LVTFan's Blog

Another Wise LTE, from 1932

A fellow named Hugo W. Noren, of Pittsburgh, wrote to the Philadelphia Inquirer, in January 1932:

To the Editor of The Inquirer:

A gentleman of your city who appears to give largely of his time to promote its welfare sends me an editorial quoting Mr. Franklin Spencer Edmonds to the effect that taxation must be stabilized and your own that taxes on real estate must be reduced.

Perhaps we shall never make any progress so long as we think of it as a tax problem.  The term "real estate," too, is confusing.  It includes land from which wealth is drawn and wealth drawn from the land.  There is no possibility of arriving at a solution if we treat land as wealth.  Land is not wealth.  It is the surface of the planet earth.  It is not produced.  No man can add an inch to it or reduce it an inch.  Wealth is produced and has no limit.  It is in our power to destroy it all or double it.

It seems necessary to grand land titles for security of possession.  But in granting such exclusive possession equity requires that an equivalent be rendered in return for the grant.  Unless such equivalent payment, called rent, is required, the possessor has an advantage over his fellows: he has a privilege.

Wherever land has a market price we know that public funds have gone astray.  Wherever public funds go astray public business must suffer.  It is no remedy to go out and punish business men, raising funds by levying penalties on production and exchange of wealth in lieu of failure to collect the public fund.

To stabilize taxes would be a guarantee to private parties a perpetual untaxed income from public funds.  Anyhow, one would hardly look for such proposal from Philadelphia, the birth place of Henry George.

To which I can only add that California's Proposition 13, which "stabilizes" the property tax, is exactly what Mr. Noren is referring to.   No wonder seniors remain in homes too large to clean, to maintain, to cool or heat, close to jobs from which they're retired and schools their children attended decades ago.  Every dollar by which their cost of living is subsidized comes out of others' pockets, in the form of higher taxes on their new neighbors, and the long commutes which younger people must endure to get from a rental they can afford or a mortgage for which they can qualify to the jobs which support themselves and their families!

The value of land is the day-to-day product of the community

The taxation of all property at a uniform rate is made necessary by the constitutions of about three-fourths of the States of the Union. The taxes on chattels, tools, implements, money, credits, etc., find their condemnation from the Single Taxer's point of view in those ethical considerations which differentiate private from public property. Where there arises a fund known as "land values," growing with the growth of the community and the need of public improvements, it is not only impolitic, it is a violation of the rights of property to tax individual earnings for public expenses.

The value of land is the day-to-day product of the presence and communal activity of the people. It is not a creation of the title-holder and should not be placed in the category of property. If population deserts a town or portions of a town, the value of land will fall; the land may become unsalable. When treated as private property the owner of land receives from day-to-day in ground rent a gift from the community; and justice requires that he should pay taxes to the community proportionate to that gift.

"Land value" or "ground rent" as the older economists termed it, is a tribute which economic law levies upon every occupant of land, however fleeting his stay, as the market price of all the advantages, natural and social, appertaining to that land, including necessarily his just share of the cost of government.

excerpt from The Single Tax Year Book (1917)

How to Bring The Cost of Housing Back within Reach of All American Families (1978)

How to Bring The Cost of Housing Back within Reach of All American Families
C. Lowell Harriss, et al.
[A pamphlet published by the Robert Schalkenbach Foundation, 1978]

Introduction
by Dr. C. Lowell Harriss, Professor of Economics, Columbia University

1. Land Supply Constraints in the United States
Excerpt from the Final Report of the Task Force on Housing Costs, William J. White, Chairman

2. The High Price of Land
by P. I. Prentice, Chairman, National Council for Property Tax Reform

3. Modernize, Don't Abolish, the Property Tax
From a report by the Subcommittee on the City of the House Committee on Banking, Finance, and Urban Affairs of the U. S. House of Representatives, Rep. Henry S. Reuss, Wisconsin, Chairman
 

Introduction
by Dr. C. Lowell Harriss

The number of Americans who lack adequate housing is much too high.  While both opportunity and promise life in the long-established principle of providing satisfactory shelter for everyone, many are still not well housed.  Population grows, and the existing stock of housing grows older.  For years to come, much new construction, expansion, and modernization will be needed.

Rapidly rising costs, however, present formidable obstacles.  One of the heaviest costs is one which also rises most rapidly.  And it is the cost of something created not by sweat and thrift, but by nature.

It is land.

The rising prices paid for land itself must be distinguished from the portion of the price of a building site which represents cost of preparation for use.  The land elements alone go up and up in price.  But land price increases do not change the quantity of land in existence.  Here is a rising price which does not add to supply.

Land is different.

In these three articles on land value taxation, the first, "Land Supply Constraints in the United States," points out that the sharp rises in land prices result in part from man-made factors.  Arbitrary, artificial, and unconstructive restrictions on land supply boost prices and threaten our housing future.  New building will therefore be kept below levels which unfettered economic conditions would otherwise achieve.  But tax policy which would encourage use, rather than underuse and withholding of land can increase the effective supply.  Need more be said?

