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!
I would love to see a map showing what states the people who take the income tax deduction for home mortgage interest live. I think we'd find it was the so-called Blue states, where the value of land is higher, and wages are higher, and property taxes are higher.
Funny that we're willing to help subsidize the borrowing necessary for some people (buyers) to paying off other people (sellers) for value the sellers didn't create! And then we don't tax those so-called "capital" gains much at all! A few communities collect a few percent of each transaction, which isn't a great idea either, particularly when it is collected from the buyers, who likely borrow it!
There has been a lot of political rhetoric lately centered around the "Job Creators," and what we can do to encourage them to create jobs (in America). Most of it seems to be centered around (1) creating some sort of "certainty" for them regarding what sorts of taxes they might be expected to pay if the jobs they deign to create are successful in increasing their profits; and (2) lifting the supposedly onerous regulations we put on them regarding product safety, environmental protection, and perhaps royalties on what they withdraw from the earth's supply of non-renewable natural resources and other services they receive from our common ecosystem.
I contend that those who frame it this way are leading us astray.
First, the jobs that the so-called Job Creators actually create occur when (a) they want more personal services -- haircuts, manicures, acupuncture, botox, dry cleaning, catering; (b) they want more goods -- dinners out, boats, cars, swimming pools, airplanes, motorcycles, jewelry, wardrobe, fancy foods, alcohol, tobacco, etc.; (c) when they decide to build or rebuild a home, and furnish it.
The real job creators are those whose demand for products and services create jobs. A few percent of us have sufficient current income -- or sufficient wealth to draw on -- that it is fair to say that virtually all of their needs and many of their wants are being met. But the vast majority of us have unmet needs and certainly more wants. And I think it is fair to say that while it is human nature to want something for nothing, and that all of us want to meet our needs and wants with the least possible effort, it is also true that virtually all of us are willing to work, to serve others with products and services, in return for wages, be they from a single employer or a collection of customers.
So what's the problem? Why can't this supply of labor get together with this demand for labor, to the general benefit of our entire society?
I can point to several problems.
First, much of the nation's capital is in the portfolios of a very small proportion of our society, and that process of concentration shows no signs of slowing down, much less reversing. (Not surprising, since we've done nothing to correct the structural causes which produce it!) Joe Stiglitz has said that the FIRE sector is harvesting something like 40% of the profits of the productive sectors of the economy. This cannot be permitted to continue if we seek to create prosperity for all.
Second, ownership of America's choicest sites -- mostly in the central business districts of our biggest cities, but also in some of the scenic coastal areas and the suburbs surrounding those cities -- is in the portfolios of a very small proportion of our society (as well as in portfolios of foreign landlords). This may not appear to some to be a problem, but I assert that it is -- and a big one. (The good news is that it is readily fixable.) An acre of Manhattan land can be worth $250 million or more, while an acre of good farm land might be worth $5,000 -- a difference of 50,000 times! That is, 50,000 acres of farmland might be worth the same amount as a single acre of Manhattan land!!) A single 25x100 residential building lot in Manhattan -- 0.058 acre -- can be worth $10 million ... that works out to $172 million per acre.
Third, we tax labor income -- wages -- to fund federal and state spending. We tax the first $105,000 or so of wages at 15% or so to fund Social Security and Medicare (that includes both the employee's and the employer's contribution, as economists agree is appropriate). After exempting some amount of income in proportion to family size ($15,200 for a family of 4) and some additional for a standard deduction ($11,900 for married filing jointly) or some combination of itemized deductions (which go mostly to high-end urban/suburban homeowners in northeastern states, with big mortgages and significant property taxes, and California owners, with big mortgages and more modest property taxes), the Federal Income Tax taxes the next dollar of wages at 10%, and the rate rises to 15%, 25% 28%, and, for a tiny but noisy minority of us (adjusted income over $217,450 after exemptions and deductions, for married filing jointly -- which Romney calls the middle class), to 33% and 35% on the marginal dollars (not on all of one's income). But 86% of us pay more in payroll taxes than we do in federal income taxes, when the employer's portion is taken into account. [source: http://www.cbo.gov/publication/43373, table 8.] It is worth noting that 15% [social insurance] plus 10%, the federal tax rate on the first dollar after deductions and exemptions, is 25%, but that for those whose household income is well above the $105,000 cut-cutoff, the 35% bracket is not all that much higher than what comes out of the pockets of the low-income worker.
So 25% to 35% of the portion of our wages beyond that allowance for some basic expenses, are being taken to fund federal spending, and in most states, more for state spending.
The federal spending, and much of the state spending, goes to projects whose effect is to increase local land values in specific places -- infrastructure, public goods of various kinds. Oddly, we fund it via taxes on wages! Wouldn't we be wiser to fund it via taxes which fall on those land values, which are so concentrated into a relative few pockets -- pockets which are currently not asked to contribute much, but receive so much from those who need to occupy those choice urban sites. I do not begrudge the owner of a luxury building the right to keep the portions of the rent he receives which can be attributed to (a) the qualities of the building itself and (b) the services he as landlord provides, but much of that rent is attributable to neither of those factors; rather, it is a function of .... (all together, now) Location, Location, Location, and value which is created by the community, not by that landlord!
Fourth, most of us of working age, and particularly our young people, are paying at least 30% of our income for housing, and many, many people are paying a far larger portion of their income. On top of that, many have student loans, car loans, and perhaps credit card debt, and live paycheck to paycheck. Many young people who bought a home during the 2002 to 2010 period are upside down on their mortgages, owing the lender more than they could sell the property for, and are thus effectively trapped in those homes until prices rise or someone does something to renegotiate their mortgage, or they win big in the Lottery. Thus they cannot move to meet their families' changing needs, or leave the area to accept a job in another part of the country.
So what does this have to do with Job Creation? Well, if those of us who don't live on the really choice bits of urban or coastal land were relieved of some portion of their tax burden, including the 15% that goes for social insurance, we'd have more to spend on satisfying our other needs and wants, and virtually all of that would create jobs. Here, in the U. S.
Man is a land animal as much as a fish is a water animal. Not only does man live on land but all of his wants are supplied by or from land. The earth is, literally, his mother. He will perish quickly if he has not access to the breast of his earth mother and will suffer and squall and become panicky if he has not free access to earth's breast and cannot obtain sufficient nutriment. His relation to land is fundamental and can be broken or disturbed only at great peril and loss to him and to society.
