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!
A shortage of New York City apartments for sale is forcing real estate agents to take extreme, if not desperate, measures in order to conjure up listings.
One tactic is sending letters to all the two-bedrooms, say, in choice buildings to try to persuade their owners to sell. Another is buttering up the doorman for information on who might be inclined to move — a couple with a baby on the way, perhaps, or newly empty nesters.
Some brokers are trolling through expired listings in the hopes of reviving a dead deal. Others are digging through rental agreements to see when leases in coveted buildings might be coming due. And at least one broker has found that her years of volunteering at nursing homes have helped her find leads (more on that later).
Working the phone, the Rolodex and even the memory, brokers say, is all part of the game now that listings have hit a record low. Just 5,160 apartments and town houses were on the market in Manhattan at the end of last year, according to the appraisal firm Miller Samuel. That’s the lowest number since comprehensive tracking began about 12 years ago.
There are no reliable statistics on the number of pieds-à-terre in New York City, but real estate experts say that global economic jitters have drawn more and more astonishingly wealthy people into the market in recent years. They come from all over, whether Monaco, Moscow or Texas, looking for a safe place to put their money, as well as a trophy, and perhaps a second — or third or fourth or fifth — home while they’re at it.
“It is a safe haven,” said Jonathan Miller, president of the appraisal firm Miller Samuel. “It’s not coming from just one country; it’s a global phenomenon.”
Scott Avram, an assistant vice president at Toll Brothers City Living, a company that builds luxury condos, said 40 percent of the buyers at the Touraine, a project at 65th Street and Lexington Avenue, were from foreign countries.
And the ultraluxury condo building One57 on West 57th Street, where two apartments are in contract for at least $90 million, has had billionaire buyers from Britain, Canada, China and Nigeria, as well as from America.
Then there is the $88 million crash pad at 15 Central Park West, bought last year by a trust linked to Ekaterina Rybolovleva, then 22 years old. Ms. Rybolovleva is the daughter of a Russian billionaire in the fertilizer industry, Dmitry Rybolovlev, who is in the middle of a rather expensive divorce. In a lawsuit filed last year, Mr. Rybolovlev’s wife, Elena Rybolovleva, alleged that the apartment was bought not as a place for their daughter to live, but as a way to put that money out of the older Ms. Rybolovleva’s reach. According to court documents, the younger Ms. Rybolovleva is a resident of Monaco.
The building at 15 Central Park West has its share of pieds-à-terre, real estate professionals say. But the concentration there is not as high as in other brutally expensive buildings, especially those in Midtown that share space and services with hotels, like the Plaza or the Time Warner Center, which shares a building with the Mandarin Oriental.
“I was living on the 16th floor, and I was pretty much the only one there,” said Charlie Attias, a senior vice president at the Corcoran Group who rented an apartment at the Plaza for three years and has handled many transactions in the building. “We had the occasional visitor — I mean, the occasional owner — once in a while.”
Millions of human creatures are housed worse than the cattle and
horses of many a lord or squire. Nearly, a million of the London
poor need re-housing; the medical authority has reported against
141,000 houses as insanitary, in which the poor are huddled
together, in numbers varying from four to twelve and more in a
single room. What delicacy, modesty or self-respect can be expected
in men and women whose bodies are so shamefully packed together?
— CARDINAL VAUGHAN, Inaugural
Address to the Annual Conference of the Catholic Truth Society at
Stockport, published in the St. Vincent de Paul Quarterly, New
York, November, 1892, p 286.
... many Americans are facing the likelihood of not having sufficient income in retirement unless they increase their savings, work longer, or significantly decrease their expenditures in retirement if they hope to make ends meet.
The Employee Benefits Research Institute recently published an analysis of 2010 Survey of Consumer Finances data. It demonstrates how few people have the traditional defined-benefit retirement plans, and the account balances people of various demographics have in their individually-directed retirement accounts.
Here are some statistics worth considering as we think about the effects of a system which permits a few of us to capture a large share of the nation's net worth and a large share of its income, and to unduly influence our elections with advertising which works to conceal and reinforce the structures of that system:
38% of all families -- of all ages -- had a family member with a retirement plan. [Figure 2]
of those 38%, 18% had only a defined benefit plan; 61% had only a defined contribution plan; 21% had both. 82% had a 401(k) type plan, and of that 82%, 22% also had a defined benefit plan
Among those families whose head was 55-64, 43% had a member with a retirement plan; among those 45-54, 53% did.
Interestingly, the top 75% of the net worth spectrum all had rates in the 41% to 46% range; in the bottom 25%, only 21%.
Among families whose head was under 65 and working, 52% had a member participating in a retirement plan [Figure 3].
Among households with income abov e $100,000, 76% had retirement plans; in the $50,000 to $100,000 income range, 64%; in the lower income groups, the rate ranged from 44% down to 9%
In the 55-64 age group, 59% had a retirement plan; in the 45-54 group, 61%.
Within this working-age universe, similar trends held: the top 50% had roughly 61-67% availability of employment-related retirement plans; for the next 25%, only 53%; for the bottom 25% of working families, only 29%.
IRAs and Keogh plans: 28% had one or both; median value, $40,000 (up from $34,574 in 2007). Among those 55-64, 41% had one or both; median value $60,000 (down from $68,101); among those 45-54, 29% had one or both; median value $40,000, up from $37,717. [Figure 5]
Even among those in the top 10% of the net worth spectrum, only 77% had IRA or Keogh accounts, median value $200,,000, up from $142,487 in 2007; in the next 15% of the net worth spectrum, median value was $60,000.
Of all families, 64% had some sort of retirement account from a current or previous employer (down from 66% in 2007)
Retirement assets in Defined Contribution plans and IRAs typically [that is, at the median] represent 61% to 66% of total financial assets, which is to say that most have less in mutual funds, stocks, checking and other accounts than they do in their retirement accounts. [Figure 8]
Only in the top 10% do retirement assets represent less than half of financial assets.
As is typical of median/average ratios, average holdings are considerably higher -- that is, the holdings of the top few are huge, and most of us are below average. The average balance is $173,232; in the top 10% of the net worth spectrum, average balances are $519,034. For the next 15% of us, the average balance is 147,061 -- well below the average of all of us! [Figure 9] Recall from Figure 6 that 64% of us have such a plan; the other 36% have no balance at all (and likely a significant percentage have very small account balances).
For those in the 65-74 age group, the average balance is $324,199; for those in the 55-64 group, the average balance is $297,903.
For those in the top 10%, average account balance is $519,034. One might reasonably guess that the top 5% have the lion's share of this.
It might be worth noting that a 70 year old must withdraw at least 1/27 of his IRA per year. Based on that 65-74 age group average balance, that's $12,000 per year. (Another rule of thumb says that if one only withdraws 3% per year, one's account should last forever. That would be $9,725 per year, for that "average" -- not median -- family in the 65-74 age group.
Enough said. Time to circle back to the study's conclusion:
... many Americans are facing the likelihood of not having sufficient income in retirement unless they increase their savings, work longer, or significantly decrease their expenditures in retirement if they hope to make ends meet.
What public policy reforms might one suggest based on these data points?
Find a way to raise wages for ordinary workers
Find a way to lower the cost of living for ordinary workers and retirees
Find a way to reduce the sum of the taxes we pay and the costs of housing without reducing the public goods which those taxes provide (unless it is by reducing the demand for social safety net
If you have other suggestions, I'd like to hear them.
But the reason for this blog is that I believe I have found the public policy reform which would accomplish these goals, in collecting the lion's share of the annual rental value of our land, and in collecting for the commons certain other kinds of natural public revenue which our current system permits to accrue to individuals and corporations. I didn't invent it. Henry George is the clearest exponent of it, but not the first or last. Is it perfect? No, but it is vastly superior to what we've got now, and I believe it is consistent with the ideals to which Americans pay the most honor.
Here's a pretty stunning number: Just under half of all homeowners under 40 are struggling with underwater mortgages.
The stat comes from Zillow's second quarter report on negative equity. And the numbers are even higher when you look at homeowners in their early thirties, a full half of whom are underwater.
That number, however, steadily drops with age, with just under a third of homeowners in their late forties underwater and just under a quarter of those in their late fifties buried under more mortgage debt than their homes are worth, according to Zillow.
The most obvious explanation is that homeowners now in their thirties were more likely to have bought starter homes at the peak of the bubble and now find themselves stuck.
So our young families are struggling with either high rents or unaffordable and unrealistic mortgages. Are we a great country, or what?
Only a few of us seem to realize there is an alternative to a system designed to produce these results.
I can easily imagine a great proprietor of ground rents in the metropolis calling attention to the habitations of the poor, to the evils of overcrowding, and to the scandals which the inquiry reveals, while his own income is greatly increased by the causes which make house-rent dear in London, and decent lodging hardly obtainable by thousands of laborers.
Thousands Sign Petition at a Mass Meeting Held in Union Square
Pastor Flays Legislature
Dr. John Haynes Holmes Says Bosses Have No Right to Stop the Expression of the People's Will
Petitions asking for a referendum vote upon the question of reducing gradually the tax rate upon buildings in New York to one-half the tax rate upon land, through five consecutive reductions in as many years, were signed yesterday by several thousand persons at a mass-meeting held in Union Square under the auspices of the New York Congestion Committee. The meeting was announced as a public protest for lower rents.
Benjamin Clark Marsh, Executive Secretary of the Committee on Congestion of Population in New York, was Chairman. Dr. John Haynes Holmes of the Church of the Messiah said that the Legislature "in the wisdom of the Big Sachem at Fourteenth Street has decreed that the people are not fit to register their judgment as to this bill. I, for one, desire to protest against the boss or set of bosses who presume to forbid the people to express their will on any question."
Frederick Leubuscher, representing the New York State League of Savings and Loan Association, said:
"It was admitted by some of the land speculators at the hearing of the Lower Rents bill at Albany that they were unable to answer our arguments. Nevertheless, a Democratic majority stifled the bill. As a savings and loan association man, I am interested particularly in the enactment of this proposed law. The stimulation of the erection of buildings and the making of improvements generally will be more market in the suburbs, where modest homes, costing from $2,000 to $5,000 to erect, are most in demand."
The purpose of the law was explained in a letter from Assemblyman Michael Schaap, who introduced the Salant-Schaap bill in the lower House of the State Legislature.
"If the tax rate on buildings had been half that on land this year," he wrote, "the rents of the average tenant would have been at least one month's rent less than it was; owners of small houses would have paid $15 to $25 less taxes than they do, and there would be fewer than 9,000 evictions for non-payment of rent.
"The taxes on all adequately improved property would have been reduced and the city would have recovered almost $20,000,000 more of ground rent which now goes to a few people of New York and to absentee landlords. This ground rent at 6% is over $273,000,000. The people of the city have created and maintain these values, but they get less than $84,000,000 of it -- the land owners get the other $189,000,000. Rent and taxes on homes and other buildings would have been reduced by at least $20,000,000."
The Rev. Alexander Irvine said that one family out of every 150 in New York City was evicted for non-payment of rent, because of the unjust taxation of improved property as contrasted with vacant land. Only 3% of the residents of the city own land, the speaker asserted.
John J. Hopper, Chairman of the New York State Independence League, said:
"A tax upon anything tends to lessen the supply of that commodity. By the same principle a tax upon buildings tends to lessen their number. A bill tending to reduce the tax upon buildings will bring about the construction of more buildings, and as a result there will be more competition and a corresponding reduction in rents.
"The Legislature refused to let us decide this question for ourselves, asserting that we did not know enough to vote on the subject of taxation. When we realize that for the expenses of the National Government each one of us pays $7.50 a year; for the state expenses, $5.50 and for the city expenses $38.50, making a total of $51.50 per individual, or $255 for a family of five, then we understand that we must think upon this subject of taxation.
Frederick C. Howe, Director of the People's Institute, said:
"Think of the stupidity of New York citizens. We talk about bankruptcy and lack of city credit and yet we give away each year at least $100,000,000 in the speculative increase of land values which the growth of the community creates. That is, the increase show by the tax valuation of the city. New York could pay a large part of its present budget out of the land speculation profits alone, if it taxed land and exempted buildings."
C. N. Sheehan of the Twenty-eighth Assembly District Board of Trade, Brooklyn, and J. P. Coughlin of the Central Labor Union of Brooklyn also spoke.
The following list comprises the most commonly asked questions about the concept of making land and resource rentals the source of revenue for government. As you continue this study, you will see the value from giving resources the respect they deserve and the benefits resulting from the freeing of labour, production and exchange from taxation. If you have any questions which are not covered here, or observations you would like to put to our panel, please feel free to do so by sending your question as an e-mail query and we will attempt to respond.
The inclusion of land and resources in the economic equation is central to any solution for revenue raising. A taxation solution which does not consider the nature of taxation itself and allows the continuing private monopolisation of community land and resources fails to recognise the essential role land plays in the economic equation and will not work. Land is the only element in the economic equation which is both fixed and finite. It can be monopolised. It is a unique class of asset which must be treated accordingly. If we were to wrest not the land itself, but its unimproved value from private monopolies and return the value to the community — whose very presence creates it — then we would have reduced many problems in one stroke with great benefit to production, to the environment and to the cause of individual freedom and justice.
On the subject of land and resource rents, Henry George said this:
The tax upon land values is the most just and equal of all taxes. It falls upon those who receive from society a peculiar and valuable benefit, and upon them in proportion to the benefit they receive. It is the taking by the community, for the use of the community, of that value which is the creation of the community. It is the application of the common property to common uses. When all rent is taken by taxation for the needs of the community, then will the equality ordained by nature be attained.
How hard it is for the very poor to have engendered in their hearts that love of home from which all domestic virtues spring, when they live in dense and squalid masses where social decency is lost, or rather never found.
— CHARLES DICKENS, Old Curiosity Shop, Chap. XXXVIII.
A tax upon ground-rents would not raise the rent of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist and exacts the greatest rent which can be got for the use of the ground.
— ADAM SMITH, Wealth of Nations (1776), Book V., Chap. 2, Art. I.
I'm reading a 1910 book by William Harbutt Dawson entitled "The Unearned Increment." I found these paragraphs particularly compelling. I think about the 2003 Schiller and Case article about the expectations of home buyers that their purchases would rise in value. The homebuyers of the last decade didn't understand why land should rise in value -- indeed, most of them weren't conscious of it being land appreciating, not the houses themselves -- but they seemed sure that it would rise forever, and they thought it essential to their own well-being that they get in on that appreciation.
100 years ago, there seemed to be a much better popular understanding of land economics than we have in 2012. It was widely discussed in quite a number of popular journals read by ordinary people. One might speculate on why we in the 21st century aren't better informed than we are on the subject. In whose interests is it that ordinary people not understand the importance and the dynamics land economics?
And here it will be convenient to refer to the plea often advanced that speculation in land is legitimate, and that there is no difference between making profits from the sale of land and making profits from the sale of ordinary commodities. Those who hold this view forget or ignore the fact that land differs from every product of man's hands in that, besides being a necessity of existence — the maintainer of life, it is a monopoly article. God made the earth as big as it is, and man cannot make it any bigger. There is so much land in the world, and no one, not even a Rothschild or a Vanderbilt, can add an inch to it. Hats, boots, and coats — manufactured goods in general — can be multiplied indefinitely. The supply is only regulated by the demand, and almost invariably the cost decreases as the demand is augmented. With the land it is otherwise: the absolute supply cannot be increased, and the cost grows with the growth of the demand. Moreover, in paying for the goods offered by the manufacturer, we pay largely for labour; but no amount of labour can produce land. It existed before man existed, and is not produced. Landed property is the one commodity of exchange in respect of which civilised society refuses to recognise absolute rights.
