By this, I mean fixing the problem of low wages -- wages insufficient to support an individual or a family in conditions we consider acceptable on a reasonable number of hours of labor per week. I don't mean minimum wage legislation, or living wage legislation, both of which I regard as well-intentioned but ultimately destructive for the community they intend to help. I don't mean measures like the Earned Income Tax Credit, either. It appears that people must jump through high hoops to get those dollars (which often seems to require professional advice, at a price), and then a significant portion of the money goes not to the wage earner but to his tax preparer/advisor, in the form of fees and interest.
No, what I mean is changing our system so that wages and the cost of living come more into line with each other. Measures which will tend to increase wages, and decrease the cost of housing and improve its quality and quantity.
At the moment, as we structure our economy, potential entrepreneurs compete with each other for scarce high-quality commercial sites and for usable building space on those sites; owners of land can afford to sit and wait to get their desired asking price, because of the low carrying costs on keeping land underused (the part of the property tax that falls on land value), and because all landholders have a disincentive to developing their land in the form of the part of the property tax that falls on buildings. The entrepreneur must pay the owner of the site he needs in order to make a "go" of his business, and then, if he is successful, must then pay taxes on his profits -- and in the meantime, must pay out in wage costs a lot more than his employees get to take home, even his lowest-wage employees. In many places, his product or service he is in business to provide is also burdened with a sales tax, which discourages the entrepreneur, by suppressing demand -- a deadweight loss, in the terms of economists. So people who want to work are competing with each other for a relatively limited supply of jobs, particularly for jobs with low education or skill requirements. Wages are driven downward.
The addition of new immigrants, who may have a lot of skills but lack language facility and/or the documents which allow them to work in their field of expertise, produces multiple problems: they compete for housing, driving residential rents higher; they are willing to work for low wages in order to meet their own or their families' needs, and live under conditions that others would find unacceptable (e.g., 4 or 6 or more sharing a single room, perhaps sleeping in shifts). Employers benefit; they have people competing for jobs, so they needn't increase wages to get the workers they need.
A landholder can afford to sit and wait to get his price for his vacant lot. He can cover his property taxes by using it as a parking lot for some neighboring business, while he bides his time. The parking lot might employ a person or two, at least part time, to collect the fees, but the land isn't producing nearly what it could for the community. Or he can keep the sort of building known as a "taxpayer" -- a diner in a 5-story neighborhood, for example -- until he is good and ready to develop the land, or sell it to finance his grandchild's tuition.
Most of us are so used to this state of affairs that we don't realize there is an alternative, an intervention that could turn this around. (Air to the bird, water to the fish.) What's the alternative? A shift in how we tax and what we tax. Lift the tax burden off those activities we mean to encourage. Place the tax burden on revenue bases that won't be deadened by the tax burden. Untax the buildings -- lighten the millage rate on buildings. Untax wages. Untax sales.
Think about the effects of such a change.
1. The landholder with the vacant lot downtown will start to feel the heat. A gentle flame at first. His property tax is going up, and his land isn't producing enough income to cover it. If he still has high hopes for a high price from that site someday, he can pay the tax from his other assets, and continue to bide his time. But if not, he may start to think about building something on it. Maybe something modest and temporary -- a "taxpayer" -- or maybe something more.
2. The landholder with a good lot occupied by obsolete buildings will find that the rent he is receiving on a 1-story or 2-story older building in what is now a 5-story neighborhood is just not sufficient to cover his taxes any more. He'll start thinking about redeveloping it.
3. As time goes on, and the tax burden shifts off buildings (and, ideally, off sales and off wages), and onto land value, the incentives to the landholder -- who used to be "in the driver's seat," deciding whether or not the community moves ahead -- begin to motivate him to do something. There is less, or no, annual penalty on the building itself, so he starts to think about building. And as the taxes on his neighbors' 5-story buildings come down and his taxes rise, he starts to see the wisdom of putting a 5-story building on his choice site, too.
4. The addition of a couple of new buildings downtown -- 5-story where there had been none or 1-story -- creates opportunities for entrepreneurs whose business plans depend on having good foot traffic; businesses that would simply not thrive out on the local fringe; businesses that require specialized equipment or inventory which rely on drawing patrons from a 360 degree radius. And the landlords are going to be competing to offer them space, driving monthly space rents downward. Some of those new commercial spaces will be occupied by local start-ups. Others will be occupied by corporations who are drawn by local amenities and the availability of affordable space, as well as a good labor force.
