LVTFan's Blog

Swiss Bank Accounts

The NYT published an editorial a few days ago entitled "If Switzerland Can ..." which included a few statistics I found interesting.

American and Swiss officials have jointly agreed to a system to identify 4,450 accounts — out of 52,000 — that are most likely to have been set up to evade taxes. The Internal Revenue Service estimates that at their peak these accounts held $18 billion. American officials are keeping secret the criteria used to identify these accounts — hoping that nervous evaders will turn themselves in voluntarily before a September deadline to get a reduced fine and avoid criminal prosecution.

Let's see.  That's about $4 million per account.

That $18 billion is a rather small percentage of the holdings of America's top 1%.  The 2007 SCF (Survey of Consumer Finances, from the Federal Reserve Board) says that the top 1% of us had Net Worth of $21.864 trillion.  $18 billion is less than 0.1% of their holdings.  A trivial figure, no?

Well, it might be worth considering that $18 billion is 1.11% of the aggregate net worth of the bottom 50% of us -- $1.611 trillion.

It is also about 0.82% of the 2006 income of the bottom 50% of us.

The article goes on to say,

The Tax Justice Network, a research and advocacy organization, estimates there are $11.5 trillion in global assets hidden in offshore havens.

I wonder how much of that is holdings of Americans, and, more important, where those dollars came from.  Rent?  Natural resources?

Are 401(k)'s going to solve our retirement problems?

A recent NYT editorial about 401(k) accounts included these paragraphs:

A calculation by Gary Burtless of the Brookings Institution showed that a 401(k) participant who retired in 2008 after contributing 4 percent of pay over 40 years and investing in a conservative mix of stocks and bonds would be able to replace a fourth of his pre-retirement income. That is only half as much as a similar worker who retired during the bull market in 1999, but far better than retiring in 1974 when markets were in a swoon.

The only way to avoid wide variations in outcomes would be to develop a savings plan in which the government shared the risk — say, by providing a guarantee that returns would not fall below a certain level. The issue is complex and deserves further study and debate.

I posted this response:

We need to look deeper, or, rather, look further upstream. The problem is much deeper than this analysis goes.

We have permitted a wealth-concentrating machine to grow in our midst. It funnels what ought to be our COMMON wealth into private and corporate pockets and portfolios, domestic and foreign. What ought to belong to all of us -- the economic value of natural resources, the value of land and other things the classical economists would recognize as similar to land even though they knew nothing of electromagnetic spectrum, geosynchronous orbits, LaGuardia landing rights, (etc.) are privatized. Those who own them -- and the ownership of such things is VERY concentrated -- aren't keen on changing the system to share them with the rest of us.  (The Federal Reserve Board's 2007 Survey of Consumer Finances showed that 1% of America's households have over 1/3 of our wealth, and 10% have over 70% of it. The bottom 50% of us have 2.5% of it.)

Looking more deeply at the 2007 SCF, for the four classes of investment assets, which together represent 50.3% of household net worth -- stocks, mutual funds, retirement assets and business equity -- the top 1% of us had 45.9%; the top 5% 73.5%; the top 10% 83.1%.   And between 2004 and 2007, our top 1% received 56.5% of the aggregate increase in these four classes of assets. The bottom 50% of us got 1.5% of the aggregate increase.

401(k)s are NOT going to put a dent in that.

Looking at retirement assets alone, the top 10% of us held 59.5% of them, and the bottom 50% held 3.8%. Retirement assets represented 13.8% of aggregate household net worth. Increasing that to, say, 15% or 18% of aggregate net worth,, and increasing the share of that 15% or 18% held by the bottom 90% of us from from 40.5% to, say, 70% -- a highly unlikely event -- ISN'T going to change the outcome for us.

We need deeper reform. Nibbling at the edges may make us feel good, but it isn't going to slow down or pause or reverse our wealth concentration machine. For that, we need to understand the extent to which we are permitting the privatization of that which rightly belongs to all of us together.

I suggest starting with the ideas of a 19th century seer, Henry George. He described the wealth-concentrating mechanism, and provided a simple, elegant remedy which we ought to be utilizing today.