Production and consumption will always be in equilibrium and commerce and exchange will always flow smoothly, if all men at all times have equal and free access to nature's storehouse of wealth and if there are no dams -- tariff, -- etc. to interfere with the exchange of products. Free land and free trade are therefore, essential to economic justice; to give all an equal opportunity to produce goods and to exchange them without paying toll to anyone. When goods are produced and exchanged freely, it is reasonably certain that production and consumption will run so closely together that there can be no serious panics or long periods of depression. Serious maladjustment can and will occur only when production and exchange are interfered with and to the extent that they are interfered with.
The private ownership of land, that is, the taking of economic or land rent by private land owners, or landlords, most seriously interferes with some men's access to mother earth. Landlords are not only dogs in the manger; they are a class and about the only class, except the tariff beneficiaries, that consume without producing; that do not give a quid pro quo for what they get.
The capitalist supplies capital and is entitled to the interest that he gets. The laborer --wage, salary or fee earner -- produces goods or gives services and is entitled to what he gets in exchange. The landlord produces neither the land nor the land rent and is not, therefore, entitled to the rent that he takes. He is the only one who takes out of the economic pot without putting something into it. He is the only one who can and does live off the labor of others. He is the greatest of all economic leeches.
Professor Thorold Rogers said, in 1870:
"Every permanent improvement of the soil, every railroad and road, every bettering of the general condition of society, every facility given for production, every stimulus supplied to consumption, raises rent. The landowner sleeps, but thrives. He alone, among all the recipients in the distribution of products, owes everything to the labor of others, contributes nothing of his own. He inherits part of the fruits of present industry, and has appropriated the lion's share of accumulated intelligence."
If, as in ordinary times, the landlord takes only a moderate rent, that is, charges only the actual rental value of land to the capitalist and laborer who use land, production and consumption proceed normally, for society has fairly well adjusted itself to this unjust system. In times of great prosperity -- so-called -- when there is great speculation in land values and they rise rapidly, the landlords can and do take even more than the normal rental value of land; that is, more rent than is produced by society. Access to land then becomes so difficult and the prices that producers have to charge for food, clothing and shelter become so high that consumers are unable, after paying excessive rent, to purchase all of the goods produced. Hence, the glut in the market; the decline in the prices of commodities; the collapse of the over-extended credits; business failures; closed mills; idle labor and low wages. The business depression does not end until land values have declined to or below normal for the population. Soon thereafter business begins to revive, mills to open, unemployment to decrease, wages to advance and prosperity to return. Industry will continue on the up-grade until rents again become excessive. Most, if not all, periods of prosperity end with real estate booms. Even our present war prosperity will probably continue until there is a boom in city, farm, forest and mine land values.
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
We all know the old saw -- the three most important things about choosing real estate are ... location, location and location! We're so used to hearing it that we don't stop to think about its larger implications -- and particularly its implications for public revenue.
Those who are thinking about buying a home as an investment may hear a related piece of advice: buy the worst house in the best neighborhood. You can't change the neighborhood, much (the infrastructure and schools which serve it are relatively fixed, in the short-term at least), but you can improve or replace that old house, at your leisure, or sell the land to someone who will, at a profit.
This article, from a California residential real estate agent, summarizes "location cubed":
Location, Location, Location is an adage you will hear over and over.
It's like the real estate agents' mantra: location, location, location. You've certainly heard the phrase enough and may wonder what possesses agents to say it three times. Or you might think it pertains to three different types of locations -- perhaps an excellent location, a mediocre location and a lousy location.
I'll put your mind at ease. It means identical homes can increase or decrease in value due to location. It's repeated three times for emphasis, and so you will remember the phrase. It's the number one rule in real estate, and it's often the most overlooked rule.
The Epitome of Location, Location, Location
You can buy the right home in the wrong location. You can change the structure, remodel it or alter the home's layout but, ordinarily, you cannot move it. It's attached to the land. The best locations are those in prime spots such as:
Within Top-Rated School Districts Home buyers with children are concerned about their children's education and often will pay more for a home that is located in a highly desirable school district.
Close to Outdoor Recreation and Nature Homes abutting the ocean, rivers, lakes or parks will hold their value because of the location, providing they are not in the path of a possible natural hazard. People want to be near water or visually appealing settings.
Homes with a View Some homes sell quickly and for top dollar because they provide sweeping panoramic views of the city at night, but even a small glimpse of the ocean out one window is enough to substantiate a good location. Other sought-after views include mountains, greenbelts or golf courses.
Near Entertainment and Shopping In many cities, you will find homes that are located within walking distance of movie theaters, restaurants and boutiques are more expensive than those located further outside of town. Many people would rather not drive if they can walk to nightlife.
In Conforming Areas People tend to gravitate toward others who share similar values and their homes reflect it. Home buyers mostly prefer to be surrounded by similar types of properties in age and construction, where people just like them reside.
In Economically Stable Neighborhoods Neighborhoods that stood the test of time and weathered economic downfalls are more likely to attract buyers who want to maintain value in their homes. These are people who expect pride of ownership to be evident.
Near Public Transportation, Health Care and Jobs Most people do not want to endure long commutes to work, the doctor's office nor the airport. They prefer to be located close to emergency services and conveniences, so naturally homes in locations that shorten travel time are more desirable.
In the Center of the Block. I prefer corner locations, but most home buyers want to be in the middle of the block. I suppose they feel less vulnerable with neighbors around them, but they definitely enjoy less traffic.
It's almost easier to talk about what constitutes a bad location than to discuss good locations. That's because the qualities that make a good location desirable can vary, depending on whether you're looking in the city, the country or the mountains. Bad locations, by their general nature, are easier to pinpoint:
Next to Commercial / Industrial Unless you live downtown, commercial buildings on your block will diminish value. Part of the reason is because home owners cannot control those who loiter in front of their home. Homes next to gas stations or shopping centers are undesirable because of the noise factor, and nobody really wants to listen to truck engines idling at night or during early morning hours.
Near Railroad Tracks, Freeways or Under Flight Paths When I take the El through Chicago, I often wonder how city dwellers with homes right on the railroad line put up with the rumbling and racket. I've also owned a home under a flight path and moved within a year. The noise was so loud I couldn't hear a caller on the phone, much less sleep in on the weekends.
