is 1.3 times their income, more than double the ratio 18 years earlier.
A wealth concentrating machine. The FIRE sector -- the banks, the insurance companies, the real estate interests -- are have been permitted to create a giant wealth machine, too big to fail.
But not too big to correct. There ARE things that can be done. I encourage you to take a look at Mason Gaffney's new book, After the Crash: Designing a Depression Free Economy. (read the interview linked at http://www.masongaffney.org/, or find the book at schalkenbach.org's bookstore.
2/23: I added a postscript to this one ... scroll down!
David Cay Johnston, first known to many of us as the tax reporter for
the NYT, and more recently the author of Perfectly Legal and Free
Lunch, and as a columnist for tax.com, last week brought to popular
attention a story which the IRS posted to its website without the
normal fanfare which announces a new piece of information there. Even
more interesting is the fact that it represents a return to the IRS
reporting data which was customarily furnished during the Clinton years
and suppressed by the Bush administration, who brought us substantial
tax cuts for the highest-income Americans -- and for the highest-value
(top 1%) decedents. As Andrew Leonard put it in Salon,
This is America, right? We've come to expect shocking statistics on income inequality. They're practically our birth right.
But then came the kicker:
The annual top 400 report was first
made public by the Clinton administration, but the George W. Bush
administration shut down access to the report. Its release was resumed
a year ago when President Obama took office.
Because you know, if you are going to reward the richest Americans with
tax cuts, it's best if you keep the rest of us in the dark as to just
how much money they're making, and how little they are paying Uncle Sam.
The new information relates to the top 400 income taxpayers. The data
published brings forward the series data, previously published for 1992
to 2000 (See http://www.irs.gov/pub/irs-soi/00in400h.pdf, published in 2003) to 2007.
Here are some of the highlights of the 2007 data:
The adjusted gross income threshold for being among the top 400 taxpayers rose from $24.4 million in 1992 to $138.8 million in 2007. In constant dollars, that was approximately a quadrupling in 15 years.
The average AGI among the 400 taxpayers rose from $46.8 million (192% of the cutoff) in 1992 to $344.8 million in 2007 (248% of the cutoff).
In 1992, the total AGI of the 400 represented 0.52% of the total
AGI for all taxpayers. In 2007, the 400 represented 1.59% of the total
AGI. In those years, total taxpayers increased from113.6 million to 143.0 million. The 400 represented .00035% of the households in 1992, and .00028% in 2007.
Over the same period, the average AGI for the remaining taxpayers increased from $31,781 to $59,798.
Salaries and Wages represented 26.22% of the Top 400's AGI in 1992; by 2007, that had decreased to 6.53% -- an average of $29.4 million per taxpayer, for the 306 who reported such income. 306 is the lowest figure since 1992.
All 400 reported Taxable Interest income. On average, they reported
$27.1 million. In total, their taxable interest exceeded their
salaries and wages. In total, their taxable interest was 4.04% of
total US taxpayer interest.
All 400 reported Dividend income, and their average was $24.5 million. Their dividends were 4.14% of total US taxpayer dividends.
The vast majority of their reported taxable income was in "Net
capital Gains less Loss in AGI": an average of $228.6 million each.
Their capital gains equaled 66.29% of their AGI, and 10.07% of total US
taxpayer capital gains.
Virtually all of their capital gains -- $226.4 million on average --were subject to preferential rates; this means they were "long-term" holdings, and were taxed at 15%. [And of course none was subject to FICA, on which the vast majority of those who labor pay 14% (more precisely, (7.65*2)/107.65, or 14.2%).]
49 reported net business income, averaging $3.2 million. More, 84,
reported net business losses, averaging $2.6 million -- they
represented 3.06% of the US aggregate.
202 reported Partnership and S Corporation net income, averaging $83.0 million. 185 reported Partnership and S Corporation net losses, averaging $25.2 million -- 3.52% of the US aggregate.
Their itemized deductions averaged $49.4 million, 1.46% of the US
aggregate; the average itemized deductions limitation was $5.4 million
-- they represented 5.4% of the US aggregate.
On average, they claimed "taxes paid" deductions of $13.9 million, and "interest paid" deductions of $9.9 million. Their "taxes paid" deductions represented 1.17% of aggregate deductions for taxes paid.
Almost all claimed contributions deductions, averaging $28.5 million -- 5.73% of the US aggregate. (Interesting that this is roughly equal to salaries and wages, or to dividend income, or to taxable interest income!)
Their Taxable Income grew from an average of $42.2 million to $296.2 million. In constant dollars, it increased 376%. In 1992, their taxable income represented 0.70% of the aggregate; by 2007, theirs was 1.95% of the total.
Their federal income taxes averaged $57.3 million; in total, the 400 represented
2.05% of the total paid, up from 1.04% in 2007. [Compare the former
percentage to their 1.59% share of AGI, and their 1.95% share of
Taxable Income.] Their average federal tax rate was 16.62% in 2007, down from 26.38% in 1992.
If we add the amount they claimed as a deduction for taxes paid to their federal income tax, their taxes represented 20.57% of their AGI in 2007, down from 32.12% in 1992. Their other taxes paid dropped from 5.74% of AGI in 1992 to 3.95% in 2007.
These 400 taxpayers paid a total of $28.4 billion in taxes,
federal and other, in 2007, on AGI of $137.9 billion and taxable income
of $74.7 billion.
In 2007, they paid $28.4 billion in taxes, federal and other.
Had their tax rate in 2007 equaled their tax rate in 1992, they would
have paid $44.3 billion in taxes, federal and other, or about $110.7
million on average, instead of $70.9 million.
Johnston's Tax.com article also points out:
The top 400 reports understate actual top incomes because of deferral
rules. For example, managers of offshore hedge funds who deferred their
gains may not be counted in the top 400 reports, which are based on the
figure on the last line of the front page of Form 1040.
At least three hedge fund managers made $3 billion in 2007. It is not known how much, if any, of their income they deferred.
Only 7 of the top 400 have shown up in the report every year, the IRS
data showed. Of the 6,400 returns covered by the 16 years of the
report, the IRS said that 2,515, or almost 40 percent, appeared one
The previous report (before the Bush administration suppressed
publication), said that less than 25% of the then 3600 returns appeared
more than once between 1992 and 2000.
A very useful table in DCJ's column shows that the income of the bottom
90% of taxpayers has increased by a mere 13% (in constant dollars) over
the 16 years.
How much of this income do you think they spent on consumer goods?
What do you think they did that helped stimulate our economy?
How many people do you think they employed, and what sort of wages did they pay?