It may be granted at once, however, that it is impossible to artificially prevent the value of land from increasing. It would be absurd to try to check the operation of social forces which act from necessity. If there were no private ownership of land, but the State were the custodian and grand lessor, the value of that commodity would inevitably tend to increase owing to a multiplicity of causes which act independently of private and collective possession of the soil. Yet while it may not be possible artificially to prevent value-growth, it is possible and expedient to check artificial value-growth. Were the unearned increment secured wholly or even in part to society, there would be less inducement to speculation in land, and the increase in its value would be dependent upon healthier and socially more desirable causes. Men do not speculate commercially for amusement or the mere love of excitement, but for money, and if there were no prospect — or little prospect — of contingent gain, the great inducement to land speculation would be taken away.
At the idea of resistance to speculation the individualist will raise his hands in alarm and remonstrance. But these pages are written on the assumption that the interests of speculators cannot claim any partial consideration in the adjustment of the important problem under discussion — or, indeed, of any problem affecting the well-being of society. Those who hold the views here expressed would not dream of prohibiting speculation in land; all they say is, that society is not called upon to sacrifice its interests to the speculators, or to offer to the latter any facilities for doing it mischief. It cannot surely be considered a social advantage that a small class of men should be able, owing to their possession of a monopoly in land, to force up its value to fictitious and fabulous heights; nor can it be regarded as desirable that the value of land should be increased in order to allow of speculators enriching themselves. The result is to create extortionate rents, which, so far as trade and industry are concerned, make production dearer, and thus injure the consumer, and, so far as concerns dwellings, compel the householder to disburse an excessive proportion of his income in the mere sheltering of himself and his family within stone walls. Apart from the gains which fall to the intermediary speculator who does not buy land to keep, but to sell, the owners of the soil pocket the public tribute paid in the form of increasing rents. For their part, the house occupiers suffer in two ways by the growing value of land: they must pay more for the dwellings they live in, and more for the articles they use and consume. It cannot be to the interest of society that the rents of town dwellings should average, say, £20 instead of £15, and should increase 5% or even 2% every year. If such an increase fell to the whole community, the evil would not be so great, for those who paid it would in one way or another reap the benefit; but, as matters are, it all goes into the landlords' purse.
The remarkable thing about this story, to my eye, is that the size of the lot isn't even mentioned! It is worth $1 million land rent per year, and one might infer from the information provided that the lot is about 10,000 square feet, or less than 1/4 acre.
Capitalized at 5% (also known as "20 years' purchase") the lot would sell for about $20 million.
I assume that in addition to the land rent, the tenant pays the property tax on the land. So the entire $1 million annual land rent flows out of NYC, to the property's owner, in Marshall, Virginia.
What, pray tell, has the land owner done to earn that land rent?
Consider how many people's wage taxes and sales taxes could be lifted, and what that additional spending power could do for the local economy. Consider what would happen if there were no taxes to be paid on the apartments or on people's condo structures.
Or NYC can just keep letting the land rent leave the city, and even leave the country, continuing to flow into private pockets, just as if they'd rendered someone some service and earned it!
Land rent is natural public revenue, and we permit landlords to privatize it. Aren't we generous with our patrimony? (Leona told us the truth!)
The developer of a nine-story Karl Fischer rental apartment building planned for a corner site in the East Village signed a 99-year ground lease that requires payments each year of about $1 million.
The development company, YYY Third Avenue, signed the long-term lease for the vacant site at 74-84 Third Avenue, at 12th Street, April 27, 2011, however, a memorandum of the lease was not recorded in public records until last Wednesday, city property documents show.
A source citing city property records said the lease payment, which is not specifically recorded, could be inferred to be about $1 million per year. Prior to the document’s release, the annual lease cost was not known.
The prolific and controversial architect Fischer filed plans to build an 82,000-square-foot, nine-story residential building with 94 units, city Department of Buildings online records show. The permit has not been approved and is pending, DOB data indicate, and is to include nearly 9,511 square feet of retail, as well.
You might also be intrigued by the URL for the story ... I'm not sure what to make of it.
I've taken some liberties with the formatting, because sometimes bullet points help ... you can find the original in the online library at http://schalkenbach.org/ I was fortunate enoguh to meet Bob
The Earth is the Lord's
by Robert V. Andelson Professor Emeritus of Philosophy, Auburn University, Auburn, Alabama
George Bernard Shaw, in a letter written in 1905 to Hamlin Garland, describes how, more than twenty years earlier, he had attended Henry George's first platform appearance in London. He knew at once, he said, that the speaker must be an American, for four reasons:
"Because he pronounced 'necessarily' . . . with the accent on the third syllable instead of the first;
because he was deliberately and intentionally oratorical, which is not customary among shy people like the English;
because he spoke of Liberty, Justice, Truth, Natural Law, and other strange 18th-century superstitions; and
because he explained with great simplicity and sincerity the views of the Creator, who had gone completely out of fashion in London in the previous decade and had not been heard of there since."
George's magnum opus, Progress and Poverty (the centenary of which occurred in 1979), is characterized by the same moral and religious emphasis remarked by Shaw in its author's London lecture, an emphasis that rises in the final chapter to the noble declaration of a faith revived. It is, I think, therefore entirely appropriate that I focus today on the moral and religious aspects of his basic proposal for economic reform — his proposal to lift the burden of taxation from the fruits of individual labor, while appropriating for public use the socially-engendered value of the land.
For land value taxation is
not just a fiscal measure (although it is a fiscal measure, and a sound one);
not just a method of urban redevelopment (although it is a method of urban redevelopment, and an effective one);
not just a means of stimulating business (although it is a means of stimulating business, and a wholesome one);
not just an answer to unemployment (although it is an answer to unemployment, and a powerful one),
not just a way to better housing (although it is a way to better housing, and a proven one);
not just an approach to rational land use (although it is an approach to rational land use, and a non-bureaucratic one).
It is all of these things, but it is also something infinitely more: it is the affirmation, prosaic though it be, of a fundamental spiritual principle — that "the earth is the Lord's, and the fulness thereof."
It is the affirmation of the same principle to which Moses gave embodiment in the institution of the Jubilee, and in the prohibition against removing ancient landmarks, and in the decree that the land shall not be sold forever. It is the affirmation of the same principle to which the prophets of old gave utterance when they inveighed against those who lay field to field, and who use their neighbor's service without wages. It is the affirmation of the same principle to which Koheleth gave voice when he asserted in the fifth chapter of Ecclesiastes that "the profit of the earth is for all."
The earth is the Lord's! Consider what this means. It means that
our God is not a pale abstraction.
Our God is not a remote being who sits enthroned on some ethereal height, absorbed in the contemplation of his own perfection, oblivious to this grubby realm in which we live.
Our God is concerned with the tangible, with the mundane, with what goes on in the field, in the factory, in the courthouse, in the exchange.
Our God is the maker of a material world — a world of eating and sleeping and working and begetting, a world he loved so much that he himself became flesh and blood for its salvation. In this sense, then,
our God is eminently materialistic, and nowhere is this more clearly recognized than in the Bible, which, for that very reason, has always been a stumbling-block and an offense to those Gnostics, past and present, whose delicacy is embarrassed by the fact that they inhabit bodies, and for whom religion is essentially the effort to escape from or deny that fact.
Our God is not a dainty aesthete who considers politics and economics subjects too crass or sordid for his notice.
Neither is he a capricious tyrant who has enjoined an order of distribution that condemns retirees after a lifetime of toil to subsist on cat food while parasitic sybarites titillate palates jaded by the most refined achievements of the haute cuisine. It is men who have enjoined this order in denial of his sovereignty, in defiance of his righteous will.
The earth is the Lord's! To the biblical writers, this was no mere platitude. They spelled out what it meant in concrete terms. For them, it meant that the material universe which had been provided as a storehouse of natural opportunity for the children of men was not to be monopolized or despoiled or treated as speculative merchandise, but was rather to be used reverently, and conserved dutifully, and, above all, maintained as a source from which every man, by the application of his labor, might sustain himself in decent comfort. It was seen as an inalienable trust, which no individual or class could legitimately appropriate so as to exclude others, and which no generation could legitimately barter away.
The earth is the Lord's! With the recognition of this principle comes the recognition of the right of every man to the produce which the earth has yielded to his efforts. As the Apostle Paul says in his first letter to the Church at Corinth, if the ox has a right to a share in the grain which it treads out, surely a human being must have a right to the fruits of his labor. For the exercise of this right, he is, of course, accountable to God — but against the world, it holds.
To one who takes seriously, as I do, that insight about human nature which is expressed in the doctrine of original sin, there can be nothing self-evident about the rights of man. In the words of my friend, Edmund A. Opitz, "the idea of natural rights is not the kind of concept which has legs of its own to stand on; as a deduction from religious premises it makes sense, otherwise not." The French Revolution and its culmination in the Reign of Terror demonstrated that humanistic assumptions afford no secure foundation for the concept of human rights. That concept, for the believer, can be neither understood nor justified except in terms of what Lord Acton so eloquently speaks of as "the equal claim of every man to be unhindered in the fulfilment by man of duty to God."
This is what it comes down to: How can a person be "unhindered in the fulfilment of duty to God" if he be denied, on the one hand, fair access to nature, the raw material without which there can be no wealth; and on the other, the full and free ownership of his own labor and its earnings?
You who have studied the history of the Peasants' Revolt in sixteenth century Germany know that in calling for the abolition of serfdom and the restoration of the common lands, the peasants were simply voicing demands which were logically implied by Luther's doctrine of the priesthood of all believers — that the service of God to which all the faithful are elected requires, as I have said, access to the land and its resources, and the free disposal of one's person and of the guerdon [editor's note: reward] of one's toil. Despite the excesses that accompanied this uprising, Luther's part in the suppression of a movement which stemmed logically from his own teaching must always be a source of pain to those of us who revere him for his spiritual genius and integrity.
The earth is the Lord's! The same God who established the just authority of governments has also in his providence ordained for the major source of revenue. Allow me to quote from Henry George:
In the great social fact that as population increases, and improvements are made, and men progress in civilization, the one thing that rises everywhere in value is land, we may see a proof of the beneficence of the Creator . . . In a rude state of society where there is no need for common expenditure, there is no value attaching to land. The only value which attaches there is to things produced by labor. But as civilization goes on, as a division of labor takes place, as men come into centers, so do the common wants increase and so does the necessity for public revenue arise. And so in that value which attaches to land, not by reason of anything the individual does, but by reason of the growth of the community, is a provision, intended — we may safely say intended — to meet that social want. Just as society grows, so do the common needs grow, and so grows the value attaching to land — the provided fund from which they can be supplied (George 1889).
On another occasion he wrote:
The tax on land values is the most just and equal of all taxes. It falls only upon those who receive from society a peculiar and valuable benefit, and upon them in proportion to the benefit they receive. It is the taking by the community, for the use of the community, of that value which is the creation of the community. It is the application of the common property to common uses (George, P&P, 421).
And yet, my friends, in the topsy-turvy world in which we live, this provided fund goes mainly into the pockets of speculators and monopolists, while the body politic meets its needs by extorting from individual producers the fruits of honest toil. If ever there were any doubt about the perversity of human nature, our present system of taxation is the proof! Everywhere about us, we see the ironic spectacle of the community penalizing the individual for his industry and initiative, and taking away from him a share of that which he produces, yet at the same time lavishing upon the non-producer undeserved windfalls which it — the community — produces. And, as Winston Churchill put it, the unearned increment, the socially-produced value of the land, is reaped by the speculator in exact proportion, not to the service, but to the disservice, done. "The greater the injury to society, the greater the reward."
We hear constantly a vast clamor against the abuse of welfare. I do not for a moment condone such abuse. Yet I ask you, who is the biggest swiller at the public trough?
Is it the sluggard who refuses to seek work when there is work available?
Is it the slattern who generates offspring solely for the sake of the allotment they command?
Or is it the man — perhaps a civic leader and a pillar of his church — who sits back, and, with perfect propriety and respectability, collects thousands and maybe even millions of dollars in unearned increments created by the public, as his reward for withholding land from those who wish to put it to productive use.
Talk about free enterprise! This isn't free enterprise; this is a free ride.
But if that same person were to improve his site — if he were to use it to beautify his neighborhood, or to provide goods for consumers and jobs for workers, or housing for his fellow townsmen — instead of being treated as the public benefactor he had become, he would be fined as if he were a criminal, in the form of heavier taxes. What kind of justice is this, I ask you? How does it comport with the Divine Plan, or with the notion of human rights?
Let me make this clear: Acquisitiveness, or the "profit motive," if you will, is a well-nigh universal fact of human nature, and I have no wish to suggest that the land monopolist or speculator has any corner on it. Even when I speak of him as a parasite, this is not to single him out for personal moral condemnation. He is not necessarily any more greedy than the average run of people. As my late friend, Sidney G. Evans, used to say: "if you have to live under a corrupt system, it's better to be a beneficiary than a victim of it." But the profit motive can be channeled in ways which are socially desirable as well as in ways which are socially destructive. Is it not our duty to do everything we can to build an order without victims one in which the profit motive is put to use in such a way that everybody benefits?
I do not harbor the illusion that the millennium is going to be ushered in by any program of social betterment. My theological orientation does not happen to be one which minimizes the stubbornness of man's depravity. Yet to make the depth of human wickedness an alibi for indifference to the demands of social justice is to ignore the will of him who said:
Take away from me the noise of your songs; to the melody of your harps I will not listen. But let justice roll down like waters, And righteousness like an ever-flowing stream. (Amos 5:23-24)
To some of you, the promotion of specific programs for social justice is seen as part of the responsibility of the institutional church; to others it is not. But all of us, I am sure, can agree that the individual Christian (or Jew or Moslem, Hindu or Buddhist, as the case may be) has a solemn moral obligation to study the issues carefully, and then involve himself strenuously in whatever social and political efforts his informed conscience tells him best advance the cause of right.
O shame to us who rest content While lust and greed for gain In street and shop and tenement Wring gold from human pain, And bitter lips in blind despair Cry, "Christ hath died in vain!" Give us, O God, the strength to build The city that hath stood Too long a dream, whose laws are love, Whose ways are brotherhood, And where the sun that shineth is God's grace for human good.*
The earth is the Lord's!
* From "O Holy City, Seen of John" by Walter Russell Bowie. Copyright, 1910, by A. S. Barnes and Company. Quoted by permission.
20. What is the best way to insure that affordable housing -- for people of all ages and stages, all income levels -- is available, both for ownership and for rental, both near the center of activities and, if needed after the desire for housing near the center of activities is satisfied, on the fringes?
B. Community Land Trusts
C. Affordable Housing Regulations that require that for every 10 new condos built, 1 must be affordable to people earning less than the local median household income
D. Rent control
G. Habitat for Humanity
H. Relaxed mortgage lending rules and more private mortgage insurance
I. Land value taxation, to encourage the redevelopment of underused sites near the center of things
I came across this rather good letter to the editor, from 1938. (Trinity Church Corporation, a major landlord in downtown Manhattan, was the subject of a NYT article this past week, as well as the subject of a major series in the NYT in December, 1894):
1938-09-03 Letters to The Times
Collecting Ground Rent Single-Tax System Regarded as No Detriment to Building
TO THE EDITOR OF THE NEW YORK TIMES:
Fabian Franklin, in his letter to THE TIMES discussing the demolition of John D. Rockefeller's Harlem tenements in order to save taxes, writes:
"That objection is simply that virtual abolition of land ownership, which the single-tax plan is designed to effect, would make the building of houses in a city an extra-hazardous business, because, under the single-tax regime, in the great majority of cases the investment would result in a disastrous loss to the owner of the building. I was neither blaming nor praising Mr. Rockefeller for the demolition of Harlem tenements."