In Crime Ridden Neighborhoods People want to feel safe. If your neighbor covers the windows with sheets instead of regular window coverings, and you hear cars coming and going at midnight, you might be living next door to a drug house, especially if the flashing lights of police cars are readily visible at any given time.
Economically Depressed Areas If your neighbors show zero pride of ownership in maintaining their homes, evidenced by lack of maintenance, poor landscaping or you spot discarded mattresses, junk car parts or old appliances lying in the yards, you might want to think twice about moving into such an area. On the other hand, some areas like this are on the edge of development and going through rehabilitation. But you're taking your chances.
Close to Hazards Name me one person who wants to live next door to a nuclear power plant, and I'll show you a mutant moron. Few home buyers want a transformer in their yard, either. If the neighborhood was built on a landfill or was recently swampland, nix it. Always order a natural hazard report when buying a home.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.
"Identical homes can increase or decrease in value due to location." While construction costs vary remarkably little from city to city (explore the geographical variance chart at saylor.com, on which, if memory serves, costs range from 74% to 106% of the Los Angeles metro costs on which the rest of their costs are based), while the price of a building lot can vary from $20,000 to $1,000,000 or more, depending on its location. (And the $20,000 one is probably a good deal larger than the $1,000,000 one, and with fewer constraints imposed by the local community.) A well-maintained 30-year-old 4BR, 2.5bath builder's colonial of, say, 2500 square feet can sell for $125,000 to $1,300,000 or more depending on the local land values.
Harvard Law School professor Elizabeth Warren, some years ago, co-authored a wise book entitled "The Two-Income Trap: Why Middle Class Mothers and Fathers Are Going Broke." She recognized that a part of it related to chasing houses in school districts where they felt their children could receive a solid education. I don't think she saw the larger implications of this truth.
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:
Found in the files ... the phrase at the beginning of the 3rd paragraph caught my attention, and then the rest seemed worth sharing:
Thank you for letting me see Mr. ___'s thoughtful and thought-provoking paper on tax incidence.
I could go through this paper in detail, praising where I think it warranted and criticizing in other spots. However, it seems more constructive to offer, tentatively, a different set of parameters, which, for me at least, clarify the matter of incidence as no current author is doing. At least it will suggest a different viewpoint from which to analyze incidence.
In the first place, land values are the great catch-all of externalities, both positive ones and negative ones. To an extent, that is what Lowell [Harriss]'s conferences on "Subsidies and Other Government Spending: Effects, with Special Reference to Land Values" and the subsequent book "Government Spending & Land Values: Public Money and Private Gain" were all about.
In the second place, as his paper points out, taxes on land values are not shifted and taxes on improvements are shifted, and for the reasons he states: land is of fixed supply and improvements are not. This, ceteris paribus, is why they are built into price and paid for by the consumer in the one case and are reflected in a lower price in the other.
But there is a factor not cited in the paper, nor in the limited amount of the literature with which I am familiar: that is the current state of the economy -- whether we are in a boom or a bust. When the demand for office or residential space is lively, the lessor waits only for the expiration of the current lease (and only if he must!) to raise the tenant's rent; when the rental market is in the doldrums, he grins and bears it, or is foreclosed, or tears his building down, to escape taxes.
I think the idea of "backward shifting" is specious; I believe it is a conconction of dear old Harry Gunnison Brown's. It has certainly set thinking on incidence back generations, having muddied the waters of a simple phenomenon to the point where no one seems to know anything certain at this time.
Lastly, may I suggest that Mr. ___ dip into Homer Hoyt's "100 Years of Land Value in Chicago," Chapter 7, especially pp. 373-403, where Hoyt lists the order in which various phenomena occur from trough to trough. He counts twenty of them; the enclosed chart, based on Hoyt, expands the list to thirty, in the interest of elucidation. In this he will see how land values tend to lag on the upside somewhat at the beginning, then get out of hand completely, and finally again especially lagging on the downside. In this he may discover primary forces affecting the natural tendencies of incidence.
--at least, this is what I think I see in all this. Thanks again for the opportunity of studying this interesting paper.
--from a letter from Weld Carter to Arthur Becker
(professor of economics, University of Wisconsin-Milwaukee and
Mason Gaffney discusses them in his "The Great Crash of 2008" (see the LVTfan blogpost here).
and finally, Which Georgist first called LVT the "least bad" tax? contains a reference to Hoyt; this book was his PhD thesis at the University of Chicago, which Milton Friedman was likely aware of when he said, both in the 1970s and shortly before he died in 2006, that land value taxation was the "least bad" tax. (Incidently, that blogpost title does not refer to Friedman; it refers to Lowell Harriss, mentioned in Carter's letter.)
Finally, you might take a look at Carter's discussion of Hoyt in his Clarion Call.
Continuing through some old files, I came across this eloquent statement in the minutes of an executive committee meeting for the Robert Schalkenbach Foundation:
"Middle income homebuyers, especially, are having to pay a lot more for their homes because of the inflation in land prices. They are having to pay more for their financing, too, because financing also reflects land prices.
What land speculators can get for their land, they can get because of the enormous expenditures of tax money to make that land usable.
I do not think the American conscience is sufficiently sensitive to be aroused because land speculators get rich at the expense of the government, because the public has come to regard the government as a cow to be milked. It would, therefore, be unwise to place the emphasis on how speculators get rich at the government's expense. Rather ... we should emphasize that the homebuyers are the ones who have to pay, have to dig deep into their savings to pay speculators more for the land, not because the speculators did anything to earn a higher price, but because taxpayers spent millions to make it better."
-- Perry Prentice, 3/5/1965
California, with Prop 13, should take note. Anyone who wants a more stable economy should take note. Anyone who would like to see the cost of living for ordinary people be stabilized and reduced should take note.
The tax plan being promoted by one of the presidential candidates, Herman Cain, seeks to impose a federal personal and corporate tax rate of 9% and a national sales tax of 9%. The word for "no" in German is "nein." Since the 9-9-9 plan would be neither equitable nor efficient, we can respond in German, "nein, nein, nein!"
The first "nein" is on the 9% business flat-rate income tax. This would impose a tax on gross income minus purchases from US firms, investment in capital goods, and exports. That would be much better for enterprise than the current top income tax rate of 35%. However, recognizing that any taxes on production has an excess burden, the best tax rate of all would be a flat zero.