The Landed Gentry ... this time, in Pakistan

but Pakistan is just an example.  A standing google alert brought an article at http://www.defence.pk/forums/national-political-issues/31924-who-rules-pakistan.html which includes this paragraph:

The democracy in Pakistan is fledgling at best. There are powerful vested interests such as the landed aristocracy. A vast majority of the members of the Assemblies are landed gentry; they do not pass any legislation that hurts big landlords, nor do they allow any taxes on themselves. Then there is the military; the government survives at the mercy of the army chief.

What is so special about the landed gentry?  Here's what Henry George said:

It is a well-provisioned ship, this on which we sail through space. If the bread and beef above decks seem to grow scarce, we but open a hatch and there is a new supply, of which before we never dreamed. And very great command over the services of others comes to those who as the hatches are opened are permitted to say, "This is mine!"

and

What largely keeps men from realizing the robbery involved in private property in land is that in the most striking cases the robbery is not of individuals, but of the community. For, as I have before explained, it is impossible for rent in the economic sense — that value which attaches to land by reason of social growth and improvement — to go to the user. It can go only to the owner or to the community. Thus those who pay enormous rents for the use of land in such centers as London or New York are not individually injured. Individually they get a return for what they pay, and must feel that they have no better right to the use of such peculiarly advantageous localities without paying for it than have thousands of others. And so, not thinking or not caring for the interests of the community, they make no objection to the system.

It recently came to light in New York that a man having no title whatever had been for years collecting rents on a piece of land that the growth of the city had made very valuable. Those who paid these rents had never stopped to ask whether he had any right to them. They felt that they had no right to land that so many others would like to have, without paying for it, and did not think of, or did not care for, the rights of all. .

See also http://www.wealthandwant.com/themes/underpop/landed_gentry.htm and http://www.wealthandwant.com/themes/underpop/landlordism.htm

Nothing particularly special about Pakistan in this regard.  But perhaps it might lead us to think about America's most landed gentry, and the windfall we grant them, at the expense of the commons and the ordinary working person.

Follow the Money: A Close Look at Recent Southern California Foreclosures

31 page PDF at http://www.areuea.org/conferences/papers/download.phtml?id=2133

A May, 2009, paper by Michael LaCour-Little, Eric Rosenblatt and Vincent Yao entitled "Follow the Money: A Close Look at Recent Southern California Foreclosures" provides some interesting data about single-family residential real estate in one part of the US.

Briefly, the paper looks at loans in five southern California counties which went into foreclosure in November in 2006, 2007 and 2008.  It traces the collateral and loans from purchase to foreclosure, and provides some useful findings.  Here's their abstract:

Abstract

The conventional wisdom is that households unfortunate enough to have purchased at the top of the market during the recent housing bubble are those most at risk of default due to recent price declines, upward re-sets of adjustable rate mortgage instruments, the economic downturn, and other factors. Here we use public record data to study three cohorts of Southern California borrowers facing foreclosure in 2006, 2007, and 2008. We estimate property values as of the date of the scheduled foreclosure sale with the automated valuation model of a major financial institution and then track sales prices for those properties that actually sold, either at auction or later as REO. We find that borrowers did not, in general, buy at the top of the market and virtually all had taken large amounts of equity out of the property through refinancing and/or junior lien borrowing. Given sales prices of collateral thus far, aggregate losses to lenders will reach almost $1.0 billion dollars compared to almost $2.0 billion dollars of equity previously extracted by property owners.

They do for mortgage foreclosures what Elizabeth Warren (et al)'s, study did for understanding the role which uninsured medical expenses play in personal bankruptcy filings.  California may be a more extreme case, for reasons which relate to the perverse incentives involved in the 1978 Proposition 13 property tax limitations.  But my interest is not the same as what the authors were driving after.

I took their data and created a small spreadsheet to look at the data from a different point of view.

Their sample is composed of 4,258 properties which went into foreclosure in Novembers of 2006, 2007 and 2008.  On average, the properties in each of the three cohorts had been purchased in 2002, and for an average price of $356,200.  By November 2006, the properties which went into foreclosure that month had an average value of $519,000 (as calculated by a commercial proprietary Automatic Valuation Model).   I made the assumption that the properties which were foreclosed on in November 2007 and November 2008 had the same AVM valuations in November 2006.