What is the so-called single-tax system? It is the collection by the government, through the taxing officials, of the entire economic or ground rent of land and the repeal of all taxes on buildings and other products of labor and capital. That ground rent is estimated to be 9% of the capital value of the land. New York City is now collecting one-third of this ground rent. The market value of the lots is the remaining two-thirds, capitalized. Dr. Franklin's thesis is that if the entire ground rent is collected no one would erect buildings, because "in the great majority of cases the investment would result in a disastrous loss to the owner of the building."
Some of the finest buildings in New York City are erected on leased land and the lessee pays the ground rent 100% besides a tax on the building. There are hundreds of buildings erected by lessees of lots owned by Trinity Church, Astor estate, Rhinelander estate, Sailors Snug Harbor and others. The lessees must pay all the taxes, both on land and building, amounting to 3% of the assessed value of both, and to the landlord 6% of the market value of the land.
Thus the entire ground rent is paid by the lessee, but only one-third to the government representing the people who made that value by their presence and activities, the remaining two-thirds to the landlord. Notwithstanding that they are thus obliged to pay 100% of the economic rent, bankers and business men erect buildings costing millions. Under the Henry George plan they would have to pay less, for the taxes on these costly structures will have been repealed.
Perhaps if Mr. Rockefeller had not been obliged to pay taxes on the buildings he might not have pulled them down; or, if he had, would have erected better buildings in their place in order to get a return on his investment in buildings. The ones who will benefit most from the adoption of the Georgian philosophy are the owners of humble homes. The average small homeowner's house is assessed for at least twice the assessed value of the lot. If the house is relieved from taxation and the lot taxed the entire ground rent, his tax will be less than it is now. The difference will be made up from vacant lots and lots that are worth more than the improvements.
After all, the building of houses is like any other business. The builder takes the risk of lessened demand because of changes in fashion, obsolescence, competition. It is estimated that 95% of new businesses ultimately fail. With the adoption, however, of the philosophy of Henry George, commonly called the single tax, failures in the housing and other businesses will be much fewer. This is because neither houses nor goods nor anything else will be taxed. The collection of the entire ground rent will not lessen the area of the surface of the earth one inch. On the contrary, it will open to occupation and use land that is now held for speculation purposes.
The taxation of any product of labor and capital will add the amount of the tax to the price, lessen demand and thus curtail production. The result is unemployment and misery.
Frederic Cyrus Leubuscher Essex Fells, N. J., Aug. 31, 1938
One long-term solution would be a type of co-op in which residents buy and sell shares according to their changing needs and circumstances. Unlike traditional co-ops, residents could purchase shares corresponding only to the units they occupy, not the land beneath, which remains in the hands of a “community land trust.” Such a structure would keep housing costs down while limiting residents’ exposure to the market. It would also provide a backstop for struggling homeowners, since the trust would have the legal right to step in and assist residents in the event of foreclosure.
Land trusts have thrived on a small scale in New York City and Chicago, among other places. The federal government should now scale up the efforts by transferring some of the nearly 250,000 foreclosed homes acquired by Fannie Mae, Freddie Mac and the Federal Housing Administration into a national trust or a series of local trusts.
How to Bring The Cost of Housing Back within Reach of All American Families C. Lowell Harriss, et al. [A pamphlet published by the Robert Schalkenbach Foundation, 1978]
Introduction by Dr. C. Lowell Harriss, Professor of Economics, Columbia University
1. Land Supply Constraints in the United States Excerpt from the Final Report of the Task Force on Housing Costs, William J. White, Chairman
2. The High Price of Land by P. I. Prentice, Chairman, National Council for Property Tax Reform
3. Modernize, Don't Abolish, the Property Tax From a report by the Subcommittee on the City of the House Committee on Banking, Finance, and Urban Affairs of the U. S. House of Representatives, Rep. Henry S. Reuss, Wisconsin, Chairman
Introduction by Dr. C. Lowell Harriss
The number of Americans who lack adequate housing is much too high. While both opportunity and promise life in the long-established principle of providing satisfactory shelter for everyone, many are still not well housed. Population grows, and the existing stock of housing grows older. For years to come, much new construction, expansion, and modernization will be needed.
Rapidly rising costs, however, present formidable obstacles. One of the heaviest costs is one which also rises most rapidly. And it is the cost of something created not by sweat and thrift, but by nature.
It is land.
The rising prices paid for land itself must be distinguished from the portion of the price of a building site which represents cost of preparation for use. The land elements alone go up and up in price. But land price increases do not change the quantity of land in existence. Here is a rising price which does not add to supply.
Land is different.
In these three articles on land value taxation, the first, "Land Supply Constraints in the United States," points out that the sharp rises in land prices result in part from man-made factors. Arbitrary, artificial, and unconstructive restrictions on land supply boost prices and threaten our housing future. New building will therefore be kept below levels which unfettered economic conditions would otherwise achieve. But tax policy which would encourage use, rather than underuse and withholding of land can increase the effective supply. Need more be said?
Yes. And in the second selection, "The High Price of Land," Mr. Prentice says more. He points to many avenues by which the harmful effects of restricted land supply spread through the economy. Developers and builders, laborers, supplier, subcontractors, and others all suffer. They have less work, operate under conditions of disadvantage, and receive poorer rewards because of essentially needless obstructions to the optimum use of land. The full and true price of land includes burdens above and beyond the dollar prices of building lots. We shoulder burdens of lost opportunity of many kinds. They are largely hidden but indeed real. The quality of too much new construction deteriorates instead of improving as an advancing society should expect. And, to repeat, the tragedy is that the rising prices for land do not create an more surface on the earth.
What to do? The third article, "Modernize, Don't Abolish, The Property Tax," points to the reform outlined generations ago but here presented in modern form: reduce the property tax burdens on structures and make up the revenue by higher tax rates on land value.
The benefits from relying more fully on taxation of land values, rather than taxation of buildings, would include greater pressure on landowners to put land to better use. Withholding land -- which reduces the current effective supply -- would become more costly if land value taxes were higher. Thus some land formerly held for speculation would be sold, and new building would be encouraged on the increased supply of land.
A careful study of probable results in Washington, D. C., showed, among other things, that taxes on present homeowners would generally fall. But this result is not the one which most justifies support for reform. More significant and constructive would be a combination of forces producing incentives for better land use. Upgrading of housing in older urban centers would be expected. Positive incentives at many points would contribute to improving America's housing.
In the files I've been digging through, from the late 50s to the early 80s, I found an early draft of a fine paper by Mason Gaffney about California's Proposition 13, for presentation at an August, 1978 conference. I dug around and found a published copy of that paper, and think it worth sharing here. Original title, "Tax Limitation: Proposition 13 and Its Alternatives"
First, a few of my favorite paragraphs, which I hope will whet your appetite for the whole paper. I won't attempt to provide the context (you can pick that up when you continue to the paper, below).
"There is a deferment option for the elderly, bearing only 7% interest (which is about the annual rate of inflation). In California, as also in Oregon and British Columbia, hardly anyone takes advantage of this deferment option. This fact, it seems to me, rather calls the bluff of those who so freely allege that the woods are full of widows with insoluble cash-flow problems, widows who are losing their houses to the sheriff and whose heirs presumptive, will not help keep the property, which they will eventually inherit."
We hear a lot these days about cutting the fat out of the public sector; but there is fat in the private sector too. I interpret "fat" to mean paying someone for doing nothing, or for doing nothing useful. Most economists agree that payments to people. for holding title to land is nonfunctional income, since the land was created by nature, secured by the nation's armed forces, improved by public spending, and enhanced by the progress of society. "Economic rent" is the economist's term, but in Jarvis-talk we may call it the fat of the land or "land-fat." It has also been called unearned increment, unjust enrichment, and other unflattering names. Howard Jarvis has said that the policeman or fireman who risks his life protecting the property of others has his "nose in the public trough." But it has seemed to generations of economists that the owner whose land rises in value because public spending builds an 8-lane freeway from, let us say, Anaheim to Riverside, and carries water from the Feather River to San Diego, is the first to have his nose in the trough. Nineteenth-century English economists who worked this out were more decorous. They said things like "landlords grow rich in their sleep" (John Stuart Mill), or the value of land is a "public value" (Alfred Marshall) because the public, not the owner, gives it value.
Some 43% of the value of taxable real estate in California is land value. When we lower the property tax we are untaxing not only buildings, but also land-fat.
The ownership of property is highly concentrated, much more so than the receipt of income. Economists in recent years are increasingly saying that the property tax is, after all, progressive because the base is so concentrated, and because so little of it can be shifted. But this message has not yet reached many traditional political action groups who continue to repeat the old refrains. Two remedies are in order.
One is to collect and publish data on the concentration of ownership of real estate. The facts are simply overwhelming and need only to be disseminated.
The second remedy is to note how strikingly little of the Proposition 13 dividend is being passed on to renters. This corroborates the belief of economists that the property tax rests mainly on the property owner where it originally falls, and not on the renter.
A high percentage of real property is owned from out of state and even out of the country. The percentage is much higher than we may think. It is not just Japanese banks and the Arabs in Beverly Hills. It is corporate-held property which comprises almost half the real estate tax base. If we assume that California's share of the stockholders equals California's share of the national population, then 90% of this property is absentee-owned; the percentage may be higher because many of these, after all, are multinational corporations with multinational ownership.
No one seems to have seized on the fact that half the taxable property in California is owned by people not voting in the state. Senator Russell Long has suggested the following principle of taxation: "Don't tax you, don't tax me, tax that man behind the tree." Property tax advocates have done well in the past and should do well again in the future when they make their slogan: "Don't tax you, don't tax me, tax that unregistered absentee. Don't tax your voters, they'll retaliate; tax those stiffs from out of state." Chauvinism and localism can be ugly and counterproductive, as we know; but here is one instance where they may be harnessed to help create a more healthy society. The purpose of democracy is to represent the electorate, not the absentee who stands between the resident and the resources of his homeland.
California's legislative analyst, William Hamm, estimates that over 50% of the value of taxable property in California is absentee-owned. This is such a bold, bare, and enormous fact it is hard to believe that Californians will long resist the urge to levy taxes on all this foreign wealth. They may be put off by the argument that they need to attract outside capital, but that carries no weight when considering the large percentage of this property which is land value.
Property income is generally more beneficial to the receiver than is the same income from wages or salaries, because the property owner does not have to work for it.
Property, particularly land, has been bought and sold for years on the understanding that it was encumbered with peculiar social obligations. These are, in effect, part of our social contract. They compensate those who have been left out. Black activists have laid great stress in recent years on the importance of getting a few people into medical and other professional schools. Does it not make more sense that the landless black people should have, through the property tax, the benefit of some equity in the nation's land from which their ancestors were excluded while others were cornering the supply?
A popular theme these last few years is that property owners should pay only for services to property, narrowly construed. Who, then, is to pay for welfare — the cripples? Who is to pay for schooling — the children? Who should sacrifice for the blacks — Allan Bakke? Who should finance our national defense — unpaid conscripts? The concept that one privileged group of takers can exempt itself from the giving obligations of life denies that we are a society at all.
Here is, perhaps, my favorite:
We can ask that a single standard be applied to owners troubled by higher taxes and to tenants troubled by higher rents. When widow A is in tax trouble, it is time to turn to hearts and flowers, forebode darkly, curse oppressive government, and demand tax relief. When widow B has trouble with escalating rents, that touches a different button. You have to be realistic about welfare bums who play on your sympathy so they can tie up valuable property. You have to pay the bank, after all. A man will grit his teeth and do what he must: garnishee her welfare check. If that is too little, give notice. Finally, you can call the sheriff and go to the beach until it's over. That's what we pay taxes for. Welfare is their problem.
Anyway, widow B is not being forced out of her own house, like widow A and so many like her. Jarvis said that taxes are forcing three million Californians from their homes this year. But in truth, while evictions of tenants are frequent, sheriff's sales of homes are rare. Those who do sell ("because of taxes," they say, as well as all their other circumstances) usually cash out handsomely, which is, after all, why their taxes had gone up.
Then there is the fruit tree anomaly. Under Proposition 13, a tree can only be assessed at its value when planted, with a 2% annual increment. The value of a seed thrown in the ground or even a sapling planted from nursery stock is so small compared with the mature tree that this is virtual exemption. This anomaly rather graphically illustrates how Proposition 13 automatically favors any appreciating property over depreciating property. The greatest gain here goes, of course, to appreciating land.
Finally, build no surpluses. Surpluses attract raiders and raiders are often organized landowners. "Property never sleeps," said the jurist Sir William Blackstone. "One eye is always open." Even though the surplus was built up by taxing income, Howard Jarvis made it seem the most righteous thing in the world that it should be distributed to property owners. He was geared up for this because his landlord patrons kept him constantly in the field.
Economists of many generations even before Adam Smith and continuing to the present — have preached on the advantages of land as a tax base. Let me enumerate a few of those.
A tax on land value is the only tax known to man which is both progressive and favorable to incentives. One can wax lyrical only about a tax that combines these two properties, because the conflict between progressivity and incentives has baffled tax practitioners for centuries, and still baffles them today.
A land tax is progressive because the ownership of the base is highly concentrated, much more so than income and even more so than the ownership of machines and improvements.
Also, the tax on land values cannot be shifted to the consumer. The tax stimulates effort and investment because it is a fixed charge based merely on the passage of time.
It does not rise when people work harder or invest money in improvements. Think about this. It is remarkable. With the land tax, there is no conflict but only harmony between progressivity in taxation and incentives to work and invest. In one stroke it solves one of the central divisive conflicts of all time.
The land tax does that because it cuts only the fat, not the muscle. It takes from the taxpayer only "economic rent," only the income he gets for doing nothing. If people could grasp this one overriding idea, then the whole sterile, counterproductive, endless impasse between conservatives who favor incentives and liberals who favor welfare would be resolved in a trice, and we could get on to higher things.
The final paragraphs speak directly to us in 2012. 34 years have passed since this was written.
Summing up, Walter Rybeck, an administrative assistant for Congressman Henry Reuss of Wisconsin, and head of the League for Urban Land Conservation, has sagely suggested that we distinguish two functions of business: wealth-creating and resource-holding. A good tax system will not make people pay for creating wealth but simply for holding resources. Most taxes wait on a "taxable event" — they shoot anything that moves, while sparing those who just sit still on their resources.
If we really want to revive the work ethic and put the United States back on its feet, we had better take steps to change the effect of taxes on incentives. Legislatures have got in the habit of acting as though persons with energy and talent, and with character for self-denial, should be punished, as if guilty of some crime against humanity. We cannot study the tax laws without inferring that Congress regards giving and receiving employment to be some kind of social evil, like liquor and tobacco, to be taxed and discouraged by all means not inconsistent with the rights of property. Little wonder the natives are getting restless. If we tax people for holding resources rather than creating wealth and serving each others' needs, we will be taking a giant step toward a good and healthy society.
If your appetite is whetted by these excerpts, you can read the entire article below:
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.
Re “Poverty Rate Soars to Highest Level Since 1993” (front page, Sept. 14): I know this is heresy, but why don’t we increase taxes on the wealthy and spend this money on infrastructure projects to put unemployed people to work?