The second "nein" is on a personal income tax rate of 9% on gross income minus charitable donations. The plan complicates this with special tax rates in "empowerment zones." Such enterprise zones often just shift business away from other areas, and then the land rent in the zone goes up to soak up the locational advantage, so the ultimate gainers are the landowners, especially those who are politically well connected and are able to buy up land in the zones prior to being established.
The poorest workers pay little or no income tax today, or even get cash under the "earned income tax credit". The flat-rate 9% tax would make the poor pay higher taxes. Again, a 9% tax is better for most taxpayers than the current tax rates that go up to 35%, and a flat tax that eliminates real estate deductions and exemptions is also better, but best of all would be a flat wage and profits tax of 0%.
The worst part of the 9-9-9 plan is the 9% national sales tax. While to some extent the effect of the sales tax would be offset by the reduction of income taxes, still, sales taxes get added to the cost of production to increase the price of goods. For companies that were making little profit, they would have paid little income tax, so the tax could end up raising their prices by more than the current tax system. If they employ low-wage labor, those workers would have been paying little or no income tax, and would now have to pay the higher nine-percent income tax, which would further increase costs to those enterprises. The 9-9-9 plan would dramatically increase income inequality at a time when inequality has already been rising rapidly.
The 9-9-9 plan is supposed to be revenue-neutral, but analysts have found that it would generate less revenue than the current system, so the 9-9-9 numbers would probably be raised to 10-10-10 or higher. Once a national sales tax or value added tax is in place, the tax rates could be raised, as they have been in Europe.
It has been pointed out that the tax plan being promoted by Herman Cain is the same as the tax structure in the 2003 video game "SimCity 4". This video game simulates a city, and the default tax rate is 9-9-9. According to some analysts, in this simulation game, the 9% tax rates were not enough to finance the desired public goods.
The favoring of one tax plan implies the rejection of the other systems. The advocacy of a national sales tax implies the rejection of alternatives such as a national land-value tax. So we can ask why a candidate is rejecting a tax on land value in favor of a tax on produced goods.
Herman Cain is correct in saying that the natural state of the economy is prosperity, and that freedom promotes prosperity. He is right in saying that government must get out of the way of production. He is right in saying that production drives the economy. But he does not go to the logical conclusion of the free-market argument: marginal tax rates of zero. To best promote employment, investment, and growth, place no tax on additional production, trade, or consumption.
A land-value tax would best let the economy rise to its natural rate of prosperity. LVT would be levied on the economic rent of all land. Taxing land value is equivalent to taxing its economic rent, also referred to as ground rent or geo-rent. LVT would be based on the most productive use of a plot of land, regardless of current use, and regardless of current rental payments. Thus if a plot of land were not being used as productively as possible, the tax would push landowners to make the best possible use of their lands, or else pay the same as those who do.
LVT would promote equity and greater equality of income and wealth, because it would equalize the benefits from land, and equalize the gains from economic progress as captured by higher rent.
The prices of goods, including wages and interest rates, provide information about their scarcity relative to the desire for those items. Taxes both on production and on goods twist, distort, and skew these numbers, so that the economy is operating on false signals. LVT does not change the market rent, and rather than acting as a tax, it acts to remove a subsidy. Land value gets subsidized as the public goods provided by government, but not paid for by landowners, pumps up rent and land value. If this rent is not collected for public revenue, then it is a gigantic subsidy to land ownership. Thus taxes on goods and on income from production and not on land value end up subsidizing land value and shifting wealth from the poor to the rich.
Thus if the 9-9-9 plan increases wealth, the gains would go to the rich at further expense to the poor. The worst part of the plan is its continuation of the massive subsidy to land value, and even if the plan generates more growth, the benefit will ultimately go to higher rent and land value, generating an even greater real estate boom to be followed by another big crash.
So let's say in German: Nein! Nein! Nein! Let's also say Zero, Zero, Zero! Zero tax on wages, zero tax on goods, zero subsidy to land value. The tax emperor appears to be dressed to the nines, but like in the story of the naked emperor, the cloth is imaginary. -- Fred Foldvary
Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
Man cannot profit from owning capital without using it, which means to employ labor. Man can profit from owning land without using it, which means unemployed labor. A low tax on land will not add one foot to the State; a high tax will not drive one acre away. A low tax or no tax on capital will bring to the State the means of developing its resources and employing its labor; a high tax will drive capital away and leave unemployment.
Which is your town/city/county/state/nation going to do? Will she listen to the land speculators, and lower the taxes on vacant land? Or will she give heed to the business men and farmers, and lighten the taxes on industry? Much depends upon her decision.
adapted from Tax Facts, January, 1928.
Think about the unused and underused land within the borders of your town or city. It is not neutral. It is a drag on your economy and contributes nothing, whil the owner sits and waits for someone to meet his price. It is held out of use to create an unearned windfall for its owner.
We ought to examine our tax policies for the incentives which make it possible for some owners to put the land in their portfolio to little or no use. I'm not concerned with land of genuinely little value, but with land served by infrastructure that we-the-people have taxed ourselves to provide and maintain. We accord landholders a privilege in taxing them but lightly, month in and month out, on the value of their holdings. (At the same time, we make a big mistake by taxing the improvements and "personal" property, including vehicles and business equipment, of those who have improved their land to make it useful and productive. I am reminded of Enoch Ensley's important statement:
NEVER TAX ANY THING THAT WOULD BE OF VALUE TO YOUR STATE, THAT COULD AND WOULD RUN AWAY, OR THAT COULD AND WOULD COME TO YOU.
Our elected representatives ought to be reminded of that, and then asked to ponder how to implement it. I commend to their attention Fred Foldvary's article "The Ultimate Tax Reform."
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.
Here is an excerpt from an article in the NYT of 8/12/2010. I am sharing it here for several reasons:
It demonstrates how ignorant most of us are about land economics;
It demonstrates how important this ignorance has been, and how expensive it has been to ordinary people.
Here's the NYT excerpt:
Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.
Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”
Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.
“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”
But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.
“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”
Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next. “I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”
Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”
How soon will we forget the learning experience we've just undergone as a nation, as an economy, as a society? When will we start to make sure that ordinary people understand the importance of land, and the workings of the market in land, and, most important, how this force can be turned to public good?