What do you think this year's portion of each fortune will be worth upon the death of the recipient?
What do you think they invested their windfalls in? I'm guessing that a lot of it went into land -- urban land -- and non-renewable natural resources of one kind or another -- that which Will Rogers and others have pointed out is not being made anymore.
What industries do you think these fortunes are coming from? How have these people benefited from the boom-bust cycle which has victimized millions of Americans? What privileges have we-the-people granted them to reap what we-the-people sow? To what degree have they benefited from privatizing the commons -- things which rightly belong to all of us? What sort of contribution do you think these companies have made to pollution, to personal bankruptcies, to concentrating America's wealth in the pockets of a relative few? How many jobs have they moved offshore? Are they being paid in shares or stock options that burden their employer's shareholders? What sort of wages have they paid their employees at various levels on the pyramid? What sort of influence will they have over our next elections -- Senators, Congressmen, Governors, President, etc., -- and over future decisions to go to war in various resource-rich parts of the world? They can certainly afford to spend to influence public opinion in ways which benefit their interests, and to guarantee that they won't be taxed heavily, even if workers, who end up with little, are.
The article lists a number of people who will likely be in the 2008 second tier -- not the top 400, but clearly well into the top half percent, based on their selling Goldman Sachs stock; the article isn't clear about what their basis might have been in the stock -- but one sold shares worth $17.6 million plus $55.7 million (he may not be an American). Another, who ran the merchant banking business, sold $29 million worth. The article suggests that most of these sellers still have considerable amounts of Goldman Sachs stock; Lloyd Blankfein's 3.3 million shares are now worth more than $500 million. Should he sell, he'd be well onto the Top 400; the 2007 threshold was $139 million.
I'm guessing that many on the top 400 list in any particular year are people who have sold a privately held business to a large corporation. They've paid 15% on the capital gains, and will likely rail against paying an estate tax on the other 85%.
"Unaffordable housing" The term still keeps cropping up. Which part of
a house is not affordable? The roof? The bricks? The drains? The
roofing tiles? The plumbing system? The amount builders have to be paid
to put it all together?
Go into any builders' merchant and check the prices. They are all very
affordable. It costs, at most, £100k to build a decent house. Which is
very affordable when spread over 40 years - £50 a week. So what is
going on to make houses unaffordable? I have asked this question many
times over the past 30 years. Usually, the response is a yawn, so the
resulting problems, are in a sense a richly deserved reward.
Too many have stood aside, not watched what is going on in the world
and failed to try and make sense of it. Hence the talk about
"unaffordable house prices" Anyone who uses the phrase "unaffordable
house prices" without further explanation is guilty of extreme mental
laziness. Which is most of us, and now we are living with the
consequences of our neglect.
This of course includes the Nationwide Building Society, which would do
everyone a good turn if they scrapped their so-called House Price Index
and replaced it with a housing land price index.
This short article by Steve Hanke, of Johns Hopkins and Cato, begins,
On January 3rd, US Federal Reserve Chairman Ben S. Bernanke delivered a
major speech at the annual meeting of the American Economic
Association. In his formal paper, “Monetary Policy and the Housing
Bubble,” Chairman Bernanke argues that the Fed’s monetary policy was
not responsible for the U.S. housing bubble. He claims that faulty
regulation was the primary culprit.
Chairman Bernanke’s claim is a great canard. The Fed is a serial bubble
blower. Let’s first consider the Fed-generated demand bubbles. The
easiest way to do this is to measure the trend rate of growth in
nominal final sales to U.S. purchasers and then examine the deviations
from that trend. As the accompanying chart shows, nominal final sales
grew at a 5.4% annual rate from the first quarter of 1987 through the
third quarter of 2009. This reflects a combination of real sales growth
of 3% and inflation of 2.4%.
These data talk, and the most interesting thing they say is that every
18 years we can expect the culmination of a credit-fueled real estate
and ensuing business cycle. This, of course, doesn’t imply that all
recessions are preceded by a real estate cycle. It only says that all
real estate cycles have spawned economic downturns.
This knowledge has allowed for some prescient forecasts. The prize in
that department goes to Prof. Fred Foldvary who wrote in 1997: “the
next major bust, 18 years after the 1990 downturn, will be around 2008,
if there is no major interruption such as a global war.”
For a full treatment of the 18-year real estate cycle, I recommend the following items:
Fred E. Foldvary. “The Business Cycle: A Georgist-Austrian
Synthesis.” American Journal of Economics and Sociology Vol. 56, No. 4,
Mason Gaffney. After the Crash: Designing a Depression-Free Economy.
Ed. Clifford W. Cobb. Chichester, U.K.: Wiley-Blackwell, 2009.
Phillip J. Anderson. The Secret Life of Real Estate and Banking. London: Shepheard-Walwyn, 2009.
It is interesting to see who wanted to participate in the increase in land value in New York City through investing in the housing deal which attempted to convert middle-class housing into something more upscale:
Many of the other companies, banks, countries and pension funds —
including the government of Singapore, the Church of England, the
Manhattan real estate concern SL Green, and Fortress Investment Groups
— that invested billions of dollars in the 2006 deal stand to lose
their entire stake.
“At the time, it looked like a sound investment,” said Clark McKinley,
a spokesman for Calpers, the giant California public employees’ pension
fund, which bought a $500 million stake in the property. “When the
market tanked, we got caught.”
Calpers, he added, has written off its investment. So has Calsters, a
California pension fund that invested $100 million, as has a Florida
pension fund that put $250 million into the deal. ...
The Government of Singapore Investment Corporation, which made a $575
million secondary loan, and invested as much as $200 million in equity,
stands to lose all of that.
It isn't as if the buyers in this deal were going to build new buildings, or add new housing capacity to NYC on this huge (80 acre) piece of land. They hoped to make minor improvements in very well-located older mid-rise buildings, and collect much higher rent from new up-market tenants than they could collect from the existing middle-class tenants they planned to force out.
NYC's failure to collect any significant share of the rental value of the land in the form of a tax on land value contributed to the perceived opportunities for Singapore, the Church of England, California and Florida public employees and others to reap the benefit from the economic activity of the NY area and the investments made by NY's taxpayers (whose sales are taxed and whose wages are taxed, even if they only work in NYC) and subsidies given by the federal government (e.g., transportation systems). (Do you see any irony in it being the California and Florida pension funds which sought to collect a windfall on NYC rent, when those two states have provisions which suppress property taxes and thereby create windfalls for their landholders? I refer to Proposition 13 and "Save Our Homes.")
If NYC wised up, and placed more of its tax burden on its land value, there wouldn't have been the hope for ongoing windfalls for private investors.