ROBIN LEVIN San Francisco, Sept. 14, 2011
And consider what would happen: the infrastructure projects would increase the value of the land served by them, and make things work better in those communities, as reliable streets and bridges and other worthwhile projects do.
Who owns that land? Is it local folks, who one might hope would spend their infrastructure-created windfall locally (but who might simply use it to buy additional land, benefiting the seller, be he absentee, local, corporate, whatever)? Is it REITs? Sovereign wealth funds?
Now suppose that instead of leaving all that infrastructure-created wealth in the pockets of the landowners, local communities wised up and collected some significant fraction of it (without raising taxes on buildings in the process: the really wise communities would take this opportunity to reduce or eliminate the taxes on the buildings!) for public purposes. What do you think would happen?
I suspect that the vacant lots in town would soon start to disappear. They wouldn't leave town. They'd get built on, when their carrying costs as vacant lots rose and the disincentive to build was decreased or eliminated. That would create jobs.
Depending on what the market wanted, it would also create housing, and creating housing also leads to creating jobs to service those homes -- plumbers, electricians, painters, home improvement of various kinds.
But it might not be the high-end housing we're used to seeing; not McMansions, but more modest homes. Not luxury condos but housing for people of all ages and stages, and not just for the highest-income people but for people of more modest means.
Sounds like a virtuous circle to me. Natural Public Revenue.
But if you like the current approach, by all means tell us why we should stick with it. (California's Prop 13 is an extreme case of suppressing this wise form of taxation. Look where it has gotten them!)
Are public sector jobs by definition a drain on the economy?
Some would say that they are. But I think there might be a false assumption in there -- one which comes from an unexamined assumption.
When a public sector job is funded via a tax on wages, or a tax on sales, or a tax on buildings -- things which are produced by human effort -- there is a burden to the economy.
Employers must pay far more than their employees receive in wages and benefits;
purchasers must pay more for goods than the producers (including those in the distribution chain -- distribution is part of production) receive;
owners of buildings and other improvements must pay an annual penalty in proportion to the value of those improvements.
All these taxes reduce the demand for what is taxed: work, goods (and, in some places, services), buildings. Fewer jobs are created, fewer goods produced, fewer buildings built and maintained well, less expensive technologies are favored over more expensive ones.
And these are the taxes most of us think about when we think about how to finance public goods.
But suppose we got ourselves outside the smallish box of taxes we're used to thinking about -- those advocated by the neo-classical economists -- and looked more closely at the wisdom of the classical economists -- Adam Smith, David Ricardo, John Stuart Mill, Henry George.
Suppose we thought about the effect of our public spending: effective public spending on goods and services that people value increases land value.
Good schools. Paved streets. Well-maintained streets. Lit streets. Plowed and cleaned streets. City water. Sanitary sewers. Stormwater runoff. Police, with well-equipped cars. Fire departments, with trained professionals and the best of equipment. Ambulances (ditto). Hospitals with life-saving equipment and professionals. Other public-health services. Courts and jails. Libraries. Public health services. Social services. Parks. Playgrounds. Highways (ideally with maintenance taking place at night or at least not during rush hour). Bridges, well-maintained. Buses, subways, railroads (passenger and freight). Airports. Beaches. Utilities (more commonly owned by shareholders, but quite realistically municipally provided). Preschools. Community colleges. Colleges and universities. Perhaps after-school activities for children. A social safety net. This list is incomplete, but each item on it is a fair example of what makes communities good places to live and worth paying to live in and conduct business in.
The presence of each of these things increases land values within the area served. It increases what landlords can charge tenants; it increases what houses and commercial buildings will sell for, without the building owner improving the building or providing additional services.
So does it make any sense to finance these things via taxes on wages? On sales? On buildings? On imports? On personal possessions? On cars? On trucks and business equipment? On business inventory? None of these things are increased in value by the provision of public services and goods.
What increases in value is land -- as everyone can chant, the three most important things in real estate are location, location and location! Much of that is the availability of publicly-funded services. (The rest can be attributed to the presence of the community -- drawn in large part by those services, but also by the beauties of nature, the harbors and rivers, the climate, other favorable conditions; to opportunities seen by entrepreneurs and nonprofits to provide commercial ventures and cultural amenities; to advances in technology and science such as air conditioning, mosquito control, fiberglass pleasure boats, etc.)
How can raising taxes put more money in your pocket? By increasing efficiency.
This year we paid $210 in higher property taxes to finance trash collection and sidewalk snowplowing. Purchased retail, those services would cost about $600. So we spent $210 to save $390. That translates into a savings of $1.86 for every dollar of increased tax. As an added bonus we have just one garbage truck a week down our street, not a different company’s truck everyday, and garbage cans on the street only on Thursday mornings.
What matters in public finance is not how much government spends, so much as what it buys with our tax dollars. But don’t count on the new “Super Congress 12″ committee to undertake serious cost-benefit analysis because cutting spending has become dogma and reality-based policies would be economic heresy.
I don't think DCJ has yet seen the cat, but he's certainly recognizing whiskers.
Would you be willing to pay $210 more in property taxes each year to have these services delivered to you by your community? I'd guess that you might be very willing to pay $210 more in property taxes AND be willing to pay the seller -- and for 30 or 15 years, a mortgage lender -- more for the privilege of living in a place where these things are provided by the community, rather than just outside of town. (If we paid for this via a tax on land value, the selling price wouldn't rise; and the cost of living would be held down. If we pay for it by taxing wages, or sales, or buildings, we do burden the economy, just as the "small government" people tell us. But they don't seem to consider the possibility of taxes which don't burden the economy.)
There are some who would complain that private trash collectors and the people who specialize in shoveling the sidewalks ought not to have competition from the public sector. They should all live in communities which feel this way. And they might concede that others might choose to live in communities which provide these amenities efficiently, with people paid from the public treasury.
So how about this: The federal government should set up a program under which the properties are turned into local land trusts, with the guideline that municipalities will fix the homes up (there is plenty of willing labor out there, anxious to work at reasonable wages, and no lack of materials, as far as I know), and sell the homes themselves, KEEPING THE LAND in the land trust. The homes would sell for whatever they're worth, and the buyers would pay land rent -- fixed for the first, say, 5 years -- to the land trust or, better yet, the community, and would pay property taxes on the improvements just as everyone else does.
Since houses are typically over-assessed and land typically under-assessed, it would be necessary for municipalities and counties to value both properly, and keep those valuations up to date. (In Connecticut, revaluations are required every 4 years now; it used to be once per decade. In southern Delaware -- Sussex County -- they're still using valuations from the 1970s! This leads to all sorts of perverse effects, including tax rates on buildings that are many times higher than the tax rates on land -- exactly what smart communities don't do!) Whatever it takes to get those assessments up to date and keep them that way seems worth doing. And it isn't all that difficult to value land well.
Were we to pursue such a program, participating municipalities would have a fine revenue source. Vacant homes would be put to use, and people would have the security of ownership. At the same time, they would be devoting less of their total income to housing, and they would be able to sell that home more easily to accept a job offer in some other part of the country.
WASHINGTON — Uncle Sam wants you — to rent a house from Uncle Sam.
The Obama administration said on Wednesday that it was soliciting ideas
on how to turn the federal government’s inventory of foreclosed houses
into rental properties that could be managed by private enterprises or
sold in bulk.
The goal, the administration said, is to stabilize neighborhoods where
large supplies of empty, foreclosed properties have hurt property
values. In addition, the plan is an effort to clear the nation’s balance
sheet of real estate holdings that, because they have been difficult to
sell individually, have hung over the housing market and stunted sales
of existing homes and new construction.
As it considers the proposals, the government-sponsored enterprises that
now own the houses will continue to offer individual properties for
sale, Edward J. DeMarco, acting director of housing finance agency, said
Wednesday. But the government says it believes that given the slow pace
of those sales, it must find new ways in which properties can be
pooled, sold and privately managed as rentals.
Greater flexibility in disposing of the houses will have other benefits
as well, Timothy F. Geithner, the Treasury secretary, said. “Exploring
new options for selling these foreclosed properties will help expand
access to affordable rental housing, promote private investment in local
housing markets and support neighborhood and home price stability,” he
said in a statement announcing the new program.
While home prices have remain depressed since the 2008 financial crisis,
rental prices have not come down. The Joint Center for Housing Studies
at Harvard University reported in the spring that more than 10 million
households — or one-quarter of all renters — pay more than half their
income for housing, a record level.
“We have to find and promote new ways to alleviate the strain on the
affordable rental market,” Shaun Donovan, secretary of the Department of
Housing and Urban Development, said.
John Taylor, president of the National Community Reinvestment Coalition,
said in an interview that an added benefit of such a program would be
the creation of construction jobs for rehabilitation of the properties.
The Obama administration and Congress have been working on plans to wind
down Fannie Mae and Freddie Mac, which the government took over in 2008
as losses on loans guaranteed by the agencies expanded.
Of the 248,000 homes owned by Fannie Mae, Freddie Mac and the F.H.A. at
the end of June, 70,000 were listed for sale, said Corinne Russell, a
housing finance agency spokeswoman. The remainder were not yet on the
market or the agencies had already received an offer from a prospective
But it is possible that hundreds of thousands of more homes that are now
in the foreclosure process could come into the possession of the
federal government in the next few years, housing experts say.
“This is a call for innovation and an opportunity for businesses to not
only make money and create jobs, but also provide affordable rental
housing for those who need it and strengthen our communities at the same
time,” said Senator Jack Reed, Democrat of Rhode Island, who has pushed
for such a program.
The proposals are at an early stage, and there is no guarantee that any
such programs will go forward. After considering the responses to the
request for information, which are due by Sept. 15, the entities may
issue a request for proposals to put specific programs in place either
jointly or separately.
Among the strategies on which the administration is seeking comment are
rent-to-own programs, in which previous homeowners or current renters
could lease properties as a path to ownership, and ways in which the
properties can be used to support affordable housing.
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?
This article describes how difficult it is for condo owners to sell, since most buyers need mortgages with high loan-to-value (LTV) ratios, and FHA, Fannie and Freddie aren't lending because of rule-making on building approvals. And many buildings prohibit renting one's condo, a particular problem in a city where people rotate from one assignment to another, often in other countries.
It suggests that people with cash offers can get good deals.
Let's consider a different approach to housing. Suppose that, instead of paying taxes on one's wages, sales and building, taxes were shifted over to the value of the land one occupies. Were we to collect the full rental value of the land, in the form of a tax, reducing the selling price of the site to $0 or a token amount, a home, be it a high-rise condo unit or a single-family house, would sell for the depreciated value of the structure. A 2-bedroom, 2 bath condo of 1200 square feet would sell for pretty much the same amount wherever it is, with the buyer taking over the land value tax just as buyers now pick up the responsibility for the conventional property tax.
Buyers would need to borrow a great deal less. A 1200 square foot condo, at a generous $100 per square foot, would sell for $120,000. A 10% down payment on that would be a manageable $12,000. And the $108,000 mortgage could probably be paid off in far less than 30 years, incurring much less interest.
Relieved of taxation on wages and other income, one could afford to pay for the location one chooses, in the form of a monthly or quarterly payment to one's community. One wouldn't expect appreciation of one's housing -- after all, it is a depreciating asset. But assuming one's local government is providing services which others consider worth the price of the rental value of the land, one could expect to sell an attractive house or condo unit fairly quickly, and be able to relocated locally or cross-country in fairly short order.
Housing would no longer be regarded as an investment expected to appreciate. Buyers would enter clear-eyed and realistic, and seek to find the housing that best fits their needs without trying to make an investment.
Perhaps best of all, it would free up capital. We'd no longer be borrowing anything to buy land, so those funds would be available for investment in buildings, equipment and other things that create jobs. And many more of us, I think, would become investors, and would be accumulating resources to see ourselves through our retirement years.
Post Script: It occurs to me that among the first people to benefit from this measure, were it to be enacted in Washington, DC, would be our incoming congressmen, senators and their aides, who could afford housing, whether they were coming from a rich district or a poor one, whether they had tremendous fortune, or barely enough for a down payment. They could afford their own home, without living with roommates on C Street, or sleeping on their congressional couch and showering down the hall, as some impecunious or loudly frugal members of Congress choose to. And they would become conscious of how much of the cost of living in a city is payment for the location itself -- which should benefit all of their constituents, be they in blue counties or red ones. (And it might be interesting to look at how many blue cities there are.)
Where I live, an Australian bank owns the city water system, a stockowner electric company has the power franchise, Cablevision has the cable franchise -- and a lot of money that could profitably be recycled locally gets sent out of town. (We do still own the sanitary sewer system.)
There was a time when these franchises were given to local entities, or held by the community. Then we permitted them to be privatized, and revenue that was once recycled locally now leaves. (Google "The City for the People" for more about this. It showed, among other things, that residents of cities where the utilities were publicly owned paid less for their utilities and workers in those utilities were better paid.)
The short article quoted below makes an interesting point. I'll preface it by quoting California Georgist Harry Pollard, who says that it would be better to collect land rent and throw it into the sea than not to collect it at all. This shows why. It comes from Tax Facts, 1926:
LAND SPECULATOR'S PARADISE
Arthur Brisbane has discovered that Ponca City, Oklahoma, a town of 15,000 population, is free from taxes. Through ownership of the power, light and water departments the city derives sufficient revenue to dispense with all taxes.
But is that an unmixed blessing? Police and fire protection, schools, etc., are so desirable that people will move to places where they may be had. Since no one can enjoy these government services without occupying land, the people will bid against each other till they force the price up to a point where it equals the value of the service. If the people know they will not have to pay taxes they can and will pay that much more for the land.
What a bonanza for the land speculator! He can add to his price what buyers save in taxes.
Economic rent, or land value, attaches to land whether or not the land is taxed. The amount of this land value depends upon the number and kind of people in the community, and must be paid in any event. Should the government take sufficient taxes out of this land value to pay expenses, two results will follow:
The user of land will pay more than he would if the owner kept it all, as in Ponca City.
The taking of this tax from the land owner will add to the cost of holding the land idle, and since it falls on all valuable idle land, it will make speculators more willing to make terms with land users.
When the city must pay a stockholder utility for the lights on the streets, who benefits? The taxpayers spend more than they would otherwise need to, and instead of getting electricity at the lowest price, pay a price that benefits the shareholders, few of whom live locally -- and if you've read the "stock ownership" pages linked at left, you know how concentrated stock ownership is, based on the Federal Reserve Board's Survey of Consumer Finances data. (A fine example of trickle-up economics.)
Local communities which own their own utilities would be more likely to care about using clean energy. They'd be creating secure local jobs, and good management would benefit the local community. Accountability.
Under our present system of taxation the wages of the worker are taken to run the city by the tax on the home being put in your rent. The increase in land-values that would run the city goes to the land speculator. Example and Proof:
Suppose the people build a twenty million dollar subway. The land increases twenty million dollars in value; the increase would pay for the subway, but it goes to the land-speculator and your wages are taken to pay for the subway by a tax on the home which is put in your rent.
-- from The Single Tax Review, March-April, 1909
And 100 years later, we're still financing subways from revenue sources other than Land Value Taxation. Slow learners, aren't we?
I'd read this a few years ago, but on a recent re-reading, some other things jumped out at me. (The emphasis is mine.) It references a number of the themes of this blog (at left). See also a related essay, The Incredible Shrinking Dollar.
Henry George foreboded that landowners might take a growing wedge of the national “pie”, or product. Labor’s wedge might grow absolutely, as the whole pie grows, but still fall as a fraction. It might even shrivel.