Those who are familiar with the ideas of Henry George know this, and most others are operating in ignorance. I do not say this as an accusation; I say it in sadness. Fortunately, ignorance can be remedied.
And if enough of us studied the topic, perhaps we would reach the conclusion that this is a fine time to enact Henry George's wise remedy, so that this will never happen again.
Where might one study this? If you're in NYC or Chicago or Philadelphia, classes are available at the Henry George School of Social Science. Otherwise, you might explore the online course offerings at the Henry George Institute or start reading on your own. Start with Progress and Poverty, in a modern abridgment or one of the essays in George's book Social Problems.
A few more lifts from the same article:
“No one had ever seen a national real estate bubble,” said Keith
Leggett, a senior economist with the American Bankers Association. “We
would love to change history so more conservative underwriting practices
were put in place.”
Since the lender made a bad loan, Mr. Hairston argues, a 10 percent
settlement would be reasonable. “It’s not the homeowner’s fault that the
value of the collateral drops,” he said.
It might be relevant to note that it isn't the homeowner's fault when the value of the collateral rises, either. He didn't create that value; it is due to the increase in the value of the land, which is a result of the activity of the community, not of the landholder or his tenant.
A lot of people have grown wealthy on our ignorance. The FIRE sector loved it, and there are those who are ready for a repeat of the upside of the bubble. Like Aleve, it works for them!
It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.
I am sometimes amazed by the extent to which people who I wouldn't expect to speak to the issues that matter to ordinary people actually publish something relevant. David Stockman said something I didn't expect to hear from something in his party.
The four deformations:
IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.
More fundamentally, Mr. McConnell’s stand puts the lie to the Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.
This approach has not simply made a mockery of traditional party ideals. It has also led to the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four great deformations of the national economy, and modern Republicans have turned a blind eye to each one.
The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. ...
The second unhappy change in the American economy has been the extraordinary growth of our public debt. ...
The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. ... But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. ...
The fourth destructive change has been the hollowing out of the larger American economy.
The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing — as suggested by last week’s news that the national economy grew at an anemic annual rate of 2.4 percent in the second quarter. Under these circumstances, it’s a pity that the modern Republican Party offers the American people an irrelevant platform of recycled Keynesianism when the old approach — balanced budgets, sound money and financial discipline — is needed more than ever.
When are we going to turn our attention to creating a stable economy in which all of us can prosper -- those who do the basic work which needs to be done but doesn't required extended specialized training or long experience, as well as those whose education or training equips them for more specialized jobs? We will continue to need farm workers, and janitors, and fast food workers, and dozens of other occupations, and it seems to me that we ought to favor a structure which makes a decent life possible for them as well as the more trained and educated. When 1%, 5%, of us get such a large portion of the products of the total labor in this land, something is wrong. The amount that is left to be divided among the other 99% or 95% is insufficient to properly compensate everyone for their labor. A few are reaping what they didn't sow, and we maintain the impolite fiction that they somehow earned it.
And there ARE answers. There ARE solutions. I happen to think that the best solutions -- probably the only solutions, but I'll leave it to you to propose something better -- are likely to come from the thought associated with Henry George. He was not original; he's part of a long continuum of people over many centuries who saw things similarly. But he was perhaps the most eloquent, and, in his first book, Progress and Poverty, very methodical and thorough in laying out his analysis. We, as 21st century people of good will, would do well to understand his analysis and argument, and see for ourselves whether we have a better answer to offer.
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.)
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.
More about what our best and brightest have been doing. Are you old enough to remember the days when our b&b went into research, medicine, or engineering, or other roles in which they could put their talents to use for the benefit of their fellow human beings? Krugman writes,
Sure enough, last week the Securities and Exchange Commission accused
the Gucci-loafer guys at Goldman of engaging in what amounts to
I’m using the term looting in the sense defined by the economists
George Akerlof and Paul Romer in a 1993 paper titled “Looting: The
Economic Underworld of Bankruptcy for Profit.” That paper, written in
the aftermath of the savings-and-loan crisis of the Reagan years,
argued that many of the losses in that crisis were the result of
Was the same true of the current financial crisis?
Most discussion of the role
of fraud in the crisis has focused on two forms of deception: predatory
lending and misrepresentation of risks. Clearly, some borrowers
were lured into taking out complex, expensive loans they didn’t
understand — a process facilitated by Bush-era federal regulators, who
both failed to curb abusive lending and prevented states from taking
action on their own. And for the most part, subprime lenders didn’t
hold on to the loans they made. Instead, they sold off the loans to
investors, in some cases surely knowing that the potential for future
losses was greater than the people buying those loans (or securities
backed by the loans) realized.
What we’re now seeing are accusations of a third form of fraud.
We’ve known for some time
that Goldman Sachs and other firms marketed mortgage-backed securities
even as they sought to make profits by betting that such securities
would plunge in value. This practice, however, while arguably
reprehensible, wasn’t illegal. But now the S.E.C. is charging that
Goldman created and marketed securities that were deliberately designed
to fail, so that an important client could make money off that failure.
That’s what I would call looting.
Krugman concludes with,
The main moral you should draw from the charges against Goldman,
though, doesn’t involve the fine print of reform; it involves the
urgent need to change Wall Street. Listening to financial-industry
lobbyists and the Republican politicians who have been huddling with
them, you’d think that everything will be fine as long as the federal
government promises not to do any more bailouts. But that’s totally
wrong — and not just because no such promise would be credible.
For the fact is that much of the financial industry has become a racket
— a game in which a handful of people are lavishly paid to mislead and
exploit consumers and investors. And if we don’t lower the boom on
these practices, the racket will just go on.
Perhaps if we make financial engineering less lucrative, some of the next generation of smart kids will find other ways to apply their talents. They might even be able to grow the pie, instead of merely gobbling larger shares for themselves.
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).
Don't miss this wonderful article about Elizabeth Warren, law professor at Harvard Law who first came to my attention when she and her daughter wrote a book called "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke" (2003). I read some of her material at TPMCafe, and watched her appearance on Bill Moyers program, which gave me a sense of the human being behind some important writing and research. Later, she co-authored the study which connected a large share of personal bankruptcies with lack of effective health insurance.
And I share the enthusiasm of the readers' comments there.
If we define the "middle class" as the middle 60% of the income distribution, our "middle class" has
less than 26% of the aggregate net worth, and
about 36% of the pretax income.