There would, likely, also be a lot more housing available to meet the needs of middle class and other folks, because taxing land value nudges the owners of underused land to reconsider, and put their land to better use. No parking lots where a high-rise could be. No urban gardens where a mid-rise could be. No rubble-strewn lots where townhouses could be. No "taxpayers" where a building that meets current needs could be.
Remember Leona Helmsley's famous statement? "WE don't pay taxes. The little people pay taxes." She wasn't describing tax evasion; she was describing how we structure ourselves.
If NYC placed more of its taxation on land value, the big real estate operators WOULD be paying their share of the costs of providing the services which make NYC NYC, and there wouldn't be windfalls for CALPERS, Singapore or the Church of England, or the next generation of Leona Helmsleys. There wouldn't be land speculation. There would be a more stable and vital economy, in which all of us could prosper.
But obviously, the powers-that-be prefer the status quo -- the system which has funneled 71.8% of America's net worth into the portfolios of 10% of us, leaving 13.5% for the middle class -- the second 10% of us -- and best wishes! to the other 80%.
And, given last week's Supreme Court decision on corporations being entitled to free speech, that 71.8% is going to drown out those who see things differently.
Reverend King gave this speech at the Riverside Church in New York on 4 April 1967, a year before his death. I was intrigued to note how frequently he mentions land reform as important.
Perhaps the most stirring paragraph is this one:
A true revolution of values will soon cause us to question the fairness
and justice of many of our past and present policies. On the one hand,
we are called to play the Good Samaritan on life's roadside, but that
will be only an initial act. One day we must come to see that the whole
Jericho Road must be transformed so that men and women will not be
constantly beaten and robbed as they make their journey on life's
highway. True compassion is more than flinging a coin to a beggar. It
comes to see that an edifice which produces beggars needs restructuring.
I think of the wealth distribution within America (2007) or throughout the world. I think of some paragraphs from Henry George's book "Protection or Free Trade" (Chapter 25) which speak of "the robber that takes all that is left." I'll share them at the bottom of this post. I think of some writings on the subject of piracy.
I wish, however, that Bob Drake's 2006 abridgment, Progress and Poverty: Why there are recessions and poverty amid plenty -- and what to do about it!, a thought-by-thought updating of Henry George's much longer original -- was also available as for Kindle.
Which of the reasons below prevents you from enrolling?
and proceeds to list 7 "reasons" one might propose. Here's the first one:
1.George's ideas may
have been important in the 19th century, but today we're in
an information economy, land doesn't really matter, and besides,
poverty really isn't much of a problem anymore. George
described fundamental principles that always apply
as long as people need a place to live and don't want to work
for nothing. Sure, the economy has changed, but land remains
extremely important. Ask anyone struggling to remain in a
gentrifying neighborhood. Poverty no longer a problem? Worldwide,
by any measure, billions of people remain in poverty. In the
U. S., few of us starve but many of us suffer from high cost
of living, low wages, and poor working conditions. Why should
supporting a family require both parents to have full-time
employment? Why should people have to commute an hour or more
from areas with affordable housing to areas with decent jobs?
These thoroughly modern problems are clearly analyzed in our
The Lincoln Institute of Land Policy, an organization founded back in the 1940s by an industrialist enthusiastic about the ideas of Henry George, who intended that his wealth be used to promote those ideas, publishes a newsletter, the link to which arrived in my inbox last week. One of the articles was by Chip Case, recently retired from Wellesley, and half of Case-Shiller. The article is titled, "Housing, Land and the Economic Crisis" and it appears in "Land Lines."
What I take issue with is this statement:
The expansionary monetary policy pursued during this short period reduced the cost of buying a home by almost a third.
It might be correct to say that monetary policy reduced the cost of borrowing a particular amount of money by almost a third, and I suspect that is what Chip meant to say. But the reality is that instead of a potential buyer being able to purchase a particular house for 1/3 less monthly outlay for mortgage costs, he was able to borrow 50% more for the same monthly outlay -- and indeed, if he wanted to buy that particular house, he was competing for it with other people who WOULD be willing to borrow 50% more, so he would have to. And he needed to accept an adjustable rate mortgage, with all the downside that leads to.
This drove up the transaction prices, and produced the appearance of home equity against which a larger percentage of non-sellers were able to borrow. The spending -- on credit -- has led to profits for retailers and manufacturers, and most certainly for bankers (and thus to greater concentration of our wealth and income) and, as it had to, to a bust of large magnitude and widespread pain.
Have we learned, or are we going to do this again?
The article is titled, "Housing, Land and the Economic Crisis" and it appears in "Land Lines." But the word "land" appears only twice in the article:
second paragraph: "Between 2000 and 2005, the value of residential land and buildings increased from about $14 trillion to $24 trillion. About half of this increase reflected new construction, and half was due to rising land values, primarily on the coasts (Case 2007). But in late 2006 prices began to decline, and by mid-2009 they had fallen roughly 30 percent.
antepenultimate paragraph (I knew I'd have a use for that word someday!): "California represents about 25 percent of all the land value in the United States, and events there have major implications for the rest of the country. The good news is that for the last three months, the indexes for San Francisco, San Diego, and Los Angeles have led the nation in price appreciation. The California Association of Realtors reports substantial increases in home sales volumes except in the Central Valley.
I'm disappointed that neither Case nor Lincoln saw fit to connect the dots.
(And I'll note parenthetically that California and Florida's steeply rising land prices were in part due to their limitations on the property tax under Proposition 13 and "Save Our Homes" respectively. Many of California's problems would get better if they would simply fund their public spending from a tax on their land value, rather than suppressing that tax and relying on taxes on sales and wages, both of which depress any economy.)
Lenders ought not to be lending on speculative land values. Localities ought to be collecting more of the economic rent on the land within their borders, lowering the selling price of land without reducing its value in use -- and arguably increasing it! Localities and states ought to be lowering their taxes on buildings, on wages, on sales, and substitute the revenue from collecting economic rent. See also Mason Gaffney: How to Thaw Credit, Now and Forever, online at his website (above).
The University of Chicago was founded with Rockefeller support. He who pays the piper calls the tune.
I think the root of a lot of our current economic problems can be found here. Our prominent economists learned their economics from neoclassical textbooks and instructors and full professors who learned their economics from neoclassicals. I suspect, too, that it is very difficult to teach what one doesn't know. It is difficult to get tenure from neoclassical departments if you aren't hewing the line.
I commend to your attention Mason Gaffney's newest book: After the Crash: Designing a Depression-Free Economy. Unless, of course, you like booms and busts. You can order it at http://www.schalkenbach.org/ or from Wiley.com.