In our times, George’s grimmer scenario is coming true. Since about 1975, labor’s wedge of the pie is shrinking as an absolute. “Real” wage rates have been falling since about 1975. “Family wage” used to mean a breadwinner’s wage high enough to support a family; now it means the combined wages of two adults. Many of these are “DINKS” (Double Income, No Kids) because that is all they can afford without cutting their customary material and educational standards.
What is this “real” wage rate? It is a ratio: the nominal money wage rate on top, divided by an index to the Cost of Living (COL) on the bottom. The higher the COL, the lower the real wage. Landowners cut into labor’s share from both the top and the bottom, because the COL includes many products of land (like building materials and energy) and land itself (like homesites). Shelter costs are by far the largest part of household budgets.
The standard index to the COL is the Consumer Price Index (CPI), calculated and published regularly by the Bureau of Labor Statistics (BLS). This index is, we will see, a political football.
Henry George said little about inflation because it was not a threat in his day. That was a time of “hard money” and the gold standard. Prices were stable or falling; DEflation was the great bugbear. Today, though, to check on George’s forecast, we have to distinguish between nominal money wages, and real wages.
An old Kingston Trio classic offered the following folk wisdom about survival in The Everglades: “If the skeeters don’t gyitcha then the gators will.” If the skeeters of life are nicks taken from money wages, the big gator now is the price of buying and owning a home.
Why deny inflation? Those in power have several reasons to understate rises in the cost of living (COL), measured by the CPI.
1. To mask the fall of real wage rates. This is supposed to placate working voters. It is supposed to support orators declaiming that our standard of living is ever rising, and we should all feel good. Actually, real wage rates have fallen steadily since peaking in about 1975. That is using the official Consumer Price Index (CPI) to measure rises in the COL. If the CPI understates rises in the COL, real wage rates have fallen even faster than the data show.
As a by-product, this denial of inflation supports those who like to dismiss George as a false prophet of doom.
2. To mask the fall of real interest rates, making savers and lenders feel better, and more willing to lend to governments. In this age of massive and growing federal debts, the U.S. Treasury depends on willing lenders more and more, to stay solvent.
3. To cut the real value of social security payments. This point is straightforward. These payments are also indexed to the CPI. If the CPI understates the COL, real social security benefits fall every year. Congress gets to spend the savings on wastes like Alaska’s “bridge to nowhere”, redundant imperialistic ventures, tax cuts for major campaign contributors, and no-bid contracts for the well-connected.
4. To cut rises in labor union and other wage contracts that are indexed to the CPI. The Federal minimum wage, like most state minima, is also indexed to the CPI.
5. To give the Federal Reserve Bank credit for having “tamed inflation”, when in fact inflation of land prices is running wild.
6. A lesser point today, but important before Congress leveled out the rise of tax rates with income, is to slow the rise of income tax brackets. That is because these brackets are indexed to the CPI. That is, when the CPI rises by, say, 5%, the income level at which you pass into a higher tax bracket also rises by 5%. Congress, briefly in a reasonable mood, enacted this sensible provision when enough people became aware that they were victims of “bracket creep”. Bracket creep is when inflation boosts your money income into a higher tax bracket, although your real income has not risen.
However, if the true COL rises by 10%, while the CPI rises by only 5%, this provision no longer protects us against bracket creep. It just gives a talking point to those who claim to protect us. Sneaky! That is why you, dear reader, may have had a hard time following the bean under one of the three shells. Politicians, of course, are good at withdrawing promises. The sneakier the method, the easier it is for them to cover their tracks
That is the “Why” of veiling inflation. Now let us look at the “How”. There have been two major steps in recent decades.
First was removing the costs of buying and owning homes from the CPI. The Bureau of Labor Statistics (BLS), the agency that calculates the CPI, did this from 1983 onwards. They didn’t remove it altogether, that would have been too transparent. Instead they substituted the “rental equivalent” of housing. This is supposed to be what your house would rent for, or what you would pay to rent a similar house. It is a hypothetical and casual figure - sloppy and unverifiable, that is - based simply on questionnaires to a sample of homeowners. It takes no account of the fact that some people will, and therefore everyone must pay a premium to own, because of expected higher future rents and resale values.
The “rationale” (cover story) for doing this is that a home is both an investment and a residence, and only the residence cost belongs in the cost of living. In fact, the annual economic cost of owning a home is the market value times the interest rate (plus the property tax rate, homeowners’ insurance, depreciation, etc.). When prices are rising we may deduct annual gain from the cost, but when prices are falling we then must add the annual loss to the cost of ownership, and now that losses are becoming current, there is no thought of adjusting the CPI for that. If the BLS were constructing a true measure of the COL they would be on top of this point; but they do not balance their act. They seize on reasons to lower the CPI, not to raise it.
Thus the land boom of 1983-89 was mostly blanked out of the official published CPI of those years. The CPI rose gently as though the land boom never happened. Again, in 2004 housing prices rose by 13%, while these “rental equivalents” rose only by 2%.
The CPI also takes no account of the price of extra land around some houses. It takes inadequate account of recreational lands, which now have displaced farming and forestry over whole counties and regions. And can we believe that the price of access to recreational lands has advanced as slowly as other prices? In 1946 a summer family membership in the Dorset Field Club, Vermont, cost $100, giving access to the links, tennis courts, and clubhouse privileges for three months. Today there is no access for non-members. A membership costs about $30,000, by private negotiation, and annual dues were $3,000 in 2003. Meantime, in the big leagues, Donald Trump is asking $300,000 or so for a membership in Ocean Trails C.C.; and even Rupert Murdoch is complaining about the green fees at Pebble Beach, $450 for one round. I am grateful that I got my fill of golf when I was young and dad could afford it.
The second major step was the Boskin Commission Report of 1995 (Newt Gingrich was dominating Congress), and its acceptance and implementation. Michael Boskin of the Hoover Institution was called upon to legitimize allegations that the CPI overstated inflation. He and his Commission obliged, and supplied the rationale for several rounds of trimming down the CPI even more.
The Boskin Commission’s advanced methodology included a lot of old-fashioned cherry-picking. They accumulated evidence supporting the foregone conclusion, and omitted contrary evidence. Most tellingly, they were silent about the biggest factor by which the CPI understates inflation: that is the use of “rental equivalence” in place of home prices. Now, shelter costs are about 40% of consumer budgets, and hence of the true COL. To accept an extreme understatement of shelter costs, while distracting us with lesser factors and arcane methodology, shows bias.
Most professional economists, sad to say, treat Boskin’s report as holy writ. They come on like preachers, salesmen, or just cheer-leaders, not like scientists exercising independent judgment. I have recently surveyed 20 current texts in Macroeconomics. They all list the same four “biases”, in the same order, that they allege make the CPI overstate inflation. These are:
a. Substitution bias. When the price of something rises, you use less of it, so it should be weighted less in the index.
b. Quality improvement bias. Products of the same name keep getting better, so they say.
c. New product bias. The CPI lags in showing how new gadgets raise our welfare. Microchip products, of course, are the example of choice.
d. “Discount bias”. The CPI scriveners assume that products sold in discount stores are of lower quality, when they really are just as good, according to Boskin et al.
As to point “a”, above, when the price of food rises elderly pensioners turn to cat food, so now the cost of fresh fruits and veggies counts for less in their cost of living, and they have shown a preference for cat food, whose weight in the CPI should rise, and they are as well off as ever. Hmmm – something fishy there.
Let’s take point “b”, above, quality improvement bias. The texts give some examples, but not a single counter-example. Here are a few of the latter.
2x4 dimensional lumber is no longer 2x4, but 15-20% smaller in cross-section, and of lower grade stock
salmon is no longer wild, but farm raised in unsanitary conditions, and dyed pink (ugh)
“wooden” furniture is now mostly particle-board
“wooden” doors are now mostly hollow
new houses have remote locations, far from desired destinations
ice cream is now filled out with seaweed products
the steel in autos is eked out with fiberglass, plastic, and other ersatz that crumbles in minor collisions
airline travel is no longer a delight but a series of insults and abuses
gasoline used to come with free services: pumping the gas, checking tire pressure and supplying free air, checking oil and water, cleaning glass, free maps, rest rooms (often clean), mechanic on duty, friendly attitudes and travel directions. They served you before you paid. Stations were easy to find, to enter and exit. Competing firms wanted your business: now most of them have merged.
cold fresh milk was delivered to your door
clerks in grocery and other stores brought your orders to the counter; now, many clerks, if you can find one, can hardly direct you to the right aisle
suits came with two pairs of pants and a vest, and they fitted the cuffs free. Waists came in half-sizes
socks came in a full range of sizes
shoes came in a full range of widths; the clerk patiently fitted the fussiest of customers
the post office delivered mail and parcels to your door or RFD, often twice a day
public telephones were everywhere, not just in airport lobbies. Information was free; live operators actually conversed with you, and often gave you street addresses
public transit service was frequent, and served many routes now abandoned
live people, living in America, used to answer commercial telephones, with no telephone tree to climb, and tell you what you actually wanted to know
autos used to buy “freedom of the road”; now they buy long commutes at low speeds and rage-inducing delays. One must now travel farther and buck more traffic to reach the same number of destinations. Boskin et al. dwell on higher performance of cars, and the bells and whistles, but rule out taking note of the cost-push of urban sprawl.
classes keep getting larger, with less access to teachers and top professors, and more use of mind-numbing “scantron” testing.
before world war II, an Ivy-league college student lodged in a roomy dorm with maid service and dined in a student union with table service, and a nutritionist planning healthy meals. All that, plus tuition and incidentals, cost under $1,000 a year. Now, to maintain your children’s place and status in the rat race, you’d put out $40,000 a year for a claustrophobic dorm and junk food. On top of that, a B.A. no longer has the former value and cachet. Now you need time in graduate and professional schools to achieve the same status. Many students emerge with huge student loan balances to pay off over life, with compound interest.
warranties on major appliances cost extra, aren’t promptly honored, and expire too soon. Repair services and fix-it shops used to abound to maintain smaller appliances. Now, most of them are throwaway.
replacement parts for autos are hard to find, exploitively overpriced, and are often ersatz or recycled aftermarket parts
musical instruments are mass-produced and tinny instead of hand-crafted and signed
piano keys were ivory; now plastic
many new “wonder drugs”, if you can afford them, have bad side-effects, while old aspirin still gets the highest marks
a rising array of taxes and other payroll deductions stand between one’s nominal income and consumer goods it might buy. Income and social security taxes are not counted as part of the CPI.
Medical doctors once made house calls, in the dim mists of history. Since then, access has become progressively more difficult, until today ... well you know, you’ve been there. In many small towns there is no doctor at all.
In 1998 the BLS dropped auto finance charges from the CPI. I do not find the cost of other consumer credit in the CPI (although I stand subject to correction). Certainly the largest cost of consumer credit, mortgage interest, has been removed by use of the “rental equivalent” substitute, with never a squawk from Boskin.
In 1995 the BLS eliminated an “upward drift” in the “rental equivalent” index, with no explanation. It is probably relevant that Congressman Newt Gingrich was in the saddle.
One could go on, but the point is that Boskin et al. seem not to have considered counterexamples to their foregone conclusions. If they did this where we can observe them, what else did they do under cover of black box models? The BLS, succumbing to the political pressure, keeps modifying the CPI to show less inflation, even while our daily experiences and shrinking savings tell us there is more. A 1999 study of the changes in the 20 years between 1978 and 1998 showed the cumulative effect of many changes had been to lower the CPI substantially (Monthly Labor Review, 6-99, p.29).
George warned that landowners might take most of the fruits of progress, leaving labor barely enough to survive. Critics then and now have urged us, instead, to don rose-colored glasses. The rosiest of these is the CPI as manipulated to screen out bad news, especially news about soaring land prices. Let us be aware of who is manipulating the news, why, and how.
 Your old geometry teacher called this a “sector”.
What a story! The developers of some subdivisions have slipped into their covenants a 1% resale "commission" which anyone who sells a property they developed must pay them ... not just once, but at every transaction for 99 years! How's that for a tax imposed by the private sector? Here are some excerpts from the article.
"But four months later, when a local television reporter was doing a story on housing taxes in their subdivision, the Dupaixs discovered that their sales contract included a “resale fee” that allows the developer to collect 1 percent of the sales price from the seller every time the property changes hands — for the next 99 years. ....
A growing number of developers and builders have been quietly slipping “resale fee” covenants into sales agreements of newly built homes in some subdivisions. In the Dupaix contract, the clause was in a separate 13-page document — called the declaration of covenants, conditions and restrictions — that wasn’t even included in the closing papers and did not require a signature.
The fee, sometimes called a capital recovery fee or private transfer fee, has been gaining popularity among companies that have been frantically searching for new ways to gain access to cash in the depressed housing market. ...
Freehold Capital Partners, a real estate financing firm founded by the Texas developer Joseph B. Alderman III, has been leading the charge. According to William White, Freehold’s chief operating officer, the firm has signed up more than 5,000 developers who are adding the covenant to developments worth hundreds of billions of dollars that will be built out over the next decade in 43 states.
Many developers see the resale fee as a creative way to get new financing. They are hoping to one day use the trickle of cash from these fees as collateral for a loan, or to get cash up front if pools of the fees are packaged into securities to be bought and sold on Wall Street. Freehold has begun shopping the idea of securitizing the resale fees, much as subprime loans were packaged and sold to investors.
Someone selling a home for $500,000, for example, would have to pay the original developer $5,000. If the home sold again two years later for $750,000, the second seller would have to pony up $7,500 to the developer, and so on. Even if a home declines in value, the seller still must pay the 1 percent fee. Freehold gets a cut of the resale fee; if the fees are securitized, it retains a percentage of the cash generated from the securitization.
Freehold’s principals and lawyers have been aggressive in sales pitches to developers, but have declined to give details on their clients, securitization efforts or the company itself. Freehold moved its corporate office from Round Rock, Tex., to New York this year as it stepped up efforts to securitize the resale fees.
Mr. White characterizes the resale fee as a win-win deal for the developer and the home buyer. The fees let developers spread out the cost of building the roads, utilities and other infrastructure across all homeowners in a subdivision, rather than just the initial buyers. As a result, he said, the developer can lower the initial price of a home to the first buyer.
For example, he says, a typical $250,000 home may be able to sell for about $5,000 less. “The fee is a fair and equitable way to spread development costs, and results in lower costs to the average consumer,” Mr. White says. ...
Jeff Moseley, founder of Badger Creek Development in Brunswick, Ga., says he signed up with Freehold after watching his business tank with the economy. “I can’t sleep at night,” he says, adding that he had laid off all 32 of his employees.
He is hoping Freehold’s resale fee program will breathe new life into his business. “I thought it was an intriguing and compelling story,” says Mr. Moseley, who owns two development projects, encompassing about 220 lots.
Under his deal with Freehold, he will get about two-thirds of the revenue from the securitized fees while Freehold and other parties will get one-third. ...
“The idea that someone who has no ownership stake or interest can continue to collect revenue off of a property that they may have built up to 99 years ago exploits an already complex transaction and doesn’t pass the smell test,” says Justin Ailes, director of government affairs at the land title association. The fee could hurt real estate values in the future if buyers are reluctant to purchase properties that have a 1 percent fee attached. ...
The Federal Housing Finance Agency is considering a proposal to prohibit the transfer fees on all mortgages financed by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. And 17 states have either banned or placed conditions on the practice.
Some bankers say Freehold will have a tough time selling the idea to Wall Street. The uncertain economy and housing market have made it next to impossible to predict when and how often a home will sell, or where home prices are headed — information that is needed to estimate cash flows to value the securities.