If we define the "middle class" as the middle 50% of the net worth distribution, our middle class has
less than 14% of the aggregate net worth, and
less than 34% of the pretax income. [data source: 2007 Survey of Consumer Finances Chartbook]
Another recent article about Warren, includes this quote:
"She truly believes that markets can work, but she knows that
participants in the market have strong incentives to rig things in
their favor," says Adam Levitin, a former student of Warren's who
specializes in bankruptcy law at Georgetown University. "If participants have a sweet deal, they'll be upset at anyone who wants to level the playing field."
While Warren sees some of that level playing field clearly -- and definitely has a gift for communicating what she sees -- IMHO, she doesn't yet see most of the land-related aspect of it. She senses it, in the chapters of Two-Income Trap which deal with middle-income couples bidding up the price of housing in good school districts, but she doesn't see the half of it yet.
I hope that she might buy (or download -- see the next link) a copy of the modern abridgment of Henry George's landmark book on political economy, "Progress and Poverty" for some airplane reading. (Political economy is the science which deals with the natural laws
governing the production and distribution of wealth and services.) One can also read the book online or download MP3s.
Most people don't see the "sweet deal" which has produced the income and wealth distributions described above. But George explains it very clearly.
While the working paper is focused on modeling what has happened to various parts of our population since the 2007 SCF (this is not an analysis of the return to the 2007 panelists in 2009, which will be out later in the year), what I'm presenting here is actual SCF data. It comes from Tables 5 and 7.
1. Percent of households
2. Percent of
households holding mortgage debt:
Median ratio of debt to income:
4. Percent of HH with debt payments >40% of income
Households by Income Percentile:
Percent of households holding debt:
2. Percent of households holding mortgage debt:
3. Median ratio of debt to income:
4. Debt payments >40% of income
Age of Head:
Percent of households holding debt:
45 to 64 years
2. Percent of households holding mortgage debt:
45 to 64 years
3. Median ratio of debt to income:
45 to 64
4. Debt payments >40% of income
45 to 64 years
Do you notice the trend? An increasing proportion of us are helping to make the FIRE sector -- the shareholders in the finance, insurance and real estate businesses -- wealthy.
Nearly half of retirees have debt, up 1/3 from 1989, and median debt has n tripled. Nearly 3 in 10 retirees have mortgages, and 15% of retirees (or is that of the retirees with debt?) have over 40% of their income devoted to debt payments.
Among our young people -- <45 years of age, 85% have debt, and at the median, their debt is 1.3 times their income, more than double the ratio 18 years earlier.
A wealth concentrating machine. The FIRE sector -- the banks, the insurance companies, the real estate interests -- are have been permitted to create a giant wealth machine, too big to fail.
But not too big to correct. There ARE things that can be done. I encourage you to take a look at Mason Gaffney's new book, After the Crash: Designing a Depression Free Economy. (read the interview linked at http://www.masongaffney.org/, or find the book at schalkenbach.org's bookstore.
2/23: I added a postscript to this one ... scroll down!
David Cay Johnston, first known to many of us as the tax reporter for
the NYT, and more recently the author of Perfectly Legal and Free
Lunch, and as a columnist for tax.com, last week brought to popular
attention a story which the IRS posted to its website without the
normal fanfare which announces a new piece of information there. Even
more interesting is the fact that it represents a return to the IRS
reporting data which was customarily furnished during the Clinton years
and suppressed by the Bush administration, who brought us substantial
tax cuts for the highest-income Americans -- and for the highest-value
(top 1%) decedents. As Andrew Leonard put it in Salon,
This is America, right? We've come to expect shocking statistics on income inequality. They're practically our birth right.
But then came the kicker:
The annual top 400 report was first
made public by the Clinton administration, but the George W. Bush
administration shut down access to the report. Its release was resumed
a year ago when President Obama took office.
Because you know, if you are going to reward the richest Americans with
tax cuts, it's best if you keep the rest of us in the dark as to just
how much money they're making, and how little they are paying Uncle Sam.
The new information relates to the top 400 income taxpayers. The data
published brings forward the series data, previously published for 1992
to 2000 (See http://www.irs.gov/pub/irs-soi/00in400h.pdf, published in 2003) to 2007.
Here are some of the highlights of the 2007 data:
The adjusted gross income threshold for being among the top 400 taxpayers rose from $24.4 million in 1992 to $138.8 million in 2007. In constant dollars, that was approximately a quadrupling in 15 years.
The average AGI among the 400 taxpayers rose from $46.8 million (192% of the cutoff) in 1992 to $344.8 million in 2007 (248% of the cutoff).
In 1992, the total AGI of the 400 represented 0.52% of the total
AGI for all taxpayers. In 2007, the 400 represented 1.59% of the total
AGI. In those years, total taxpayers increased from113.6 million to 143.0 million. The 400 represented .00035% of the households in 1992, and .00028% in 2007.
Over the same period, the average AGI for the remaining taxpayers increased from $31,781 to $59,798.
Salaries and Wages represented 26.22% of the Top 400's AGI in 1992; by 2007, that had decreased to 6.53% -- an average of $29.4 million per taxpayer, for the 306 who reported such income. 306 is the lowest figure since 1992.
All 400 reported Taxable Interest income. On average, they reported
$27.1 million. In total, their taxable interest exceeded their
salaries and wages. In total, their taxable interest was 4.04% of
total US taxpayer interest.
All 400 reported Dividend income, and their average was $24.5 million. Their dividends were 4.14% of total US taxpayer dividends.
The vast majority of their reported taxable income was in "Net
capital Gains less Loss in AGI": an average of $228.6 million each.
Their capital gains equaled 66.29% of their AGI, and 10.07% of total US
taxpayer capital gains.
Virtually all of their capital gains -- $226.4 million on average --were subject to preferential rates; this means they were "long-term" holdings, and were taxed at 15%. [And of course none was subject to FICA, on which the vast majority of those who labor pay 14% (more precisely, (7.65*2)/107.65, or 14.2%).]
49 reported net business income, averaging $3.2 million. More, 84,
reported net business losses, averaging $2.6 million -- they
represented 3.06% of the US aggregate.
202 reported Partnership and S Corporation net income, averaging $83.0 million. 185 reported Partnership and S Corporation net losses, averaging $25.2 million -- 3.52% of the US aggregate.