My calculations proceed as follows: I compare the average 2002 purchase price of $356,200 (a weighted average of the three cohorts) with the 2006 AVM valuation of $519,000, which provides a 4-year appreciation of $162,800 per property.  Assuming that each homeowner's annual property taxes started at 1.25% of their 2002 purchase price, and rose by the Prop 13 maximum of 2% per year, they each paid, on average, $19,578 in property taxes over 4 years. 

Houses don't appreciate.  They depreciate at about 1.5% per year. They're never worth more than what it would take to reproduce them. Taking 65% as an estimate of the share of the value of single family homes in southern California which can be attributed to land (1998 was 64.9% and 2004 was 78.7% in Los Angeles, according to Davis & Palumbo, May, 2006), 65% of the 2002 purchase price of $356,200 is $231,535.  Let's assume that the house doesn't depreciate at all, to account for owner-made improvements.  Land value, then, rose from $231,535 on average in 2002 to $394,300 by 2006.

So what produced that rise in land prices? 

• Some of it has to be attributed to the increase in population during that period of time -- due to fertility, improved public health, immigration from other countries and other states.  New relationships and broken relationships both contribute to the demand for housing. Since the quantity of land is fixed, land prices tend to rise with population.
• Some of it has to be attributed to relaxed lending standards, which permitted more people to borrow more money
• Some of it has to be attributed to changes in interest rates, which permitted more borrowing for the same monthly payment.
• Some of it has to be attributed to Proposition 13, which limited property taxes to 1.0% (in practice, roughly 1.25%) of the original purchase price, with an annual increase capped at 2%.  The annual rental value of land is generally 5% of the purchase value, so the 3.75% to 4% difference gets capitalized into the selling price of the land.

But let's think, too, of why people were willing to pay more to live in these five counties.  It was due to the schools, to jobs, to the roads, the sewers, the water system, the police and other emergency services, buses and trains, airports, the courts, jails and prisons, the universities, the hospitals and libraries, and public health and a myriad of other publicly provided goods.  The homeowners as homeowners paid only about $20,000 in taxes, and received, if the AVM is correct and they sold in 2006, $162,800 in appreciation on their land. 

The study shows that those who were in the 2006 foreclosure cohort had total average housing-related debt by November, 2006, of $469,000, up from the original loans of about $334,400.  So they'd taken out an average of $134,600 by borrowing against their home equity.

Did the services which contributed to raising that land value by over $160,000 over 4 years really only cost $20,000 per property?  No.  Sales taxes, and wage taxes and other taxes also financed those services.  And they were paid not just by landholders -- the roughly half of southern California residents who own their own homes -- but also by the other half, who rent their homes from others.

So homeowners reaped a huge windfall, and those who were not homeowners ended up financing it.  And as we attempted to increase the homeownership rate by a few percent by relaxed lending standards, they got to pay another time.

Most people think there is no viable alternative.  They're so used to the current structure -- and in California, Proposition 13 is sometimes referred to as the "Third Rail" of California politics" (touch it, and you die!) that few stop to consider that our taxes are at the root of our most serious problems.

So what's the alternative?  Sanity would be for all those public goods whose effect is to support and increase property values to be financed by a tax on land value.  Justice -- ditto.  Efficiency -- ditto.

California is floundering because it can't fund its spending.  And yet these 4,258 households stood to collect from buyers, if they sold in 2006 after buying in 2002, an aggregate windfall of $693 million: I've aggregated the data for these November foreclosures and here's the story.

Total Households:	4,258
Aggregate purchase price, approx 2002:	$1,516,735,000
Aggregate down payment:	$263,551,350
Aggregate value in 2006:	$2,209,902,000
Aggregate appreciation 2002 to 2006:	$693,167,000
Aggregate 4-year appreciation as percent of down payment	263%
Aggregate real estate taxes paid (@1.25% of purchase price, rising by 2% annually)	$78,142,339
Aggregate appreciation as percent of property taxes paid	887%

Folks who think they and people like them stand to reap a gain of $700 million on an investment of $264 million in 4 years, while paying just $78 million in property taxes may not consider it to be in their best interests to shift taxes off wages, off buildings, off sales.