I came across an interesting table in a November, 2007, Federal Reserve Board Study entitled "First-Time Home Buyers and Residential Investment Volatility" by Jonas Fisher and Martin Gervais, and another version from "Why Has Homeownership Fallen Among the Young?" (FRB, March, 2009), by the same authors.
While median income (in real dollars) has fallen, the ratio of median house price to median income has nearly doubled, down payments at the median are down by over 1/3, and, perhaps most important, the proportion of after-tax income going to mortgage payments has nearly doubled, to 40%. Consider also that in 1976, most mortgages were fixed rate instruments, while by 2005, a very high percentage were adjustable rate mortgages, whose interest rate could rise by 2% at the end of the first year, raising that proportion higher in the second year.
And then, of course, in addition to paying 40% of after-tax income to the mortgage lender, our young people must also pay taxes: payroll taxes, wage taxes, sales taxes, taxes on their house and the land on which it sits. Those who have read this blog for a while will know that placing the largest share of our tax burden onto land value would have many desirable effects, including reducing the selling price of land to a nominal amount. Instead of borrowing from a mortgage lender a large sum to pay the seller for land value the seller didn't create, we'd pay land rent to our community, which would keep some of it for local purposes, and pass some up to the state and the federal government -- revenue which would replace some or all of the state sales and income taxes, and the federal income taxes.
And that 40% is mostly interest, not principle payment. Depending on the interest rate, in the first year of a mortgage, one pays 70% (at 4%), 78% (at 5%), 83% (at 6%), 88% (at 7%) 91% (at 8%) of one's mortgage payment as interest, and only 30% to 9% to pay down principle. The fact that, for some, mortgage interest isn't taxed, should be little consolation. (Why "for some"? Because for many families, the standard deduction is a better deal than itemizing deductions. Most homebuyers don't realize that, and assume they'll benefit as homeowners.)
Yet another FRB study, from May, 2006, showed that in the top 46 metro areas, on average, land value represented 51% of the value of single-family residential property. In San Francisco metro, the figure was about 88%; in NYC and Boston metros, it was well over 70%. Oklahoma City was the lowest, in the 20's range.
Homesellers reap gains they didn't sow. Mortgage lenders get to pocket large shares of young people's wages. There has to be a better way. Longtime readers will know what it is: shift our taxes onto land value, and off productive activity.
Table 2: Characteristics of First Time House Buyers
Median Real Income
Median Price/Median Income
Mean Monthly Payment/After-Tax Income
Notes: The table entries are from various issues of The Guarantor,
1978-1998, the 2005 National Association of Realtors Profile of Home
Buyers and Sellers, and 2005 American Housing Survey. The Real median
income is based on the CPI. Mean Monthly Payment/After-Tax Income
before 2005 is from The The Guarantor. In 2005 we made an assumption
about the average tax rate, .25, to calculate this variable.
From "Why Has Homeownership Fallen Among the Young?"
Table 3: Characteristics of First-Time House Buyers
Median Price/Median Income
Mean Monthly Payment/After-Tax Income
Source: Various issues of The Guarantor, 1978-1999.
perhaps the answer to Professor Krugman's question is that very few of
the current crop of economists -- saltwater or freshwater (read the
article!) -- ever were guided into reading the work of one of the
foremost writers on political economy.
And perhaps the few who did read it were too embarrassed to challenge their brethren.
But even a look at the textbooks from which most of the college and university economics professors teach their students would demonstrate that Henry George got it right,
and that his ideas, while eclipsed by economists who know where their
own bread is buttered, and which ideas they ought not to embrace while
seeking tenure (during which they forget the little they ever did learn
about this wise man's thought and observations) still shine and still
explain what we see around us better than the neoclassical economists
who are embraced by most teaching and government economists and economics pundits.
I commend to their
attention Henry George's books, all of which are available online and
all of which can be purchased in hardcopy from http://www.schalkenbach.org/:
* Political economy is the science which deals with
the natural laws
governing the production and distribution of wealth and services. Seems like something most of us have a vital interest in understanding ourselves and promoting widespread understanding.
Henry George, along with the other CLASSICAL economists (as opposed
to the NEO-classical economists from whom most of today's students
learn their economics) recognized that there were three factors of
production: land, labor and capital. The Neo-classicals seem to
consider the distinction between land and capital too much nuance for
their taste, and gloss lightly over it, as if land and natural
resources were no longer worth talking about in 20th or 21st century
America -- or the rest of the world. While the classical economists weren't familiar with electromagnetic spectrum, or geosynchronous orbits, or rush-hour landing rights at LaGuardia Airport, or water rights, or pollution rights, or oil as a major energy source, or parking spaces for cars in congested cities, they would immediately recognize each of these things as "LAND," and they would likely agree with Henry George that we are all equally entitled to them, and that permitting some to privatize their value, and forcing others to pay them just as if they'd created them is a poor idea.
We fail to measure the value of these important assets, or we measure them only poorly, or we ignore the implications of valuing these rightly-common assets. Or we ignore the work of those who do measure them. Do you think that land value and natural resource value mattering is just a quaint agrarian idea, in the context of the 21st century?
Remind me again what it is that we and
others go to war over.
Remind me how much of the typical family's
budget is going to the FIRE sector (finance, insurance, real estate -- including the sellers from whom homeowners in coastal states bought their homes, who reaped what they did not sow).
Remind me how much the typical family is paying for energy and other
non-renewable natural resources.
Remind me which direction the average worker's wages are going, and how difficult it is to find work, despite there being so many unsatisfied needs and wants in the world
Remind me how concentrated our
nation's and the global income and wealth is -- and why.
Remind me again of the havoc that our boom-bust cycles create in the lives of Americans and our neighbors around the world.
Remind me again of what sprawl costs us; of what too little exercise costs us; of what long commutes cost us; of what children growing up in families with insufficient income to meet their most modestly defined needs costs us. (These are very closely related, and can be traced to a single underlying fallacy in how we structure our economy. And they can be ameliorated by recognizing and correcting that fallacy.)
Then tell me
again that LAND and natural resources don't matter in the 21st century.
How did economists get it so wrong? To use my mother's phrase, their education was neglected. Even Paul Krugman's as best I can tell.
A May, 2009, paper by Michael LaCour-Little, Eric Rosenblatt and
Vincent Yao entitled "Follow the Money: A Close Look at Recent Southern
California Foreclosures" provides some interesting data about
single-family residential real estate in one part of the US.
Briefly, the paper looks at loans in five southern California counties
which went into foreclosure in November in 2006, 2007 and 2008.