Yes.  And in the second selection, "The High Price of Land," Mr. Prentice says more.  He points to many avenues by which the harmful effects of restricted land supply spread through the economy.  Developers and builders, laborers, supplier, subcontractors, and others all suffer.  They have less work, operate under conditions of disadvantage, and receive poorer rewards because of essentially needless obstructions to the optimum use of land.  The full and true price of land includes burdens above and beyond the dollar prices of building lots.  We shoulder burdens of lost opportunity of many kinds.  They are largely hidden but indeed real.  The quality of too much new construction deteriorates instead of improving as an advancing society should expect.  And, to repeat, the tragedy is that the rising prices for land do not create an more surface on the earth.

What to do?  The third article, "Modernize, Don't Abolish, The Property Tax," points to the reform outlined generations ago but here presented in modern form: reduce the property tax burdens on structures and make up the revenue by higher tax rates on land value.

The benefits from relying more fully on taxation of land values, rather than taxation of buildings, would include greater pressure on landowners to put land to better use.  Withholding land -- which reduces the current effective supply -- would become more costly if land value taxes were higher.  Thus some land formerly held for speculation would be sold, and new building would be encouraged on the increased supply of land.

A careful study of probable results in Washington, D. C., showed, among other things, that taxes on present homeowners would generally fall.  But this result is not the one which most justifies support for reform.  More significant and constructive would be a combination of forces producing incentives for better land use.  Upgrading of housing in older urban centers would be expected.  Positive incentives at many points would contribute to improving America's housing.

read the rest of the pamphlet:

Mason Gaffney: An Alternative Reform

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"

I see that there continue to be people who see the stupidity of Proposition 13 -- see http://www.dailyrepublic.com/opinion/letters-editor/time-for-a-petition-against-proposition-13/ Perhaps they will find this of use.  Georgists recognize Prop 13 as the antithesis of logical and just taxation.

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."

You can read more about the Poor Widow by clicking on the "widow's skirts" link at left, in the tag cloud, and by reading Bill Batt's Property Tax Relief Measures: Answers to the "Poor Widow " Argument (or the pdf version)

• 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:

Thinking about taxes and jobs

AN IMPORTANT DIFFERENCE

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."

Riches from real estate: cui bono?

As you read this one, think about the effect of California's Proposition 13, which caps the annual property tax at 1% of the assessed value (rising by no more than 2% peryear, even when land values are rising much faster), and requires the state and cities and counties to rely on sales and wage taxes.

Think, too, about what the effects of so-called "property tax relief" really are.

This comes from Tax Facts in November, 1926 --- fifty years before Prop 13, and eightly years before the crash it produced..

BUY REAL ESTATE

The real estate editor of the Los Angeles Times does his bit in boosting the city in this way:

Fact and Comment solicits your indulgence and again advises you to buy real estate. Your attention Ib called to the sale of the northeast corner of Wilshire and Hauser boulevards last week. Bought scarcely two years ago for $36,000, it turned last week for $100,000.

"No plans were made public for the improvement of the property," says the report of the deal. "We contemplate no immediate development," the buyers of the corner assert, "we consider the deal a bargain and we thought this time excellent for buying."

To add to its impressiveness, the real estate editor continues:

There is food for a little serious thinking, Mr. Wise Investor. When the professional crepehanger and the wet-blanket artist cry "Business is bad," that is a signal to  —  buy some real estate.

There you have it, the quick and simple way of building up the community: buy real estate. Never mind about putting it to productive use. Let someone else attend to that. Just buy it and hold it. It will enrich you. And if it enriches you, a citizen, it enriches the community.

Ah, but does it? The second man who sold the corner mentioned by the real estate editor is nearly three times as rich as he was two years ago, it is true; but how about the man who wishes to use that corner?

Two years ago the man who wishes to use that corner would have had to pay $6.00 a day just for the site upon which to set his building. Today he would have to pay $16.00 for the same privilege. The owner of the land might be enriched to the extent of sixteen dollars a day, but what of the public?

When the cobbler makes a pair of shoes, and the tailor a coat, each has bettered himself, and the community has been enriched to the extent of a coat and a pair of shoes. But when the speculator buys a corner for $36,000 and sells it in two years for $100,000, he may have trippled his own wealth, but what of his fellow citizens? The corner is still the same vacant lot.

Holding land idle may or may not enrich the holder. It does not enrich the community. Only the user of the land adds to the wealth of the community. One man invests $36,000 in a lot; another puts $36,000 in a building on the lot; a third stocks the building with a $36,000 consignment of furniture.

In two years the lot is worth $100,000; the building is worth $36,000, less depreciation; and the furniture is the same. Yet the community taxes all this property alike.

The speculator with his $100,000 can now buy another $36,000 lot, erect a $36,000 building, and stock it with a $36,000 consignment of furniture. But will he? Experience has taught him that only land grows in value. A building adds to the value of land, but not to itself. A stock of furniture adds to the value of land, but not to itself or to the building.

"No," the speculator will say, "the community lays the same tax burden upon property that does not increase in value, as upon property that does. I'll buy three $36,000 lots, and in two years I'll have $300,000."

Is it any wonder that the speculators among the California Realtors in their state convention at Del Monte condemned the "tax relief plan'' that would equalize in some degree the burden on industry by shifting some of the taxes on business and homes and farms to the land speculator?

It remains to be seen what the farmers, home owners and business men will say.