Their itemized deductions averaged $49.4 million, 1.46% of the US
aggregate; the average itemized deductions limitation was $5.4 million
-- they represented 5.4% of the US aggregate.
On average, they claimed "taxes paid" deductions of $13.9 million, and "interest paid" deductions of $9.9 million. Their "taxes paid" deductions represented 1.17% of aggregate deductions for taxes paid.
Almost all claimed contributions deductions, averaging $28.5 million -- 5.73% of the US aggregate. (Interesting that this is roughly equal to salaries and wages, or to dividend income, or to taxable interest income!)
Their Taxable Income grew from an average of $42.2 million to $296.2 million. In constant dollars, it increased 376%. In 1992, their taxable income represented 0.70% of the aggregate; by 2007, theirs was 1.95% of the total.
Their federal income taxes averaged $57.3 million; in total, the 400 represented
2.05% of the total paid, up from 1.04% in 2007. [Compare the former
percentage to their 1.59% share of AGI, and their 1.95% share of
Taxable Income.] Their average federal tax rate was 16.62% in 2007, down from 26.38% in 1992.
If we add the amount they claimed as a deduction for taxes paid to their federal income tax, their taxes represented 20.57% of their AGI in 2007, down from 32.12% in 1992. Their other taxes paid dropped from 5.74% of AGI in 1992 to 3.95% in 2007.
These 400 taxpayers paid a total of $28.4 billion in taxes,
federal and other, in 2007, on AGI of $137.9 billion and taxable income
of $74.7 billion.
In 2007, they paid $28.4 billion in taxes, federal and other.
Had their tax rate in 2007 equaled their tax rate in 1992, they would
have paid $44.3 billion in taxes, federal and other, or about $110.7
million on average, instead of $70.9 million.
Johnston's Tax.com article also points out:
The top 400 reports understate actual top incomes because of deferral
rules. For example, managers of offshore hedge funds who deferred their
gains may not be counted in the top 400 reports, which are based on the
figure on the last line of the front page of Form 1040.
At least three hedge fund managers made $3 billion in 2007. It is not known how much, if any, of their income they deferred.
Only 7 of the top 400 have shown up in the report every year, the IRS
data showed. Of the 6,400 returns covered by the 16 years of the
report, the IRS said that 2,515, or almost 40 percent, appeared one
The previous report (before the Bush administration suppressed
publication), said that less than 25% of the then 3600 returns appeared
more than once between 1992 and 2000.
A very useful table in DCJ's column shows that the income of the bottom
90% of taxpayers has increased by a mere 13% (in constant dollars) over
the 16 years.
How much of this income do you think they spent on consumer goods?
What do you think they did that helped stimulate our economy?
How many people do you think they employed, and what sort of wages did they pay?
What do you think this year's portion of each fortune will be worth upon the death of the recipient?
What do you think they invested their windfalls in? I'm guessing that a lot of it went into land -- urban land -- and non-renewable natural resources of one kind or another -- that which Will Rogers and others have pointed out is not being made anymore.
What industries do you think these fortunes are coming from? How have these people benefited from the boom-bust cycle which has victimized millions of Americans? What privileges have we-the-people granted them to reap what we-the-people sow? To what degree have they benefited from privatizing the commons -- things which rightly belong to all of us? What sort of contribution do you think these companies have made to pollution, to personal bankruptcies, to concentrating America's wealth in the pockets of a relative few? How many jobs have they moved offshore? Are they being paid in shares or stock options that burden their employer's shareholders? What sort of wages have they paid their employees at various levels on the pyramid? What sort of influence will they have over our next elections -- Senators, Congressmen, Governors, President, etc., -- and over future decisions to go to war in various resource-rich parts of the world? They can certainly afford to spend to influence public opinion in ways which benefit their interests, and to guarantee that they won't be taxed heavily, even if workers, who end up with little, are.
The article lists a number of people who will likely be in the 2008 second tier -- not the top 400, but clearly well into the top half percent, based on their selling Goldman Sachs stock; the article isn't clear about what their basis might have been in the stock -- but one sold shares worth $17.6 million plus $55.7 million (he may not be an American). Another, who ran the merchant banking business, sold $29 million worth. The article suggests that most of these sellers still have considerable amounts of Goldman Sachs stock; Lloyd Blankfein's 3.3 million shares are now worth more than $500 million. Should he sell, he'd be well onto the Top 400; the 2007 threshold was $139 million.
I'm guessing that many on the top 400 list in any particular year are people who have sold a privately held business to a large corporation. They've paid 15% on the capital gains, and will likely rail against paying an estate tax on the other 85%.
The term "millionaire" used to always be a reference to net worth. Recently, we've started to see it used to refer to people with annual incomes of $1 million or more -- usually in articles suggesting that a significant and growing percentage of us fall into that category and isn't America wonderful?
In 2007, according to the Federal Reserve Data, only 9% of U.S. households had at least $1 million in net worth. That
9% made the majority of charitable contributions, owned the majority of
equity in unincorporated and closely held businesses, and had a
disproportionately large share of investable assets as compared with
the remaining 91% of the population. These “wealthy households” made
53% of all household charitable contributions ($117 billion). They also
owned 93% ($13.7 trillion) of business equity owned by all households
in unincorporated and closely held businesses, and they had 41% ($10.3
trillion) of investable assets owned by all households, i.e. liquid
assets, stocks, bonds, and mutual funds. Typically, wealthy households
do not have million dollar incomes. In 2006, the average wealthy
household income before tax amounted to $354 thousand, while the median
amounted to $159 thousand. Only 6% of millionaire households made as
much as $1 million in 2007. The pattern is similar for unearned income.
The average household unearned income of millionaire households was
$145 thousand in 2006 and the median was $18 thousand. Only 6% of
wealthy households had unearned income of as much as $500 thousand.
Nevertheless, wealthy households received 86% of total unearned income received by all households in 2006.
Among wealthy households, both household income and household assets
are importantly related to charitable giving, but assets, especially
investable assets, are much more important than income. Statistically,
the relationship between the value of assets and the amount of
charitable giving is roughly 7 times stronger than the relationship
between the level of income and the amount of charitable contributions.
Put simply, millionaire households make charitable contributions more
because they are wealthy than because they earn a high income.