5. Some of the newly motivated landholders will examine the market to see whether they might want to develop residential offerings -- midrises or highrises replacing their block of Victorian houses that have been turned into multi-family rentals (a/k/a taxpayers). The first such building might be luxury housing, if there is a demand for it. But soon the market for luxury housing will be sated, and still there will be land that is being underused (perhaps not in the central business district -- perhaps in the next ring) -- and landholders feeling some tax heat. Landholders will scratch their heads and figure out that for some of those sites, housing for the middle class -- for rentals or for sale as condominiums -- is their best bet. They might seek to serve a particular market -- seniors, for example -- with housing specially suited to their particular needs and preferences. Doing so will draw some seniors from outside the existing community, drawn by modern, well-built affordable housing in proximity to whatever local amenities make the town or city special. But some customers will be local people who now find it appealing to downsize from the family-sized house and yard in which they raised their family, with all the yardwork, maintenance, plowing, heating and cooling bills that go with an older home. They will sell to younger people who can use that larger house and yard, located near good schools and jobs; they will not need to locate on the fringe of town, where the schools are new and unestablished, and sewers and city water need to be extended. And soon, too, some landholders will find themselves motivated to build housing that is affordable for people throughout the lower part of the income spectrum. The density already created by the multi-family housing downtown will have lead to the kind of density which makes public transportation realistic and effective. Win, win, win.
6. All of this activity creates jobs:
a. First in the redevelopment of the sites -- construction jobs, jobs for architects, jobs for real estate brokers, jobs for people directing traffic at the downtown job sites.
b. The available commercial space attracts entrepreneurs and professionals, who can afford the rent because landlords are now competing with each other for tenants. They create jobs in their budding businesses and practices -- support staff, other professionals, sales people, etc.
c. The landlords need to provide services to their tenants -- building maintenance, daily janitorial services, perhaps doormen, security, etc. -- creating permanent jobs.
d. The increased activity -- commercial and residential -- in the community will draw other entrepreneurs -- coffee shops, dry cleaners, grocery stores, clothing stores, restaurants, theaters, bars, etc. All of these will create jobs.
e. The wages created by these jobs will encourage further division of labor -- nail salons, take-out caterers, dry cleaning delivery services, etc.
7. All this activity will also create competition among the new businesses, which will tend to keep prices down for consumers. Where three grocery chains compete for customers, prices stay lower than where shoppers only have a single option at hand.
8. The people attracted by these jobs will need housing. Some may be content to commute some distance; others will prefer to live within city limits, if they can find appealing housing at a price they can afford.
9. More people will be living in newer housing, with buildings that take advantage of the newest technologies and standards -- insulation, efficient heating and cooling, windows which keep hot and cold air in and out, buildings which withstand earthquakes, hurricanes, rising water -- buildings with shared walls, using less energy. More people will be using public transportation instead of cars for commuting. More people will be walking, promoting better health. More people will have access to more amenities.
A virtuous circle!
Who loses? I can only see one category of loser, and I don't have a lot of sympathy for him. The loser is the land speculator. That might be an individual who lives in town, watching his lots or old buildings and waiting for his opportunity, his windfall -waiting for somebody else to make him rich. It might be a widow who lives modestly off the rent from an obsolete building. It might be family trust for a family which has long since retired to Florida or offshore. It might be an absentee investor from overseas. It might be a developer who thinks that your town might be a great place to build someday, and can afford to wait. It might be a foundation, philanthropy, university endowment whose beneficiaries live elsewhere, but are betting on your town's future and not all that interested in its present . (If there are some categories of landholders we want to subsidize -- the local widow, for example, for a limited period of time and not beyond her lifetime for the benefit of her heirs -- we can design programs which do that. But let's make them fine tools, for a specific need, not blunt tools which protect the non-interests of all these other categories of inert landholders forever! Winston Churchill commented on how overworked the "poor widow" argument was, even in 1909! See Bill Batt's Property Tax Relief Measures: Answers to the "Poor Widow" argument at http://www.wealthandwant.com/docs/unindexed/Batt_poor_widow_solution.htm )
Land speculators are inert. They seek to siphon off the unearned increment -- the economic value that the local community creates. Land value taxation recycles that value locally, to fund local infrastructure and services.
The economic value of the local land can either be a perpetual fountain -- a geyser that recirculates the land value locally -- or it can be a spring, filling private swimming pools for the entire season, with a small portion of it being returned to the community in the form of an estate tax once per generation.
The landholder is inert. He doesn't create value for anyone in his role as a landholder. Only when he builds, and employs, does he make a contribution to his community. Let's motivate him to do so, instead of empowering him to sit on his nest egg, waiting for it to hatch -- some day in the distant future. Our communities can't wait that long.
Recycle that economic value locally. It is our common treasure. And as land value rises, as it does as a result of (a) population increases; (b) technological progress; (c) public investment in infrastructure and services, be it local money or federal money; (d) an active healthy local economy. There is no logic in letting anyone privatize that value.
And, to return to the subject of wages -- when entrepreneurs compete with each other for workers, wages will be higher. (As we're structured now, when wages do rise, it is the landlords who benefit, because they can raise the rents. But when we tax that land value, we recycle what today they get to privatize. And workers will be the big beneficiaries. The cost of living -- the cost of essentials like housing -- will go down, and wages will rise.
Incidentally, lest you think there is something original about my analysis, I did not invent this. These are very old ideas. David Ricardo and Henry George are two of the names you might research.
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