And some worry that an all-out ban of resale fees by states or the federal government could make the securitized paper worthless.
Dave Ledford, a senior vice president at the National Association of Home Builders, says he’s not sure Freehold can deliver on its big promises. “It’s almost in the category of ‘too good to be true,’ ” Mr. Ledford says.
Mr. White dismisses the criticism as sour grapes. He contends that Realtors oppose the fee because homebuyers might pressure them to lower their commissions to offset it. “Apparently 6 percent to a Realtor is justified, yet 1 percent to pay for roads and utilities isn’t,” Mr. White says. He says he believes title companies are worried that they might face legal claims if they miss the fee during a search.
LVTfan here: 1% to pay in 2050 or 2090 for roads built in 2010? Right .... Tell us another one.
See also http://www.wealthandwant.com/docs/Gross_Rent.html Rent-seeking is alive and well -- and these folks are reaping what they didn't sow -- and won't sow. It doesn't come out of thin air. It will come out of the pockets of future owners and users of the property.
Shouldn't we-the-people -- the public sector -- get that benefit?
This seems a bit like the Baltimore land rent story: private parties getting to collect value today, in return for someone paying a bit less 50 or 100 years ago to buy a house.
And both situations ignore what those who have read Henry George know: that land rent ought to be used by the commons to finance our common spending, not privatized by any individual or corporate entity.
Little people pay the taxes ... and we're paying to the wrong parties. When private entities get to collect what we-the-people create, there's something badly wrong with the structure. It forces us to rely on sales taxes, wage taxes, building taxes, and other taxes which burden the economy and steal from those who produce in order to enrich those who speculate in land value.
Wise states will implement the legislation necessary to wipe out such structures.
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.
This is an excellent article which I encourage you to read. I want to share the response which a friend posted to a global listserv we're both on.
Before I do that, though, I think it is worth considering that the much reported downturn in the market for new housing, as opposed to resale, might relate to a flight to quality. New subdivisions are on the fringes. Often they are beyond the fringe, surrounded by farmland -- sometimes described as checkerboard development. (I've even seen townhouses surrounded by farmland!)
If you have a choice between a new home in a distant subdivision and a resale home in an established location, served by established transportation systems, schools, jobs, shopping, cultural amenities, etc., which will you choose? Maybe the explanation of why new houses are not selling is that buyers now have a wider choice of homes they can afford, and are choosing the better locationsover the newly constructed houses on or beyond the distant edge of the community.
If I'm correct, it bodes well for smaller builders who are doing infill and redevelopment of existing neighborhoods. Wise policy can promote infill, while unwise policies lead to sprawl. I suspect the sprawl-folks have a lot more lobbying money than the infill-oriented ones, so can only appeal to good sense.
Here's Ed's response to the sprawl article, which I found to be well reasoned and well stated:
"A colleague of mine forwarded the link of this article to me for
comment, as my professional work in the United States has been in
community revitalization and the development of quality affordable
What I came to understand midway in my career was that land markets are made dysfunctional
by law that favors the landed over those who develop and utilize
locations. There are many issues causing sprawling development
patterns, but one of the most consistent is the struggle to gain
control over land that allows for profitable development. And, of
course, developers are not concerned with the infrastructure costs of
bringing roadways; water, sewer and other utilities, hospitals,
libraries, schools, and other public goods and services to
newly-created subdivisions. These costs are passed on to property
owners, working people and businesses.
There is only one measure that will redirect development inward,
leaving more distant land available for agriculture, recreation and
habitat for other species. This is for government to fully collect the
annual rental value of every location within its geographical
boundaries, while exempting improvement made thereon from the
tax/revenue base. What this change in policy will do is easy to see.
First, profit from speculating in the hoarding of land will disappear.
Thus, investors will acquire control over land only when profitable
development is possible.
Second, existing owners of land parcels will not be able to continue to
ignore land they hold because the cost of doing so will (particularly
if the and parcels are centrally-located) make this costly. They will
either develop land based on highest, best use or sell the land to
someone who will.
Third, the cost of property assessment will fall dramatically once property improvements are removed from the tax base.
Fourth, removing speculation and hoarding of land will bring down the
price (but not the annual rental value) of land parcels. This will make
it far less costly for public agencies to acquire land for needed
public buildings and (if still required given household incomes) to
construct decent, affordable housing units for the housing-deprived.
In summary, what will curtail sprawl is public policy that encourages
the renovation of existing structures and in-fill construction of new
buildings where infrastructure already exists, while at the same time
requiring land owners to compensate the community for the value that
comes to locations because of public goods and services."
"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.
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.
On the one side are those who believe in democratic capitalism — ranging from the United States to Denmark to Japan. People in this camp generally believe that businesses are there to create wealth and raise living standards while governments are there to regulate when necessary and enforce a level playing field. Both government officials like President Obama and the private sector workers like the BP executives fall neatly into this camp.
On the other side are those that reject democratic capitalism, believing it leads to chaos, bubbles, exploitations and crashes. Instead, they embrace state capitalism. People in this camp run Russia, China, Saudi Arabia, Iran, Venezuela and many other countries.
Many scholars have begun to analyze state capitalism. One of the clearest and most comprehensive treatments is “The End of the Free Market” by Ian Bremmer.
Bremmer points out that under state capitalism, authoritarian governments use markets “to create wealth that can be directed as political officials see fit.” The ultimate motive, he continues, “is not economic (maximizing growth) but political (maximizing the state’s power and the leadership’s chances of survival).” Under state capitalism, market enterprises exist to earn money to finance the ruling class.
The contrast is clearest in the energy sector. In the democratic capitalist world we have oil companies, like Exxon Mobil, BP and Royal Dutch Shell, that make money for shareholders.
In the state capitalist world there are government-run enterprises like Gazprom, Petrobras, Saudi Aramco, Petronas, Petróleos de Venezuela, China National Petroleum Corporation and the National Iranian Oil Company. These companies create wealth for the political cliques, and they, in turn, have the power of the state behind them.
It might be worth looking at these assertions in light of how wealth is distributed ... concentrated might be a better description ... in America. The 2007 Survey of Consumer Finances, from the Federal Reserve Board, reports the following distribution of "Equity," which includes individual stocks and equity mutual funds, whether held in retirement or non-retirement accounts:
Bottom 50% 1.5% Next 40% 19.6% Next 5% 12.4% Next 4% 30.5% Top 1% 36.0%
The SCF also reports the distribution of holdings of "BUS" -- the value of privately-held businesses:
Bottom 50% 0.4%
Next 40% 6.0%
Next 5% 5.5%
Next 4% 25.5%
Top 1% 62.7%
The two categories are of roughly equal size: Equity $13.7 trillion and BUS $14.9 trillion. So one might reasonably estimate that the top 1% have roughly 50% of the aggregate value of these two categories, and the next 4% have about 28% -- leaving 22% for the bottom 95% of us.
If state capitalism puts, say, 80% of business in the hands of the top 5%, is it that much worse than what we've got? In some ways, yes -- but the question is worth pondering.
Brooks closes with this:
We in the democratic world have no right to be sanguine. State
capitalism taps into deep nationalist passions and offers psychic
security for people who detest the hurly-burly of modern capitalism. So I
hope that as they squabble, Obama and BP keep at least one eye on the
We need healthy private energy companies. We also need to gradually move
away from oil and gas — the products that have financed the rise of
aggressive state capitalism.
More than "needing healthy private energy companies" we need to start collecting for the commons more of the value of the natural resources they draw from our common supply -- not to mention forcing them to privatize the environmental risks associated with drilling. Remember what Henry George said about a well provisioned ship? He who controls the hatches controls his fellow human beings.
And of course, we need to be undertaking the shift of incentives which will redirect sprawl into the underused sites in our cities. Land value taxation -- untaxing buildings, and uptaxing land value -- will produce the urban density which will lead to walkable cities and populations which will support effective public transportation systems. It will provide technologically modern housing affordable to people at all levels of the income spectrum, close to their work -- for those who want that. The reduced pressure on the suburban markets will lower prices there, too, for those who want that. That urban redevelopment will also create more commercial venues in the centrally located places where specialized businesses thrive. And of course all that building activity creates jobs, and those new technologies will produce buildings which use less energy and produce less pollution. And because untaxing buildings removes the penalties associated with things like solar power, all the incentives will be pointing in the same direction.
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.
Let's free a few of the slaves. We wouldn't want to burden the "good" slaveholders, would we?
This is a NYT story about a woman in California -- an MBA with a child in the Menlo Park public schools -- who wants to half-fix Proposition 13, by changing its provisions only as they affect commercial property, and leaving it in place for residential property. Her goal is to increase the funding of the public schools.
Prop 13, now 30 years old, required the assessor to ignore the market value of all properties when assessing them for tax purposes. The assessment is based on the owner's purchase price (or the 1976 assessment, whichever is newer) plus annual appreciation of no more than 2% per year. It has led to neighboring properties with identical homes carrying vastly different assessments and therefore tax bills. It has led to a tight housing market, to high land prices, to unaffordable housing, to extremes of boom-bust, to foreclosures. And older homeowning Californians love it, and so do their heirs, who stand to inherit property made valuable by it. And their heirs even get to keep that grandfathered valuation and low property tax bill.
And all this woman wants to change is how commercial property is affected.
I'm sure she means well, for her own child and his classmates.
She says, though:
“If every Californian understood the situation, and they decided they
didn’t want to do anything about it, that would be fine with me,” Ms.
Bestor said. “But nobody seems to know about this.”
I wonder if she'd include in that sentiment the 50% of California residents who DON'T own the homes they live in, and those among the homeowners who recognize the injustice Prop 13 creates. Or are they below the radar level?
“Any time you bring this up people start saying you’re talking about
overturning Proposition 13,” Ms. Bestor said. “That’s not what this is
BUT IT SHOULD BE!
Lobby to free a few of the slaves, but be sure you don't harm the interests of any slaveholders in the process!
I've not heard any really good answers to this question yet. Which is not to say that I don't think there are answers; they just aren't being widely discussed yet.
The answer lies deeper than the analyses which are commonly discussed. We need to shift our incentive system at a deeper level than what is currently being discussed.
We spend a lot of money heating and cooling older homes many miles from where people actually work. People commute long distances -- most of them via private cars because there aren't viable alternatives. Why do they live so far from their work? Usually because they can't afford to live closer.
The selling price of most housing within a commutable distance of any vibrant city is mostly land value. And most people don't know it.
Let me say that again.
The selling price of most housing within a commutable distance of any
vibrant city is mostly land value. And most people don't know it.
And they don't know why this is so, or realize that there is an alternative which would be desirable from virtually every point of view, or realize the far-ranging ramifications of this reality. And this is as true of people who hold graduate degrees in economics from our best universities as it is of people whose formal education ended with high school.
And the fact that the selling price of a home in a metropolitan area is mostly land value -- not value associated with the current structure -- seems to be invisible to most of us. As are the ramifications of the fact that houses -- like nearly everything else which is manmade -- depreciate! What appreciates is land value -- locational value -- and it appreciates for reasons which have nothing to do with the landholder himself.
The ramifications? I'll list a few here, but the list is very long.
As population grows and more jobs are in cities, population density in the city itself and the closest surrounding suburban rings needs to increase. What might once have served as large-lot single-family housing ought to give way to multi-family housing -- townhouses, low-rises, mid-rises. Vacant lots ought not to remain vacant for long. Low-rise commercial ought to give way to mid-rise commercial, or high-rise mixed use, with retail on the street level and housing or offices above.
More people living in walkable communities, with public transportation to move them to their work, reduces our reliance on cars.
More people living in technologically modern housing reduces the per-person fuel to heat and cool their living spaces.
Incentives which discourage redevelopment of underused sites are counterproductive
Incentives with encourage the prompt redevelopment of well-located sites to their highest and best use will reduce our reliance on oil and other non-renewable natural resources as well as the pollution associated with those fuels.
When we tax land value, we don't take from anyone value which they created.
When we tax land value, we reduce our reliance on income taxes and sales taxes.
When we tax land value, we can reduce our taxation of buildings and other improvements, which reduces the disincentives to redevelopment, to using modern techologies -- both of which create jobs.
When we tax land value, we reduce the selling price of housing, making it more affordable to ordinary people, and requiring them to borrow less. This frees up credit for activity which creates jobs.
When we tax land value, we stabilize our economy, reducing or eliminating the boom-bust cycles which afflict us roughly every 18 years.
Well-paid economists are trying to figure out how we can back out of the situation our current set of incentives have created with respect to purchasing housing. It used to be that a 20% down payment on a home purchase was standard, and one rented until one was able to save that amount and still have something left in the "rainy day fund." Today, the concept of a rainy day fund is considered a quaint oddity, something it would be nice to have but which few seem to be able to attain, for the vast majority of Americans. And 20% down payments are apparently fairly rare, not just for first-time buyers but for those purchasing "move-up" homes, unless one is moving from a part of the country where housing is expensive to a less expensive area.
20% down payments gave way to 10% down payments, which in turn gave way to 5% and 3% and no down payment, and then to 107% financing. Homebuyer tax credits have been supplying the down payment for many people in recent months. But how do we wean ourselves from this?
It is time to start thinking outside the box. I don't yet see the full mechanics of the transition, but here's the thought process.
Houses do not rise in value. Like cars and other mechanical things, they depreciate, year in and year out. It is never worth more than what it would cost to construct today, less depreciation. At some gut level, every homeowner knows it. (And most renovation projects do not increase the value of a house by as much as they cost; the exceptions appear to be adding a 2nd bathroom to a house with only one, and adding a deck to the house. Other renovations customize the house to the preferences of the current owners, which may be something quite different from what others would be willing to pay that amount for; there's nothing wrong with that, as long as owners do it with their own money. A, say, $50,000 renovation might only increase the market value of the property by $25,000 or less.)
Let's think about what one buys when one buys a house. First of all, with very few exceptions, one is buying the piece of land on which it is built. (In a leased land situation, one does not buy the lot, but one may be buying the right to occupy it for the payment of some amount of ground rent to another party; the formula for the ground rent will affect the selling price. In a condo or co-op situation, one is buying a part of a larger entity which usually involves owning the land.) While this may be a surprise to those who have only owned land in the heartland of America, in many places the value of the land under the home represents more than half, sometimes far more than 75%, of the price of the home. These are what used to be known as "high rent districts." (You know the song, "New York, New York" -- "if you can make it here, you'll make it anywhere?" Some of that is a reference to coping in a high-rent area.)
One is buying the house that sits on that lot, which might be quite new and technologically up to date, or quite old and, despite being well maintained, somewhat out of date. One is also buying the right to replace that older building, subject to local zoning and other requirements, with something which better suits current market wants. The existing structure may be quite usable, but if it is a cottage in the middle of a city block, the building itself may actually have a negative value: it will cost you something to tear it down and remove the debris.
Here's the part we need to think about. The buyer pays the seller for the value of the land and for the value of the structure on it. The seller, or someone in the chain of previous owners of that site, created the building on it. But he didn't create the land value. The community did. The current owner, if he has owned it for more than a few years (a few months, in some places, even in 2010) has ridden the value up. He might have put down a 10% down payment, and experienced a, say, 10% increase in the value of the total property, doubling his money. In places where land is scarce or conditions are structured to discourage selling, he may have experienced a 50%, 100%, 150% increase in the value of the total property. But remember that the house itself has been depreciating while he owned it, even if he has taken good care of it. The seller is reaping something he didn't sow. The buyer must borrow from a lender to pay him for it, and will be paying it off for the next 30 years of his life.