Most (more than 90%) millionaires acquired their wealth in their own
lifetimes through business, investment, or service as corporate
executives rather than through inheritance. The majority became wealthy
through growing their own business or investing in businesses of
others. They tend to be entrepreneurial and agents of economic
expansion. In earlier paragraphs we saw that as a group they own 93% of
the equity in unincorporated and closely held businesses owned by all
households in the U.S. Even in retirement millionaires participate in
business opportunities. They contribute to local economic development
as a source of funds, as a potential investor, and as an agent for
creating new businesses and expanding established ones.
This seems to be a paean to trickle-down economics, and even those of us who don't believe in trickle-down economics can be tempted to accept that, since our wealthiest fellow citizens have such a large fraction of the total net worth, trickle-down must be the only relevant model for understanding wealth.
I question the realities behind the statement that "Most (more than 90%) millionaires acquired their wealth in their own
lifetimes through business, investment, or service as corporate
executives rather than through inheritance."
Many of them, I suspect, were given college educations by their parents or grandparents; a private college education today costs about $200,000. Not an insubstantial figure. Graduate school runs about the same amount, particularly in the private universities or for out-of-state students at public universities.
Many of them, I suspect, were given the 20% down payment on a home either by the government or by their parents or other relatives. It might have been 20% of $80,000 or $125,000, which might sound trivial in relation to their 2007 $1,000,000 corpus -- but it made a big difference which the paragraph above fails to acknowledge. (Paying off the other 80% made a relatively small contribution to their "home equity.") The appreciation of the land under that home may be a major contributor to their net worth.
We may call that "investment" but it is really the legalized privatization of that which one's community and one's local, state and federal governments' spending has created. Self made men? Hmph! And the startup funds for their businesses may have come from borrowing on that land equity. -- and of course that interest is deductible on one's federal and, likely, state income taxes. A nice subsidy, huh? And the most profitable businesses tend to be those who own the building and land on which the business is conducted -- and the sites of others' businesses too! Those folks may work hard -- almost as hard as their employees -- but they also get the benefit of the local economic activity as it drives the selling and rental value of their landholdings upward. Bu we permit them to call themselves self-made. Aren't we generous? Or would it be more accurate to say that we're wearing blinders?
We should set the playing field level between landlord businesses and tenant businesses. (Land value taxation would do this.) Landlords do not create land! To permit structures which compensate them as if they do is dumb.
A bit later, the study continues,
According to the Survey of Consumer Finances, sponsored by the Board of Governors of the Federal Reserve, on a national basis households
with net worth of at least $1 million, headed by a person age 60 or
older, comprise 4% of all households but donated approximately 25% of
all household charitable contributions in 2007 (the most recent year for which data is available).
The first paragraph of their 3-paragraph conclusion reads:
During the December 13, 2009 edition of “Meet the Press” former Chairman of the Federal Reserve, Alan Greenspan, touted the importance of rising stock prices to economic recovery. In a broader context Greenspan’s words highlight the importance of wealth to economic growth. During decades of research at the Center on Wealth and Philanthropy we have consistently found that wealthy households contribute disproportionately more to charitable causes both from their household assets and from their foundations, trusts, and donor advised funds.
Perhaps we would have less need for charity if we had a less concentrated distribution of wealth in America. Perhaps, if we funded our local, state and federal spending via taxes on the value of the commons that individuals and corporations and other domestic and foreign entities claim as their own -- instead of taxing sales and wages and buildings -- we'd create more opportunity for more people to earn adequate incomes.
Until we do that, though, shouldn't we be collecting back this land appreciation once per generation, through taxes on the largest estates?
This one has apparently made the rounds several times, variously placing the bar in Berlin or Detroit. I thought it worth sharing. It explains the real estate bubble.
Heidi is the proprietor of a bar in Detroit. She realizes that
virtually all of her customers are unemployed alcoholics and, as such, can no
longer afford to patronize her bar. To solve this problem, she comes up with
new marketing plan that allows her customers to drink now, but pay later. She
keeps track of the drinks consumed on a ledger (thereby granting the customers
Word gets around about Heidi's "drink now, pay
later" marketing strategy and, as a result, increasing numbers of customers
flood into Heidi's bar. Soon she has the largest sales volume for any bar
By providing her customers' freedom from
immediate payment demands, Heidi gets no resistance when, at regular
intervals, she substantially increases her prices for wine and beer, the most
Consequently, Heidi's gross sales volume
increases massively. A young and dynamic vice-president at the local bank
recognizes that these customer debts constitute valuable future assets and
increases Heidi's borrowing limit. He sees no reason for any undue concern,
since he has the debts of the unemployed alcoholics as collateral.
At the bank's corporate headquarters, expert traders
figure a way to make huge commissions, and transform these customer loans into
DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and
traded on international security markets. Naive investors don't really
understand that the securities being sold to them as AAA secured bonds are
really the debts of unemployed alcoholics.
bond prices continuously climb, and the securities soon become the
hottest-selling items for some of the nation's leading brokerage houses.
One day, even though the bond prices are still climbing, a
risk manager at the original local bank decides that the time has come to
demand payment on the debts incurred by the drinkers at Heidi's bar. He so
Heidi then demands payment from her
alcoholic patrons, but being unemployed alcoholics they cannot pay back their
drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced
into bankruptcy. The bar closes and the eleven employees lose their jobs.
Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in
price by 90%. The collapsed bond asset value destroys the banks liquidity and
prevents it from issuing new loans, thus freezing credit and economic activity
in the community.
The suppliers of Heidi's bar had granted
her generous payment extensions and had invested their firms' pension funds in
the various BOND securities. They find they are now faced with having to write
off her bad debt and with losing over 90% of the presumed value of the bonds.
Her wine supplier also claims bankruptcy, closing the doors on a family
business that had endured for three generations, her beer supplier is taken
over by a competitor, who immediately closes the local plant and lays off 150
Fortunately though, the bank, the brokerage
houses and their respective executives are saved and bailed out by a
multi-billion dollar no-strings attached cash infusion from their cronies in
Government. The funds required for this bailout are obtained by new taxes
levied on employed, middle-class, non-drinkers who have never been in Heidi's
Ah -- but some of them have benefited by being able to finance their spending through home equity borrowing made possible by Heidi's high prices. Their hands are not completely clean.
Having said that, let's study so that we know what created this bubble, and how to avoid doing the same thing again. Start at http://www.masongaffney.org