Had Proposition 13 not been in place, and property owners paid just 1.25% of their properties' market value each year, aggregate property tax would have been $97,500,000, or about 25% more (assuming straight-line increase from 2002 purchase to 2006 average value of $519,000).  Still a tiny fraction of the appreciation.

The study's sample was only the November foreclosures.  To approximate the figures for all the foreclosed properties in the five counties in those 3 years, one might multiply by 12.  And recall that foreclosures are still a tiny fraction of all single-family residential properties in these five counties, and that these are relatively newly purchased properties.  Think of how much could be collected in the form of a tax on land value if everyone, no matter what year they bought their property, paid at the same millage rate on their true market value, instead of some paying on values based in the 1970s.

We-the-people created that appreciation.  Should homeowners and other landholders get to keep it as if they created it?  Does the answer to that question hinge on whether the homeownership rate is 30%, or 50%, or 65%, or 75% in that particular place, or in our country as a whole?  Or is the homeownership statistic irrelevant to the justice or logic of this privatization?  (Remember that residential real estate is frequently NOT the biggest piece of this: the urban real estate owned by corporations, REITs, foreign investors including airlines and sovereign funds, pension funds, philanthropies, 150-year trusts, private equity funds and other private entities, appreciates far faster.  (Remember Leona Helmsley's description: we don't pay taxes; the little people pay taxes.)

On the other hand, when one takes into account the fact that the run-up in prices this situation has led to a situation in which all these people have been foreclosed on, a large and rising proportion of mortgages are "under water" and observers are saying that the "bust" portion of this boom-bust cycle is going to leave something like 50% of mortgage holders "under water" by 2011, perhaps one might reach the conclusion that even if one is not convinced of the justice of revising our system, one might choose it strictly on the basis of avoiding boom-bust cycles being wise.

So is the Woodstock Generation going to fix America's most serious problems?

I was a rising senior in high school when Woodstock took place. A fellow waitress in the local deli in which I worked -- Max for Snacks, in King of Prussia, PA -- took off for Woodstock, and the rest of us dreamed of doing so. 

We thought we could change the world.  Many had a vision of a society in which all could prosper, all could succeed.  We sang, we danced, we applauded, we protested.  Gradually we worked our way up.  We educated ourselves, we bought homes, we had children -- not always in that order -- and we became part of the establishment.  We bent the establishment, a bit, perhaps, to our advantage.

But we didn't correct the problems, and arguably, we let them grow worse.  We watched as the benefits of public investment -- local, muncipal, county, state, federal -- accrued not to all of us but to those who own our land and claim title to our natural resources.  We permitted corporations and individuals to lay claim to our common resources, we who grew up hearing about Jed Clampett being somehow entitled to the oil revenue, to the exclusion of the rest of us.

We're so used to the way this aspect of the world was handed to us that few of us think to question it.  And yet the privatization of the economic value of urban land and the privilege of collecting the revenue on non-renewable natural resources on which all of us are dependent together produce some of our most serious social, economic, environmental, poverty and justice problems.  Most wars are fought over these two things.

And until we come to recognize this, all we can do is put bandaids on those problems -- locally, nationally and globally.

These two things are what someone wisely referred to as "Natural Public Revenue" sources.  Yet we largely ignore them, and use taxes which set up perverse incentives -- and wonder why we can't seem to solve any of our biggest problems.

NRDC: Ranking States’ Oil Vulnerability and Solutions for Change

Ranking States’ Oil Vulnerability and Solutions for Change
http://www.nrdc.org/energy/states/files/states.pdf

A few lifts from an interesting paper.  It speaks only to oil usage related to cars, putting aside heating oil and other uses of oil.