Suppose that we started recognizing the distinction between the land and the building on it, and set things up so that our buyers were buying the building and the right to the land under it, but instead of paying the seller for something the seller didn't create, would pay the community, year in and year out over the course of his ownership, the annual value of the lot. In a place where land was quite valuable, that would be a lot of money each year -- more than local government needs, and enough to send some up to the state and federal governments, which have paid for the infrastructure in the highest-value cities. In a place with little infrastructure and few services and no natural amenities, it would be quite little. Banks would lend some percentage of the value of the house itself, while recognizing that they're financing a depreciating asset.
Here's a quick and dirty table. It hasn't caught the extremes at the top or bottom end, but perhaps it will help illustrate:
Major coastal city
Major coastal suburb
*beyond commuting distance, but perhaps weekend-accessible
Incidentally, you might be surprised to learn that construction costs don't vary all that much from one part of the country to another. Based on costs in southern California, as 1.00, the range is from .73 in El Paso, .74 in Charlotte and Raleigh, .76 in Savannah, .77 in Montgomery, Jackson, St. Petersburg, .87 in Dallas, .91 in Boston, .95 in Seattle, 1.02 in Newark, 1.03 in New York City, 1.08 in San Francisco, to 1.29 in Anchorage and 1.44 in Honolulu. And, according to the same source, economy construction for a 2000 square foot, 1-story home can be as little as $86psf, or $172,200 -- in southern California -- which would equate to $126,000 in El Paso. "Luxury" construction on a 3,000 sf home would run $210 psf, or $630,000 in SoCal. The cost of the building varies much less than the cost of the land does.
This is consistent with Mason Gaffney's findings. (Search this page for the word "wine," and then go up 6 or 8 paragraphs.)
This is also consistent with Morris Davis and Michael Palumbo's May, 2006 paper, The Price of Residential Land in Large U.S. Cities, at http://www.federalreserve.gov/pubs/feds/2006/200625/index.html: average structure values vary far less than average land value does across metro markets. See, for example, Table D and Tables 6a through 6g.
Today a significant number of homeowners with mortgages owe more than their homes are worth. While what I am proposing would create a certain major disruption for many people who expect to live off their home equity, I think it is something we need to look at very carefully, and find a way to make an orderly transition to. A gradual shift of taxes off productive activity and onto land values is in order.
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).
Here's the comment I attempted to post ... it was probably too long for their standards:
Perhaps one of the motives in trying to increase the homeownership rate was to raise the percentage of Americans who think they might get to share in the rising value of American land from 66% to 69%. That doesn't address the fact that 31%, as renters, were not sharing in that appreciation, or the more relevant point that appreciation is very uneven, and that in most of the heartland, there was relatively little appreciation.
Most of us have never learned in any class or any reading that houses depreciate, and that land appreciates for reasons which have nothing to do with the individual landholder. Where land represents a high share of the value of housing, as in Boston, NYC, San Francisco metros, rising land value far offsets the 1.5% annual depreciation of the house. Where land values are low, on the fringes, in the heartland, and the house represents, say, 75% of the value of the property, there may be little appreciation of the total property.
But not recognizing that, people jumped on the bandwagon, thinking that owning a home, with the magic of leverage, of supposed income tax benefits (which in reality flow only to a relative few who don't use the standard deduction), was somehow their key to riches. They didn't quite see how, but doesn't everyone know that homeowners have lots more wealth than renters? Wasn't that enough information on which to base a purchase decision, particularly with mortgage brokers and Realtors telling them to get in while they could, and everything would be okay with their mortgage and life would be good?
Most people's education in land economics is sadly lacking -- and that includes the economics graduates of most of our best colleges and universities.
Where do you start to get the real story? Henry George. Read more about his ideas, or take an online course at henrygeorge.org, or at a (bricks-and-mortar) Henry George School in NYC, SF, Chicago or Philadelphia. You'll gain new lenses to understand a lot of things which otherwise make no sense -- including why we have this boom-bust cycle, and how to change it!
This is a well-researched piece about a Menlo Park, California, parent, concerned about program cuts in her child's school, who looked into consequences of Proposition 13, with emphasis on the proportion of funding coming from commercial property owners versus the owner-occupied residences.
Ms. Bestor's research of Menlo Park properties -- particularly of
parcels on one commercial strip and one residential street -- sheds
light on how the provisions of propositions 13 and 58 created the
lopsided tax-burden equation.
Looking at Menlo Park's main downtown street, she found that of the 56
commercial parcels on Santa Cruz Avenue, 23 are at the 1978 assessment
(plus 2 percent per year) level. Of those 23 parcels, only four are
owned by the same people who owned them in 1978. Eleven have passed to a
son or daughter, and in a number of cases are held in family trusts.
By contrast, of the 53 residential parcels in Ms. Bestor's
neighborhood, 13 are owned by the same people who held them in 1978, and
two are held by children of the 1978 owners, so are taxed at the 1978
level. The assessments of two other parcels were affected by other
The other 36 parcels (including Ms. Bestor's) have been reassessed
after changing hands, she says.
"My street is paying its way," Ms. Bestor says. "I think that Prop. 13
did what people hoped it would do (for homeowners). It allowed people to
stay in their homes and families to plan their financial futures."
What she doesn't say, of course, is that while her street might be "paying its way" -- I'm not quite sure what she means by it -- some of its residents are paying quite a bit more than their long-time-owning neighbors. 15 out of 53 are being highly subsidized by newer arrivals, and those who have bought most recently are doing the subsidizing. They are paying 1% of their purchase price annually, but due to some neighbors in similar homes getting 90% subsidies, they are not receiving in services as much as they would if their neighbors weren't receiving a 90% discount on their tax bills. Ms. Bestor is too polite to say it. It is not clear whether she is a subsidizer or a subsidizee within her neighborhood.
Her research, however, on the commercial sector, which she chooses to focus on, appears to me to be based on the right questions.
The article continues,
On the other hand, commercial property owners who are assessed at 1978
levels are not paying their way, she says. "Does it really make sense to
subsidize family trusts, major real estate corporations and developers,
who make smaller and smaller contributions (proportionally) to public
services each year?"
In her letter to Mr. Buffet, Ms. Bestor cites a downtown Menlo Park
example to underscore the inequity: "The Trader Joe's property -- the
'new' market in town contributes just $7,471 of general tax towards our
local services (for two-thirds of an acre of prime commercial property)
compared with Draeger's up the street at $66,585. It isn't Trader
Joe's, of course, that's paying the tax -- if they'd bought the property
when they moved in, that parcel would be contributing 500 percent-plus
"Trader Joe's leases it from a family trust, descendents of the 1978
owner ... with an address on a leafy street in Cape Cod. Since landlords
charge what the market will bear, it's fair to guess that the property
tax savings are accruing to those folks in Massachusetts while the
costs are borne by school kids and residents of Menlo Park."
Assuming that Draeger's and Trader Joe's are both on sites of comparable value, and that both are tenants, the annual costs to the tenants are probably comparable. The difference is that Draeger's pays more of it to Menlo Park, and Trader Joe's pays more of it to the landlord, bypassing the city.
Now here is the question: who has created the land value? The landlord? The tenant? Or the community? If the landowner and the landuser are the same entity, is the answer any different?
Let's think about what Prop 13 does to and for residential owner-occupants. Local conditions -- jobs, good schools, attractive views, recreational opportunities, high-quality health care -- attract newcomers to the community. If new housing is not being constructed -- houses where there was previously vacant or farmland, or multi-family homes where previously single-family homes stood, or smaller lots -- the price of existing homes is driven up. (Houses don't appreciate, but the land value rises.)
But Prop 13 reduces the supply of houses available by reducing the normal turnover. Where in most parts of the country, elderly people might decide that the house in which they raised their children no longer fits their needs, or is too large to heat/cool/clean/maintain/navigate in, particularly for a single adult, in California, they have several strong incentives to stay there nonetheless:
Their property taxes, if they've lived there for 30 years, are tiny, particularly for what some of the choicest (highest-appreciation) towns are offering in terms of amenities. This is known as a "free lunch." But it is only "free" to them. It does not come out of thin air; it comes at the expense of their neighbors.
Their children can inherit their highly-subsidized status, and receive all that the town offers for a tiny fraction of what ordinary folks would pay there, or what they would pay in a comparable neighborhood or town nearby. They will be able to put the grandchildren into some of the finest school districts and pay only the 1976-based property tax rate, a tiny fraction of what the new folks next door must pay.
Like everyone else, they hate to think of moving. Prop 13 provides them a good excuse to "think about it later" or not think about it ever.
At the same time, young families living in apartments or condos, which typically have two or perhaps three bedrooms, want more space. To get it, they must either compete with others who want to buy from the constrained supply of family-sized housing available, or locate further out -- putting a load on highways, using fuel, creating pollution, paying for 2 cars where one might have sufficed, reducing the time they can spend with their children, and possibly requiring the building of more houses on the fringe, requiring the extension of taxpayer-provided infrastructure (roads, water, sewer, drainage, roads, parks, etc.) and services (police, fire, ambulance, hospitals, libraries, public health, etc.) more schools (while the ones in the neighborhood they'd have preferred are not filled, because a lower percentage of the homes have school-aged children).
California has among the lowest homeownership rates in the US; the figure that sticks in my mind is 55% when the total US was 69%, which means that the homeownership rate for the rest of US must have been perhaps 72%.) That's pretty well known. But you might be interested to know that California's seniors actually have a higher homeownership rate than their counterparts in the remainder of the US. Prop 13 is clearly a major factor in that.
While I understand the pressures on Ms. Bestor not to speak of the Emperor's nudity, and applaud her research, as far as it goes, I think the entire Prop 13 system needs to be examined and dismantled.
She proposes capping the Prop 13 benefits to commercial property owners at 20 years. This would produce some interesting effects on revenue flows if all commercial properties get re-evaluated at the same time, and continue some awesome inequities if some get re-valued now and some 19 years from now.
Prop 13 – and then Prop 58 that made Prop 13 bases inheritable – has
created economic inequities that are evident from simple on-line
searches of the county assessor's database – and destroy any idea of a
level business playing field. A quick trip around my town illustrates
The nondescript little gas station on El Camino near my house pays
$30,148 a year in property tax for the privilege of selling me less
expensive gasoline than the two Shell stations ($14,214; $17,214), the
Union 76 ($15,920), and the Chevron ($20,388) down the street. Those
big-name stations have service bays to increase revenue and are on major
intersections. But the "new guy" in town (well, actually, there's been
a station there since 1978 -- but the new competitor in the market) is
the one who's paying $10,000 a year more for police, fire, road repair,
education, parks and courts.
Flipping the equation around, the Trader Joe's property -- the "new"
market in town -- contributes just $7,471 of general tax towards our
local services (for two-thirds of an acre of prime commercial property)
compared with Draeger's up the street at $66,585. It isn't Trader
Joe's, of course, that's paying the tax -- if they'd bought the property
when they moved in, that parcel would be contributing 500%+ more.
Trader Joe's leases it from a family trust, descendants of the 1978
owner ... with an address on a leafy street in Cape Cod. Since
landlords charge what the market will bear, it's fair to guess that the
property tax savings are accruing to those folks in Massachusetts --
while the costs are borne by school kids and residents of Menlo Park.
Of course, if the Cape Codders visited, they would probably look across
Curtis Street to the Walgreens (Unamas and Starbucks) building and point
out that that whole complex is only paying $8,709 in general property
tax ... without providing customer parking. In fact, the Walgreens
building pays 51% more for sewer service ($13,181) than it does towards
police, firefighters, courts, roads, and maintaining its free city
Do you wonder whether any commercial properties ARE contributing
meaningfully towards our local services? Well, the Chase takeover of
Washington Mutual appears to have triggered a reassessment of that
property (WaMu's earlier absorption of Home Savings had not). So that's
an additional $25,000 into the pot (up to $45,190). And a dry cleaner
we use, Menlo Art, is in a building that pays $30,346. The dry cleaner
only occupies 25% of the building, so their share is a mere $7,587 --
but compare that with the $944 paid by the much busier cleaner across
Santa Cruz Avenue. (Hoot'n'Toot sits on yet another property whose
sewer bill dwarfs their property tax contribution -- with an
out-of-state owner on the possibly-less-leafy Leisure World Drive in
Mesa, AZ.) I wish I could afford Tom Wing's jewelry ($21,687), but I do
have pizza at Amici's ($32,809) whenever possible. And Kepler's, our
doggedly independent bookstore, occupies about a sixth of a building
that pays $220,395.
Well, Mr. Buffett, I think you get the idea. People say that increasing
taxes will make prices go up but, frankly, that requires the generous
assumption that, in this totally unbalanced model, landlords aren't
charging what the market will bear.
To make sure, I tested this. I took identical loads of my husband's
laundry into each of the dry cleaners mentioned above (after a
particularly depressing talk by our school superintendent -- spending
per pupil is down this year over last, with only one new teacher hired
for over 120 new kids, and 14 teachers due to be laid off in May) -- and
found that cleaning three shirts, two khaki slacks and a cashmere
sweater cost me $37.00 at the popular ($944) cleaner, while I paid
$35.60 across the street ($7,587). Wherever the savings are going, it's
not to customers.
And then there's the threat that Business Will Leave if commercial
property taxes go up. Having spent twenty years in the corporate world
before becoming a mom, forgive my skepticism. I sat in on many meetings
at Apple Computer Inc. in the early 80's and 3Com Corp. in the early
90's discussing siting new sales and manufacturing operations. Property
tax was never, to my best recollection, mentioned. Consolidated tax
levels, yes, but in the broad context of the overall cost and relative
ease of doing business. What attracted us? Locations with a level
playing field (not one that discriminated against the new entrant); a
highly skilled (educated) workforce; good road-, rail- and
air-transportation; fair and efficient courts and public services;
reliable infrastructure; and a community environment that made employees
want to live there.
OK, out of fear of throwing the baby out with the bathwater, we are now
drowning him in it.
The original article, near the end, includes this:
So what is to be done? Ms. Bestor suggests capping Proposition 13
benefits for commercial property owners at 20 years. "Every 20 years,
non-residential property is reassessed at market value, then gets to
enjoy another 20 years of tax relief," she writes.
She also suggests a system whereby properties can be reassessed
gradually so as not to overburden assessors' offices, and a process for
Ms. Bestor also is attempting to launch local fundraising efforts that
would focus on commercial property owners who benefit from lower tax
levels. "I have the feeling these people are ready to be asked," she
"They need strong schools and a vibrant residential community just as
much as anyone else does."
Assessing land properly is not all that difficult, and if California would simply stop taxing the buildings, doing high-quality annual assessments of land value would not unduly burden the assessors' offices.
But I think that final point is correct: even absentee landlords benefit from strong schools and a vibrant residential community.
As I watch the mid-Atlantic states dig out from heavier snows than they are accustomed to dealing with (or budgeting for), the question of how we ought to finance such costs comes to mind.
Let's review the choices.
We could tax wages.
We could tax capital income (dividends, interest, appreciation of capital - a/k/a capital gains).
We could tax sales of goods.
We could tax services.
We could tax corporate profits.
We could tax specific kinds of transactions: e.g., stock sales, property transfers, tobacco sales, luxury goods, imported goods.
We could tax pollution.
We could tax buildings.
We could tax land value.
We could impose user fees.