It traces the collateral and loans from purchase to foreclosure, and
provides some useful findings. Here's their abstract:
Abstract The conventional wisdom is that households unfortunate enough to
have purchased at the top of the market during the recent housing
bubble are those most at risk of default due to recent price declines,
upward re-sets of adjustable rate mortgage instruments, the economic
downturn, and other factors. Here we use public record data to study
three cohorts of Southern California borrowers facing foreclosure in
2006, 2007, and 2008. We estimate property values as of the date of the
scheduled foreclosure sale with the automated valuation model of a
major financial institution and then track sales prices for those
properties that actually sold, either at auction or later as REO. We
find that borrowers did not, in general, buy at the top of the market
and virtually all had taken large amounts of equity out of the property
through refinancing and/or junior lien borrowing. Given sales prices of collateral
thus far, aggregate losses to lenders will reach almost $1.0 billion
dollars compared to almost $2.0 billion dollars of equity previously
extracted by property owners.
They do for mortgage foreclosures what Elizabeth Warren (et al)'s, study did for understanding the role which uninsured medical expenses play in personal bankruptcy filings. California may be a more extreme case, for reasons which relate to the perverse incentives involved in the 1978 Proposition 13 property tax limitations. But my interest is not the same as what the authors were driving after.
I took their data and created a small spreadsheet to look at the data from a different point of view.
Their sample is composed of 4,258 properties which went into foreclosure in Novembers of 2006, 2007 and 2008. On average, the properties in each of the three cohorts had been purchased in 2002, and for an average price of $356,200. By November 2006, the properties which went into foreclosure that month had an average value of $519,000 (as calculated by a commercial proprietary Automatic Valuation Model). I made the assumption that the properties which were foreclosed on in November 2007 and November 2008 had the same AVM valuations in November 2006.
My calculations proceed as follows: I compare the average 2002 purchase price of $356,200 (a weighted average of the three cohorts) with the 2006 AVM valuation of $519,000, which provides a 4-year appreciation of $162,800 per property. Assuming that each homeowner's annual property taxes started at 1.25% of their 2002 purchase price, and rose by the Prop 13 maximum of 2% per year, they each paid, on average, $19,578 in property taxes over 4 years.
Houses don't appreciate. They depreciate at about 1.5% per year. They're never worth more than what it would take to reproduce them. Taking 65% as an estimate of the share of the value of single family homes in southern California which can be attributed to land (1998 was 64.9% and 2004 was 78.7% in Los Angeles, according to Davis & Palumbo, May, 2006), 65% of the 2002 purchase price of $356,200 is $231,535. Let's assume that the house doesn't depreciate at all, to account for owner-made improvements. Land value, then, rose from $231,535 on average in 2002 to $394,300 by 2006.
So what produced that rise in land prices?
Some of it has to be attributed to the increase in population during that period of time -- due to fertility, improved public health, immigration from other countries and other states. New relationships and broken relationships both contribute to the demand for housing. Since the quantity of land is fixed, land prices tend to rise with population.
Some of it has to be attributed to relaxed lending standards, which permitted more people to borrow more money
Some of it has to be attributed to changes in interest rates, which permitted more borrowing for the same monthly payment.
Some of it has to be attributed to Proposition 13, which limited property taxes to 1.0% (in practice, roughly 1.25%) of the original purchase price, with an annual increase capped at 2%. The annual rental value of land is generally 5% of the purchase value, so the 3.75% to 4% difference gets capitalized into the selling price of the land.
But let's think, too, of why people were willing to pay more to live in these five counties. It was due to the schools, to jobs, to the roads, the sewers, the water system, the police and other emergency services, buses and trains, airports, the courts, jails and prisons, the universities, the hospitals and libraries, and public health and a myriad of other publicly provided goods. The homeowners as homeowners paid only about $20,000 in taxes, and received, if the AVM is correct and they sold in 2006, $162,800 in appreciation on their land.
The study shows that those who were in the 2006 foreclosure cohort had total average housing-related debt by November, 2006, of $469,000, up from the original loans of about $334,400. So they'd taken out an average of $134,600 by borrowing against their home equity.
Did the services which contributed to raising that land value by over $160,000 over 4 years really only cost $20,000 per property? No. Sales taxes, and wage taxes and other taxes also financed those services. And they were paid not just by landholders -- the roughly half of southern California residents who own their own homes -- but also by the other half, who rent their homes from others.
So homeowners reaped a huge windfall, and those who were not homeowners ended up financing it. And as we attempted to increase the homeownership rate by a few percent by relaxed lending standards, they got to pay another time.
Most people think there is no viable alternative. They're so used to the current structure -- and in California, Proposition 13 is sometimes referred to as the "Third Rail" of California politics" (touch it, and you die!) that few stop to consider that our taxes are at the root of our most serious problems.
So what's the alternative? Sanity would be for all those public goods whose effect is to support and increase property values to be financed by a tax on land value. Justice -- ditto. Efficiency -- ditto.
California is floundering because it can't fund its spending. And yet these 4,258 households stood to collect from buyers, if they sold in 2006 after buying in 2002, an aggregate windfall of $693 million: I've aggregated the data for these November foreclosures and here's the story.
Aggregate purchase price, approx 2002:
Aggregate down payment:
Aggregate value in 2006:
Aggregate appreciation 2002 to 2006:
Aggregate 4-year appreciation as percent of down payment
Aggregate real estate taxes paid
(@1.25% of purchase price, rising by 2% annually)
Aggregate appreciation as percent of property taxes paid
Folks who think they and people like them stand to reap a gain of $700 million on an investment of $264 million in 4 years, while paying just $78 million in property taxes may not consider it to be in their best interests to shift taxes off wages, off buildings, off sales.
Had Proposition 13 not been in place, and property owners paid just 1.25% of their properties' market value each year, aggregate property tax would have been $97,500,000, or about 25% more (assuming straight-line increase from 2002 purchase to 2006 average value of $519,000). Still a tiny fraction of the appreciation.
The study's sample was only the November foreclosures. To approximate the figures for all the foreclosed properties in the five counties in those 3 years, one might multiply by 12. And recall that foreclosures are still a tiny fraction of all single-family residential properties in these five counties, and that these are relatively newly purchased properties. Think of how much could be collected in the form of a tax on land value if everyone, no matter what year they bought their property, paid at the same millage rate on their true market value, instead of some paying on values based in the 1970s.