What it misses is the fact that our incentives are aligned to create sprawl, and that until we realign them, we aren't going to get smart growth.  Readers of this blog know that the first realignment -- necessary, if not sufficient -- is a reform of the conventional property tax, shifting taxation off buildings and onto land value, followed by a shifting of more of the tax burden off sales and wages and onto land value.  When we tax land value heavily, only good things happen --

• from the point of view of the environment,
• from the point of view of efficiency,
• from the point of view of the economy,
• from the point of view of encouraging smart growth,
• from the point of view of job creation and affordable housing,
• from the point of view of dense cities and walkable cities and effective public transit which people want to use and are willing and able to rely on, day in and day out.

The NRDC is not going to achieve its goals without the tool of land value taxation.   "Targets" and "funding" are all well and good, but they don't counteract the current disincentives that our system of taxation creates.  I'd be happy to provide the NRDC folks with material which will help them understand the needed change.

Good public transit systems can be fully funded by the increased land value they create.

From their paper:

America’s dependence on oil is problematic in several ways, including the following:

• The United States has less than 2 percent of the world’s oil supplies but is responsible for about one-quarter of the world’s oil consumption.2 We import almost two-thirds of our crude oil supply from foreign countries, and more and more of the world’s future supply will come from regions that are either politically unstable or unfriendly to U.S. interests.3
• Our unstable supply of oil threatens our national economy, particularly since about 96 percent of our transportation system relies on oil.4
• Oil consumption is a leading contributor to the greenhouse gas (GHG) emissions that cause global warming. In the United States, the oil-based transportation system is responsible for roughly one-third of our global warming pollution

...

Smart growth and public transit. States can reduce oil dependence by integrating land use and transportation policies and designing them to reduce vehicle-miles traveled and promote alternatives to driving. Nineteen states, including Hawaii, Georgia, Tennessee, and Maine, have adopted smart growth measures intended to curb sprawl and reduce the associated traffic and vehicle-miles traveled. Fourteen states have created an agency or other mechanism to develop and coordinate land use policies. Six states have set targets for reducing vehicle-miles traveled. In addition, some states — led this year by New York, New Jersey, and Washington — have prioritized the funding of public transit through the allocation of state funds and/or by transferring portions of their federal highway dollars.

...

• Nineteen states have growth management acts. Among the most comprehensive ways of promoting smart growth is growth management legislation, such as Washington’s Growth Management Act (GMA). This GMA affects 29 counties (95 percent of Washington’s population) and requires, among other things, policies covering sprawl reduction, affordable housing, open space and recreation, environmental protection, natural resource industries, permit processing, concentrated urban growth, regional transportation, historic lands and buildings, and public facilities and services.13 Despite Florida Governor Crist’s weakening of his state’s growth management laws this year, growth management legislation was still one of the areas of greatest improvement from last year, when only 12 states had such laws.
• Only six states have set targets for reducing vehicle-miles traveled. For instance, the state of Washington amended its GMA to make it even more effective at lowering oil consumption, calling for reductions in per capita vehicle-miles traveled (VMT) of 18 percent by 2020, 30 percent by 2025, and 50 percent by 2050.14
• Fourteen states have an agency or other mechanism to coordinate development. Many states have recognized that several different state entities influence development, sometimes in potentially contradictory ways, and have created mechanisms to coordinate public investment that supports development. In 2003, Massachusetts established a powerful Executive Office of Commonwealth Development.15 Such coordination is a vital first step toward smart development, enabling a state to take into account the wide range of relevant influences. We encourage states to use coordinating mechanisms to promote smart growth.
• Some states have prioritized the funding of public transit. Public transit systems, such as bus, commuter rail, subway, and light rail programs, are important components in state efforts to promote smart growth and reduce oil dependence. By creating or expanding reliable and accessible public transit programs, states can reduce the number of single-passenger cars on the road, consequently lowering average VMT. And strong public transit provides a critical transportation alternative as gas prices rise. A case in point: Americans drove 1.4 billion fewer highway miles in April 2008 than in April 2007 because of soaring fuel prices; many took trains or buses instead, leading to a surge in transit ridership.16 In 2008, public transportation saw its highest level of ridership in 52 years.17

States have the ability to “flex” certain federal funds that ordinarily would be spent on highway projects and use them to pay for public transit programs. States that choose not to transfer federal funds to transit programs are not necessarily neglecting transit funding, however, as they may be spending more state dollars on transit. The best way to understand state transit prioritization is to compare the amount of total state spending (including flexed federal funds) on mass transit with the total spent on highway programs, as shown in the far right column of Table 3. By this measure, the top five states prioritizing public transit spending are New York, New Jersey, Washington, Massachusetts, and Utah.