It is very tempting, of course, to recommend that We tax whatever I have the least of. That's the "don't tax you, don't tax me; tax the guy behind the tree" approach, and many people never move beyond it in their thinking about taxation. It is one of the factors that causes us to rely on taxes which fall on people who have relatively little. (Remember Leona Helmsley's statement -- "WE don't pay taxes; the little people pay taxes." -- I don't think she was talking about tax evasion; she was describing how we've structured things.)
When we tax wages, we take from people that which they create. We discourage them from working, from producing, from contributing.
When we tax dividends or interest, we discourage savings and investment. Our corporations need capital. (Notice, however, that when one buys an existing share of stock from another investor, the corporation is not getting a new infusion of capital; what is changing hands is the entitlement to an actual or potential stream of dividends, and to a payment of some size if management decides to sell the corporation to another corporation or some private entity.)
When we tax capital gains, what we are taxing is a mixed bag. Capital does not appreciate. As anyone who has left a home unoccupied for a few months knows, as anyone who has owned a car knows, buildings and machines and the like do not appreciate. They depreciate, even with the best of maintenance. Most "capital" gains are actually either appreciation of land, or relate to the extraction of scarce -- nonrenewable -- natural resources. (Much of what is taxed by the estate tax, too, relates to one of these kinds of gains, which have NOT already been taxed elsewhere in our system. Taxing them once per generation, particularly when there are huge concentrations, is better than not taxing it at all.)
When we tax sales of goods, or sales of services, we impose both on the purchaser and on the buyer; by raising the price of goods or services, we lower the demand for them.
When we tax corporate profits, we encourage corporations to move those dollars to another country. And they are happy to oblige.
When we tax transactions of various kinds, we discourage those transactions. That can be a good thing or a bad thing. If we are discouraging hedge funds from skimming profit away from the market, many would argue this is desirable. If we are discouraging the flipping of houses by making it less profitable, many would argue this is desirable. Some would argue that discouraging liquor, or tobacco, or recreational drug transactions is desirable. Some would argue that discouraging trade with other countries is desirable. (Others would take the position that Henry George took: that it is doing to ourselves in peacetime what other countries might seek to do to us in war!)
When we tax pollution, we should get less pollution.
When we tax buildings, we should expect to have slower redevelopment, poorer maintenance, less investment in energy-conserving technologies and renovations, fewer highrises and less vibrant cities. We will certainly have fewer people employed in these activities or in spaces created by them.
When we tax land value, what happens? To quote the eminent economist Lowell Harriss,
Land as area is fixed in quantity. Tax it heavily,
and it will not move to some other place, or decide to take a vacation,
or leave the inventory of productive resources by going out of
existence. Tax land lightly, and the favorable tax situation will not
create more space in the community.
But we don't have to figure this out over and over. Adam Smith, in The Wealth of Nations, provided us with the canons of taxation -- the criteria by which to judge the various options. You might take a look at these two pages on the subject:
All those goods and services whose effect is to maintain or increase property values -- land values, since buildings depreciate -- should be financed via taxes on land value. We should avoid taxing any of the other possible tax bases at all until we have fully taxed land value. (At this point, you might be wondering what it means to "fully tax land value." Generally, it means to collect something approaching 100% of the annual rental value of the land itself. Quick and dirty, that's about 5% of what the selling price of the land would be in the complete absence of a tax on it. So if a lot would currently sell for $100,000, while bearing no annual tax on land value, the annual land rent would be about $5,000. Land value taxes up to that amount do not place a burden on the landholder. Collecting 100% of that amount would reduce the selling price of the land to a token level, but would not reduce its annual rental value by a penny.)
"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 is an exciting website which shows promise of digging California out of the hole into which it has dug itself.
The only downside I see for the rest of us is that it will make all the taxes which California residents pay deductible on their federal tax returns, and therefore, perhaps, reduce the tax revenue the federal government receives from this huge state, at least in the short run.
But the upside is exciting: California could be the first state to eliminate the dumb taxes which weigh on any economy: sales taxes and the portion of the wage tax which falls on the first $150,000 of personal income.
As I've noted in an earlier post, Lowell Harriss died a few weeks ago. I've been reading some things he wrote during his long and productive career.
The first is a piece he wrote in 1978, a few months after Proposition 13, California's taxpayer initiative which lowered property taxes and "protected" property owners from paying for services through property taxes, was passed. It is entitled "Property Taxation After the California Vote."
He starts with this: What approach to property taxation would
be most in our interest and that of our children?
He provides some history of the property tax, in general and then specifically in California.
Keep in mind that, in California more than in most of the country,
assessments on homes rather promptly reflect market conditions -- in an
environment in which house and land prices have been rising rapidly.
Often, however, local officials did not use the increases in tax base
to finance offsetting reductions in tax rates. Homeowners faced rising
tax bills; cash income, especially for retired persons, did not always
go up correspondingly.
California's colleges and universities were, however, among the best in the US, and surely some significant portion of the public spending was to provide the very services which caused California's property values to rise.
Lowell went on to say,
The full results of Proposition 13 will not appear at once. Only time
will reveal whether new jobs develop now as property owners use the
addition to their disposable income; whether extensive declines will
occur in state-local employment; and how much more erosion of local
authority will result from expansion of state payments to replace
revenues lost by the sweeping changes in real estate taxes.
Present owners of property have voted themselves capital gain
"windfalls." The reduction in property taxes will tend to raise real
estate prices. Today's owners, in voting essentially permanent
reductions in annual property taxes, have enlarged the stream of net benefits
(income) to be capitalized in valuing real estate. This one-time
capital gain in effect absorbs much of the future benefit from the tax
cut. In this respect, the specific results of Proposition 13 are
difficult to judge because assessments (but not the tax rate) will rise
after a sale. Future buyers will pay a higher price -- higher by
enough, in general, to offset the tax benefit. "No election will ever
be lost by votes in the future," runs the
conventional wisdom. And certainly California voters did not have
future property owners (or voters) in mind when they rallied to the
support of Proposition 13.
Lowering the tax reduces the cash required to hold on to underdeveloped
land. "Speculative underutilization" becomes less expensive. Waiting
for population growth and inflation to boost prices will cost less. The
current offerings of land will decline -- and thereby prices will be
raised -- because owners face lower cash pressure to sell or develop.
Income tax considerations, of course, complicate individual decisions
and require some caution in generalization, but the net effect on land
use will be some -- or much -- distortion away from the direction of
Will the California economy get a boost from Proposition 13? Of course
it will. Other things being the same, tax something, and there will be
less of it (land being an exception). The 50- to 60-percent cut in
taxes on man-made capital will alter favorably the "arithmetic" of
construction projects in California. How much so is difficult to say.
This cost reduction will interact with many other factors, including
the forces tending to raise land prices. The change in prospective net
returns at the margin may be more modest than impressive. But one
conclusion is clear: More capital will flow where tax reduction improves the prospects for investment.
The once widely accepted criticism that property taxes are regressive
does not survive modern economic analysis. In fact, a persuasive
argument in favor of property taxation for local services can be made on grounds of
equity. Especially important, it seems to me, is the fact that in
effect this tax enables localities to capture some of the fruits of
forces raising prices of land, including public outlays on streets, schools, sewers, and other facilities.
Finally, and probably of greatest potential, there is a real
opportunity in the wake of Proposition 13 for restructuring
fundamentally the way we tax property. We can reduce burdens on
man-made capital and make up the revenue from higher taxes on site
values, a procedure which seems to me eminently desirable on several
grounds. This possibility should be part of the broader public
discussion of the role of property taxation stimulated by the vote in
One change may be politically tempting -- to reduce burdens on
residential property while maintaining or even raising burdens on
business and public utility property. Such moves would not only add to
concealment of costs of government in the form of hidden burdens on
consumers and investors. In addition, the productive portions of the
economy would suffer. Building better communities will not come from
boosting taxes on business.
Americans should be "up in arms" -- or at least doing something -- about
restricting and effectively controlling the growth of government.
"Revolt" seems to me too strong a term; it also seems misleading,
implying as it
does that a single, dramatic action will do the job. Patient, informed,
continuing efforts are required. Among them will be the reform of
property taxation to develop its potential as a high-quality revenue
Greater fairness in sharing the costs of local
government constitutes a prime -- but not the only -- reason for
shifting much of the tax from improvements to land. This country will
be around for a long time. So also, I hope, will meaningful local
government. Effective freedom requires financial independence,
including ability and responsibility for raising revenue.
One of the biggest legacies we leave our children
will be the tax system. We want to make it as good as possible. Equity
is one (again, not the only) element of "goodness" of a tax system.
He proposes a shift to a structure where the millage rate on land is about 4 times that on buildings. He talks about transition issues, and issues of equity during and after the transition:
Two markedly different sets of equity issues command
attention. The one of dominant concern ought to be the situation in
which we (and our children) would carry on our affairs after generally
full adjustment as contrasted with conditions then if present practices
were to continue. The long run in which "we" are not all dead! The
other concern involves the transition. The shift itself would produce
results distinguishable from those to prevail after the economy had
settled down to the new system.
Writing of long-term equity issues -- remember that this was 1970 when you consider the dollar figures --
Community Use of
Values Created by Social Development and Local Government Spending
Over the longer run, landowners would get less of
the increment in the values of location. The general public would get
more in the form of a larger flow of the rising yields of the worth of
location (land) to finance local services. On this score, the equity
results commend themselves very strongly indeed. Socially created
values would go for governmental, rather than for private uses -- and
locally. The absorption of the increments for local, rather for state
or national, governmental use would channel these funds on a benefit
The localities doing most to make themselves
attractive would have most of this revenue source. In major cities
$10,000 to $15,000 (now often considerably more) of governmental outlay
is frequently needed for each new dwelling unit -- schools, streets,
fire and police, sanitation and health, park and prison, facilities.
Under present arrangements much benefit from such outlays in developing
areas accrues to the owner of locations being "ripened" for more
lucrative use; his payment in taxes (and special assessments) toward
the cost will generally be only a modest portion of the total.
He describes this as a "burdensomeless" tax:
As for the future, the tax on values of location
above their present levels would be almost burdensomeless, except as
owners of land and their heirs get less of the "unearned increment" of
rising values over the decades. Much of the element of true economic
surplus would be used for public purposes. For those parcels of land
whose values drop, the annual tax would also decline. Then, because tax
rates on land would be higher than today, local government would share
more fully in the loss of worth. For landowners the proposal would not
be a one-way affair which assumes that land always rises in price.
No other revenue source seems to me to compare so
favorably on this score of fairness. Future users of land would be
no worse off for the much heavier tax they would pay on the value of
location. The purchase price of land would be correspondingly less. Of
the total flow of yield of location value, interest (explicit or
implicit) would be smaller, taxes higher. Who would be less well off?
The landowners and their heirs who would have gotten the (unearned)
More of the rise in land value which results from
(1) governmental investment in community facilities and (2) the general
rise in demand due to the growth of population and income would go to
pay for the costs of local government. Such a tax on a pure economic
surplus seems to me about as fair as any imaginable source of funds for
financing community services. The National (Douglas) Commission on
Urban Problems estimated that in the 10 years to 1966, and despite
rising interest and tax rates, land prices rose by over $5,000 per
American family -- $250,000 million. Even a modest fraction
of this amount if used for local government would have permitted quite
a reduction of burden on buildings. The estimated rise in land prices
was over four times the total growth of state-local debt and was
greater than all of the property tax paid in the 10-year period.
Land as area is fixed in quantity. Tax it heavily,
and it will not move to some other place, or decide to take a vacation,
or leave the inventory of productive resources by going out of
existence. Tax land lightly, and the favorable tax situation will not
create more space in the community.
Our ethos apparently ties economic justice -- equity
-- to rewards based on "accomplishment." This principle does not lead
to justification of large rewards because of the ownership of land.
Differences, big ones, in payments for human services or for the use of
capital can rest on what the recipients have done. But for the owners
of urban locations such justification can rarely be found; when there
have been private inputs for community development, to the extent
feasible administratively, they belong on the tax rolls as improvements
rather than as land.
And just before he concludes, he writes,
What an owner can get in the form of land price
increases in and around cities has made rich men out of owners of
farmland, vegetable plots, and waste areas. More than one owner of a
few acres of potato land on Long Island or farms on the outskirts of
many a city in the United States, of a small plot of rice land near
Tokyo or Bangkok or Taipei, has reaped handsome gains because of the
pressure of population. In America, North and South, in Europe and
Australia and Africa, private enrichment has come to the passive owner
of land who has done little or nothing to enlarge its worth as part of
the city whose growth has brought his good fortune. In fact he may have
paid no more than an infinitesimal fraction of the taxes which have
financed the streets and other governmental facilities that have helped
to elevate the value of his land.
Next, I moved on to a longer piece, from the same time, and containing some of the same material. I ended up feeling that it is perhaps the best piece I've read in a long time on Land Value Taxation. It is titled "Property Tax Reform: More Progress, Less Poverty" and it is a lecture he delivered at DePauw University in 1970. I commend it to your attention.
Finally, I note a book from the TRED -- Committee on Taxation, Resources and Economic Development -- series (#6) entitled Government Spending & Land Values: Public Money & Private Gain edited by C. Lowell Harriss (1973). Each book in this series came out of a 2- or 3-day conference, held at the University of Wisconsin-Milwaukee. Lowell organized this conference, and wrote the book's introduction. Here's the dust jacket material:
Billions of tax dollars are spent
annually on government subsidy programs which are designed to help
certain groups, areas, and industries, and contribute to the general
welfare. Despite the good intentions of legislators, however,
analysts point to evidence that the programs are not only burdensome
for the taxpayer but often fail to do their intended jobs. Critics
find that major benefits go not to those whom the programs are
designed to help, but to others who can "capitalize" on them.
One major feature of the subsidy benefit pattern -- unintended but
predictable -- is the capitalization of land values. The value of
land will increase when the benefits, chiefly money income, are
enhanced by government subsidization. When the land is sold, the
benefit of a subsidy which seems likely to continue will be captured
by the seller. Thereafter, tax funds that continue to subsidize a
program will not fully benefit those for whom they were presumably
intended, but the seller will have made a capital gain.
A classic example can be drawn from the experience of
federal farm programs. Taxpayers and consumers have been spending
billions annual to aid some farmers. In practice, of course, these
programs have often -- and intentionally -- reduced farm output and
raised consumer prices. The consumer-taxpayer is thus dealt a double
blow, in effect subsidizing an increase in his own food prices. Yet
the operating farmer, burdened with a higher land price, fails to get
the full benefits of the programs established for his welfare.
In farm programs, as in some other subsidy programs, the expected
annual benefits are capitalized into higher land prices. Then, after
land prices have gone up to reflect these benefits, the annual
payments to farm operators in effect support the higher land prices.
In effect, the seller of land realizes the benefits of government
subsidy into perpetuity. A somewhat similar pattern is to be expected
in other public spending programs, including those concerned with
urban renewal, where benefits are localized. The pattern shows that
farm programs do not raise wages of low-paid farm labor, that urban
projects do not rid cities of slums, and that the taxpayer-consumer
bears the burden of both.
This volume explores, and at least attempts to define, the extent
to which land values tend to capture the benefits of subsidies and
other government spending through capitalization. It includes papers
by proponents as well as critics. The contributors, who include some
of the nation's leading economists, discuss the nature and effects of
farm and housing programs, commodity price supports, transportation
outlays, land preservation projects, water resource development, and
urban renewal programs. Their work will be of more than routine
interest to economists, political scientists, lawyers, political
officeholders and government officials, planners, and all others who
seek to unravel the complex fabric of multi-billion-dollar government
Lowell made contributions in many parts of economics; I am probably familiar with only a small portion of his work, but I am grateful for it.
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.
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).
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.