We-the-people created that appreciation. Should homeowners and other landholders get to keep it as if they created it? Does the answer to that question hinge on whether the homeownership rate is 30%, or 50%, or 65%, or 75% in that particular place, or in our country as a whole? Or is the homeownership statistic irrelevant to the justice or logic of this privatization? (Remember that residential real estate is frequently NOT the biggest piece of this: the urban real estate owned by corporations, REITs, foreign investors including airlines and sovereign funds, pension funds, philanthropies, 150-year trusts, private equity funds and other private entities, appreciates far faster. (Remember Leona Helmsley's description: we don't pay taxes; the little people pay taxes.)
On the other hand, when one takes into account the fact that the run-up in prices this situation has led to a situation in which all these people have been foreclosed on, a large and rising proportion of mortgages are "under water" and observers are saying that the "bust" portion of this boom-bust cycle is going to leave something like 50% of mortgage holders "under water" by 2011, perhaps one might reach the conclusion that even if one is not convinced of the justice of revising our system, one might choose it strictly on the basis of avoiding boom-bust cycles being wise.
I was a rising senior in high school when Woodstock took place. A fellow waitress in the local deli in which I worked -- Max for Snacks, in King of Prussia, PA -- took off for Woodstock, and the rest of us dreamed of doing so.
We thought we could change the world. Many had a vision of a society in which all could prosper, all could succeed. We sang, we danced, we applauded, we protested. Gradually we worked our way up. We educated ourselves, we bought homes, we had children -- not always in that order -- and we became part of the establishment. We bent the establishment, a bit, perhaps, to our advantage.
But we didn't correct the problems, and arguably, we let them grow worse. We watched as the benefits of public investment -- local, muncipal, county, state, federal -- accrued not to all of us but to those who own our land and claim title to our natural resources. We permitted corporations and individuals to lay claim to our common resources, we who grew up hearing about Jed Clampett being somehow entitled to the oil revenue, to the exclusion of the rest of us.
We're so used to the way this aspect of the world was handed to us that few of us think to question it. And yet the privatization of the economic value of urban land and the privilege of collecting the revenue on non-renewable natural resources on which all of us are dependent together produce some of our most serious social, economic, environmental, poverty and justice problems. Most wars are fought over these two things.
And until we come to recognize this, all we can do is put bandaids on those problems -- locally, nationally and globally.
These two things are what someone wisely referred to as "Natural Public Revenue" sources. Yet we largely ignore them, and use taxes which set up perverse incentives -- and wonder why we can't seem to solve any of our biggest problems.
An LTE in the San Bernardino Sun challenged the notion, promoted by the (real estate operator) governor, that California is overtaxed, with the following research:
We're not overtaxed
Posted: 06/06/2009 05:10:29 PM PDT
recently spent some time on the Internet investigating the governor's
claims that Californians are the most highly taxed state, or nearly so.
I found as follows:
California's property taxes under Proposition 13 are ranked in
an Arizona study as 34th for residential property taxes and 41st for
industrial property taxes under California's split-roll system.
California's state and local sales taxes per capita are ranked 15th per $1,000 of personal income in a Wisconsin study.
Our taxing of utilities ranks 12th per $1,000 of personal income in a Wisconsin study.
California's personal income tax ranks seventh greatest among the states at $3.22 per $100.00 of personal income per capita.
state corporate income tax has a flat rate of 8.8 percent and is ranked
sixth, but many corporations pay no taxes due to legal loopholes.
Cigarette taxes of 87 cents per pack are ranked 30th among the states, less than the U.S. median of $1 per pack.
Excise taxes on liquor ($3.30 per gallon) are ranked 19th among the states, less than the U.S. median of $3.75 per gallon.
taxes on beer (20 cents per gallon) are ranked 43rd among the states,
considerably less than the U.S. median of 69 cents per gallon.
The real estate transfer tax of $1.10 per $1,000 valuation is ranked 29th among the states.
Gasoline tax of 35.3 cents per gallon is ranked third among the states, most of which has been diverted to the state's general fund for years, last raised in 1994.
recent increase of the state's vehicle license fee ("car tax") from .65
percent of the car's value to 1.15 percent raises the tax from 20th
rank to about seventh, it appears, based on a Wisconsin study.
I concluded that Californians aren't overtaxed and that the governor's story is misleading.
is evidence of the same old misleading and partisan tricks that cause
us to be divided instead of illustrating a productive way for
California to solve its problems.
President, Hemet Unified School District Governing Board
Director, Region 18,
California School Board Association
I posted this comment:
Not over taxed, just relying on the wrong ones. Dense cities need infrastructure built and maintained, and are logical places for many other kinds of community investment -- in services such as education, emergency services, public health, etc. This costs money, but it also results in higher land values.
But Prop 13 prohibited the logical taxation of land value. To the extent that Prop 13 reduced taxation of houses and commercial buildings and other individually-funded improvements to land, it was a good thing. But that good is vastly overshadowed by its prevention of the use of the most logical and just tax yet devised: the tax on land value.
Land value rises for reasons which have nothing to do with the activity or inactivity of the individual landholder, and everything to do with the health and vitality and investment of the community. Every infrastructure project serves to increase land value. Good schools increase land value. Good jobs increase land value. Prop 13 permits the landholder to privatize all but a tiny fraction of that public investment, and forces the community into taxing, often heavily, things which ought not to be taxed at all.
Tax land value heavily. Not one acre will leave town. Not one building lot will wither and die under the burden. Not one square foot less will be "produced" -- the land is already there. What WILL happen is that the well-located acres which are languishing underused will be put to better use. This creates JOBS and businesses vying for your patronage and businesses vying for your labor, which drives wages upward -- the reverse of what we see now, where workers are competing for jobs, driving wages downward.
And lifting taxes off wages and off sales and even off corporate profits will have a whole other set of effects -- none of which are undesirable -- for the economy.
It isn't the amount of the total tax burden which is the problem. Rather, the load is badly placed. Rather than being put on the back of the horse, evenly loaded, it is put around his mouth and hung from his tail. No wonder he is struggling under the load.
San Bernardino sticks in my mind because of a 2006 Federal Reserve Board Study which showed, for 46 major metro areas in the US, the percentage of the value of the single-family housing stock which was accounted for by land value. For the aggregate of the 46 metros, the figure was 51% in 2004. San Francisco was 88%, and, of all the other cities in California listed, San Bernardino was the lowest at 62%. I'm guessing that they may not have experienced the horrendous run-up in housing prices that most of the rest of the state experienced, due in large part to Prop 13. But they're still stuck with the miserable tax structure that Prop 13 forces them into.
And think of the impact on all the towns that have courted car dealerships for the sales tax revenue, now that the auto manufacturers are shutting down dealerships.