Conservatism

"Cardinal Newman says that a conservative is a man who is at the top of the tree, and knows it, and means never to come down."

Quoted in "The Public" October 31, 1903, a few days before election day.

To that might I add that some of today's conservatives aren't at the top of the tree, but have high hopes that they will get there, and want the privilege of being held up should they somehow managed to get there.

I seem to recall reading that 19% of us consider ourselves to be in the top 1%.  And if that is so, how many more think that they will actually make it into the top 1%?? 

Lottery ticket sales and gambling revenues suggest that many of us think our best chance lies in that department, rather than in labor, saving and investment.

William Jennings Bryan, on liberty and future generations

William Jennings Bryan gave a fine speech in London in 1903 at the American Society's Thanksgiving dinner.  I thought this except, reprinted in The Public, worth sharing:

We sometimes feel that we possess a sort of proprietary interest in the principle of government set forth in our Declaration of Independence, yet the principle therein set forth was not the invention of an American mind. Thomas Jefferson expressed it in felicitous language and put it into permanent form, but the principle had been felt and thought by men before. The doctrine that men are created equal and endowed with unalienable rights and that governments derive their just power from the consent of the governed was not invented in the United States of America. It did not come from an American mind, it did not come so much from any mind as it was an emanation of the human heart. It had been in the hearts of men for ages before Columbus turned the prow of his vessel westward; before the barons wrested Magna Charta from King John. Before Homer sang, that sentiment had nestled in the heart of man and nerved him to resist the oppressor.

That sentiment was not even of human origin. Our own great Lincoln declared it in the toast, "God Himself, who implanted in every human heart the love of liberty." When God created man, when He gave him life, He linked with life love of liberty. We have received great blessings from God and from all the world, and we cannot make adequate return to those from whom we have received those gifts. It is not in our power to repay the Father above the debt we owe Him, nor can we make return to those who have sacrificed so much in the past. We cannot make return to the generations past; we must endeavor to pay our debt to the generation living and that to come. We must discharge our debt not to the dead, but to the living.

How can we discharge this debt we owe? In but one way, and that is by giving the world something equal to what we have received from the world. What is the greatest gift man can bestow upon man? Food, clothing, wealth? No. It is an Ideal that shall be with him always, lifting him to a higher plane of life: giving him a better conception of his relations to his fellow-men.

I know of no greater service that my country can furnish the world than to give it the highest ideal the world has known. And that ideal must be so far above us that it will keep us looking up all our lives; and so far in advance of us that we shall never overtake it even to the hour of our death.

Our nation must make its contribution to the welfare of the world, and it is no reflection upon those who have gone before to say we might do better than they have done. We would not meet the responsibilities of today if we did not build still higher the social structure to which they devoted their lives. The world has made progress. No longer do ambition and avarice furnish sufficient excuse for war. Today you cannot justify bloodshed except in defense of right already ascertained, and then only when every possible means for peace has been exhausted. The world has made progress. We have reached a point where the greatest man today is the man who will die not in securing something he might desire, but in defense of his rights.

We recognize the moral courage of the man who is willing to die in defense of his rights, but there is a higher ground. Is he great who will die in defense of his rights? There is yet to come the greater man who will die rather than trespass upon the rights of another man. Hail to the nation, whatever its name may be, that leads the world toward a realization of this higher ideal!

Among my "take-aways" from this is the notion that we must recognize that 2009 is not the merely culmination of all that has come before and that therefore we need not take heed of the rights of future generations, but that 2010, and 2020, and 2030 and 2100 will come, and it is in our laps, and within our capability, to begin to move the world to a society which is sustainable, equitable, just, efficient.  And if not us, who? If not now, when?

And we can start by recognizing what the structures we accept as normal do to our fellow human beings, and to us.  They favor the few with privileges which most of us don't realize are at the root of our most serious social, economic and justice problems.