The top 25 entries, whose 2009 holdings range from £10,800m down to £1,400m, include 16 which came from
The combined value of the top 25 fortunes is £73.88 billion. At 5% per year, that produces £3.7 billion in income -- quite a sizable amount to be shared among 25 families! (£1,400m is $2.1 billion US; £3,700m is $5.6 billion US.)
Notice that each of these fortunes is fundamentally from natural resources. Yes, there is capital involved, and labor. But under the laws of most countries, natural resource holdings and extractions are taxed lightly if at all, and labor is taxed heavily.
I'm playing catch-up, after having been occupied with other work for the past month or so, and came across some articles from UK publications listing the sources of wealth for the 2000 or so most wealthy people in the UK.
See a few entries down, where Michael Kinsley laid it out this way in the Washington Post:
Perusing the Forbes 400
list of America's richest people, it's striking how few of them made
the list by building the proverbial better mousetrap. The most
common route to gargantuan wealth, like the route to smaller piles,
remains inheritance. The ability to pass money along to your kids may
motivate many a successful executive or investor to work harder, but it
can't possibly motivate those kids to inherit harder in order to pass
it along once again.
Dozens of Forbes 400 fortunes derive from the rising value of land or other natural resources. These businesses are fundamentally different from mousetrap building. Land does not need to become "better" to increase in value, and that value increase doesn't produce more land.
Yet other fortunes depend directly on the government. The large
fortunes based on health care and pharmaceuticals would not exist if
not for Medicare and Medicaid. The government hands out large fortunes
even more directly in forms as varied as
drilling, mining and mineral rights;
minority small-business loans; and
other special treatment.
We must conserve the earth -- yes. But we must also share its bounty with all, not permit the privatization of that bounty. Henry George put it this way:
We sail through space as if on a well-provisioned ship. If
food above deck seems to grow scarce, we simply open a hatch -- and
there is a new supply. And a very great command over others comes to
those who, as the hatches are opened, are permitted to say: "This is
It is a well-provisioned ship, this on which we sail through space. If
the bread and beef above decks seem to grow scarce, we but open a hatch
and there is a new supply, of which before we never dreamed. And
very great command over the services of others comes to those who as the
hatches are opened are permitted to say, "This is mine!"
In case it isn't obvious, I'm not opposed to fortunes which come from creating better mousetraps! I'm quite in favor of them. But we need to distinguish between what monopoly privilege creates, and what hard work creates, and LVT does that.
The schedule for the annual gathering of Georgists (that is, people who are persuaded that the economist and social philosopher Henry George (b. 1839, Philadelphia; d.1897, NYC), author of "Progress & Poverty" and a book of essays entitled "Social Problems," among others, pretty much had it right) is now online. It is in downtown Cleveland in early August.
Looking over the schedule, I see a lot of familiar names -- people I've come to know since I attended my first CGO meeting in 2001 -- and some people I've not yet met face to face but know online. I'm happy that we have few sessions running side by side, because virtually all of the programs are of interest to me.
My last visit to Cleveland was with 600 delightful women, and included a great and noisy party at the Rock 'n' Roll Hall of Fame. (I just had the pleasure of being on the host committee for the same group's 2009 Annual Meeting!) At that time, I didn't know the significance of the larger-than-life statue nearby of Cleveland mayor Tom L. Johnson. The book he holds in his hand is P&P.
If you would like to see an end to poverty, come join us.
If sprawl and its concomitants concern you, come join us; we know how to slow it and reverse it and channel it into reusing the land already well served by taxpayer-provided infrastructure.
If long commutes -- and the fuel, pollution, spending and time loss involved -- worry you, come join us.
If you would like to see a more stable economy, without the booms and busts which cause such widespread pain and ruin, we have answers.
If you would like to see healthier cities and a more vibrant economy, come listen to what some of these people have to offer.
If unaffordable housing troubles you, come talk to us.
If the extreme concentrations of income and wealth -- particularly of natural resource wealth -- trouble you, we know how to correct it gently and justly.
If you hate the income tax and recognize that sales and consumption taxes damage the economy, but still believe that there are some things government can do better than the private sector, we know how to finance that spending justly.
We come from all over the political spectrum, and share little except a major commitment to creating a better and more sustainable world and society and economy for all. (That's a lot actually!) It is a joy to spend a few days with people so passionate about social and economic justice and with a clear vision of how to get there.
If you're curious about Henry George, you might start where I started, with four of his speeches. I found these as pamphlets in the files of my late grandparents when I took possession of their library and file cabinets and some sentimental treasures. My first pass was for genealogical information. Shortly after that, I started reading a speech entitled "Thou Shalt Not Steal," and it clicked. My paternal grandparents (three of them, actually: my own grandparents, and my step-grandmother, whose first husband was a dear family friend, too, in the 1940s and 50s) were all Georgists. For every landmark occasion in my young life, their gifts included a lovingly inscribed copy of Progress & Poverty (just in case I'd misplaced the previous ones!) But I'd not done more than thumb through it. When I first did get around to reading it, I was in my late 40s; my grandparents were quicker studies, and devoted the second half of their lives to promoting these ideas. My first read of P&P was a slow slog; a friend shocked me when she said she found it a page-turner, a mystery whose solution she was anxious to get to. Now I admit I read it for, and with, pleasure.
Another piece you might read is my grandfather's "An Introduction to Henry George" or my grandmother's more humorous article, "My Introduction to Henry George;" she went on to write delightful short stories for Ladies Home Journal, Colliers, the Saturday Evening Post and many other magazines in the 40s. Things have come full circle -- I'm on the board of two Georgist foundations, including the one my grandfather worked for and with for over 30 years, the Robert Schalkenbach Foundation. And following in the example of my late stepgrandmother, who tried to write an activist letter every day, I try to post comments on either my blog or other blogs or articles online every day. I mostly succeed, though in the past month or two, I've fallen short. And I've created a website to make Henry George's ideas accessible to people coming from a wide range of interests and points of view: http://www.wealthandwant.com/
What is home equity, and how does it relate to the American Dream?
Sometimes we hear about "building home equity" as if it were some sort of muscular activity. There are two ways to "build home equity." The first, the old-fashioned way, is by paying down the mortgage. This happens fairly slowly. On a 30 year mortgage, and making no extra payments, here is the payoff schedule for several mortgage rates:
Cumulative Mortgage Payoff Schedule for 30-year Mortgage
Mortgage Interest Rate
The other -- and much faster -- part of home equity, of course, is the appreciation we have come to expect. What few people realize is that houses do not appreciate; they are never worth more than what it costs to build them, less depreciation, to account for deterioration, obsolescence of systems, etc. A Federal Reserve Board Study (May, 2006) pegged annual depreciation of single family home stock at 1.5%.
So when housing was rising in value by 5% or 10% per year, what was rising was the price of the land under the houses, not the houses themselves.
What causes land to rise in value? Not individual activity. Not the landholder himself. There is no muscular activity on the part of the landholder here! (Yes, the owner who does a gut renovation adds to his property's total value, though not always as much as the project costs. Most studies suggest that adding a second bathroom to a home which has only one actually adds more to the value of the property than the project itself costs; some say that adding a deck also pays back more than the project costs. Few other projects pay back fully, so while home equity may rise, it is through individual investment, and the owner's net assets do not increase as a result.)
Land rises in value for reasons which have little or nothing to do with the landholder himself:
Local taxpayers invest in goods and services which people value: good schools; well-paved streets; well-equipped fire trucks and ambulances; police trained in CPR and equipped with defibulators; parks; courts, jails; sewers and city water replacing septic and wells; libraries; community colleges; letc.
State and federal taxpayers invest in goods and services which people value: electricity; good transportation systems; infrastructure; "pork"; broadband; public colleges and universities; etc.
Private sector investments: good hospitals; cultural amenities; an active and vibrant local economy; a healthy downtown; private universities; charities; etc.
Technological advancements: elevators (urban land); air conditioning (southern states); earth moving equipment -- advances from WWII equipment (making difficult sites easier to develop); fiberglass boats (waterfront properties); maglev trains; etc.
Population increases: natural fertility increases; assisted fertility; fewer wars or auto or industrial accidents; better outcomes after such events; reduced infant mortality; better health resulting in longer lifespans; people having larger families because of religious beliefs or greater prosperity; local amenities which attract population to the school district or metro area; immigration from other countries; lower cost of living drawing more people;
So if all those things were happening, why did we just experience a crash in land values?
Well, what we experienced was a crash in land prices. Land prices got well ahead of land values in many places. This is known as land speculation. People were "investing" in land, buying homes for outlandish prices, thinking that prices would continue to rise forever. Mortgage lending standard went from 20% down to 10% down to 5% down to 1% down to 105% financing. Private Mortgage Insurance became the norm for first-time buyers. Debt to income ratios rose from 28% to the high 30's, or weren't even discussed. Mortage rates dropped, particularly for Adjustable Rate Mortgages. Interest-only mortgages became available, and negative amortization mortgages were a possibility.
How could we be so stupid?
Did someone yell "FIRE?" (as in the FIRE sector of the economy: Finance, Insurance, Real Estate) The FIRE sector was making money from this. Home builders. Land sellers -- including farmers, land speculators, mom-and-pop subdividers, and many others. Builders. Real estate brokers. Mortgage brokers. Mortgage insurance sellers. Title insurance sellers. Homeowners' insurance sellers.
We considered this private enterprise and pronounced it good.
Go back to the five items listed above, and tell me why a smallish -- or even a largish -- portion of the private sector ought to reap all the benefits for all those things, in proportion to the size and quality of their landholders.
But only the Georgists were aware of what was really happening. What was happening was that we attempted to increase the homeownership rate from the low 60's to the high 60s, under the guise or illusion that by doing so we'd be extending the "American Dream" to an additional 10% of our fellow residents of this country. But of course the homes they could afford were not in the places where land was appreciating, and their attempts to "catch the brass ring" which would, they hoped, make them part of the "rising tide." (Okay, too many metaphors ... but haven't we heard all of them in this context?)
What did the Georgists know? That land value which our system permits landholders to privatize ought to be socialized. Small landholders ... most of the residential owners, that is ... get to privatize some small land value ... a bone to shut them up, while the big landholders -- individuals, family trusts, corporations, REITS, philanthropies, universities, churches and other tax exempts, individual foreign investors, pension funds, private equity funds, foreign sovereign funds, etc. -- get to privatize the BIG land value in our cities. Even in our small cities and medium-sized towns, the businesses which are their own landlords are, on average, far more profitable than those which are tenants, and landlords take a significant share of their tenants' production -- a non-agricultural version of sharecropping, which we honor as if the landlord was actually a producer of some sort.
John Stuart Mill, one of the classical economists, told it this way: Landlords grow rich in their sleep.
So back to the initial question: what is home equity, and how does it relate to the American Dream? Home equity is a sop, thrown to keep the puppies quiet and calm, while the big dogs enjoy the contents of the manger.
We'd be far better off if the vast majority of us -- and our elected officials -- understood and talked openly about what Henry George was telling us, in his landmark book on political economy entitled Progress and Poverty -- subtitled: An inquiry
into the cause of industrial depressions and of increase of want with
Remedy: that we permit the privatization of the economic value of our natural and other rightly-common resources, including urban land value, at our extreme peril.
We turn the American Dream into our common nightmare. Increasing home equity holdings is not the answer to our problems; it is, at bottom, a symptom or sidelight of the problem itself!
We can fix this through a simple and just tax reform.
These colliding instincts — pro-safety net, anti-welfare — each draw on legitimate concerns. One side sees poverty amid plenty, and an economy that heavily favors the few even when times are good. It trusts the impulse to help.
The other fears taxation, warning that it can quash initiative and choke an economy. This side also stresses moral hazards, warning that while feeding the hungry may be necessary, it can discourage people from feeding themselves.
“This tension waxes and wanes — but it remains a tension, absolutely,” said Isabel V. Sawhill, a researcher at the Brookings Institution. “Americans understand that some people are poor through no fault of their own. On the other hand, they suspect that some people aren’t doing all they could to help themselves. It’s pretty deep-seated in our national mindset, this belief that you can succeed.”
So let's talk about how we might solve this. As readers of this blog know, not all taxes are created equal: the ones we rely on currently do have a tendency to quash initiative and choke the economy. But that doesn't mean that the same is true of all taxes. The taxes that are exceptions to that rule, though, turn out to be ones which don't favor the few, and whose utilization could reduce poverty greatly.
The powers that be don't want to touch a system that works satisfactorily for them, and so all we're likely to hear about is the so-called "FairTax," which would greatly reduce taxes for our highest income people and increase them for most of the rest.
SNAFU? Yes. FUBAR? No.
But it is time to move toward implementation of Henry George's remedy. Start by reading his books, "Progress & Poverty" and "Social Problems" and some of his speeches. You'll come away newly educated and hopeful. You'll know why we have poverty, and how to end it. You'll know why our economy is limping so badly, and how to fix it. You'll know why we experience booms and busts, and how we can prevent them through radical tax reform -- that is, tax reform that goes to the root of the problem.