|Wealth and Want|
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Most of us would say that we favor policies that promote economic growth. And yet we tolerate tax policies which provide perverse incentives: polices that increase the price of land, policies that privatize what should be common property, policies that take what should be private property. How backwards we are! And then we wonder why wages fail to keep up with the cost of living, and why poverty is on the increase, and our children can't afford housing, and why wealth is increasingly concentrated in a relatively small portion of our population. Is there an alternative? Absolutely. Reduce taxes on wages -- starting with those who have the lowest incomes. Increase taxes that are on land values, which none of us can legitimately claim to have created, starting with the highest-valued land. Stop taxing profits. Start taxing what individuals and corporations take from the commons, charging for the electromagnetic spectrum and other such resources.
... What is the railroad to do for us? -- this railroad that we have looked for, hoped for, prayed for so long? ...
For years the high rate of interest and the high rate of wages prevailing in California have been special subjects for the lamentation of a certain school of local political economists, who could not see that high wages and high interest were indications that the natural wealth of the country was not yet monopolized, that great opportunities were open to all -- who did not know that these were evidences of social health, and that it were as wise to lament them as for the maiden to wish to exchange the natural bloom on her cheek for the interesting pallor of the invalid?
But however this be, it is certain that the tendency of the new era -- the more dense population and more thorough development of the wealth of the State -- will be to a reduction both of the rate of interest and the rate of wages, particularly the latter. This tendency may not, probably will not, be shown immediately; but it will be before long, and that powerfully, unless balanced and counteracted by other influences which we are not now considering, which do not yet appear, and which it is probable will not appear for some time yet. ... read the whole article
Henry George: The Single Tax: What It Is and Why We Urge It (1890)
From the Single Tax we may expect these advantages: ...
2. It would enormously increase the production of wealth--
What would be the direct result? Take this city, this State or the whole country; abolish all taxes on the production of wealth; let every man be free to plough, to sow, to build, in any way add to the common stock without being fined one penny. Say to every man who would improve, who would in any way add to the production of wealth: Go ahead, go ahead; produce, accumulate all you please; add to the common stock in any way you choose; you shall have it all; we shall not fine or tax you one penny. What would be the result of abolishing all these taxes that now depress industry; that now fall on labour; that now lessen the profits of those who are adding to the general wealth? Evidently to stimulate production; to increase wealth; to bring new life into every vocation of industry.
On the other side what would be
the effect when abolishing all
these taxes that now fall on labour or the products of labour, if we
were to resort for public revenue to a tax upon land values; a tax
that would fall on the owner of a vacant lot just as heavily as upon
the man who has improved a lot by putting up a house; that would fall
on the speculator who is holding 160 acres of agricultural land idle,
waiting for a tenant or a purchaser, as heavily as it would fall upon
the farmer who had made the 160 acres bloom? Why, the result would be
everywhere that the dog in the manger would he checked; for the
result everywhere would he that the men who are holding natural
opportunities, not for use but simply for profit, by demanding a
price of those who must use them, would have either to use their land
or give way to somebody who would. Read the entire article
Nic Tideman: The Case for Taxing Land
I. Taxing Land as Ethics and Efficiency
II. What is Land?
III. The simple efficiency argument for taxing land
IV. Taxing Land is Better Than Neutral
V. Measuring the Economic Gains from Shifting Taxes to Land
VI. The Ethical Case for Taxing Land
VII. Answer to Arguments against Taxing Land
There is a case for taxing land based on ethical principles and a case for taxing land based on efficiency principles. As a matter of logic, these two cases are separate. Ethical conclusions follow from ethical premises and efficiency conclusions from efficiency principles. However, it is natural for human minds to conflate the two cases. It is easier to believe that something is good if one knows that it is efficient, and it is easier to see that something is efficient if one believes that it is good. Therefore it is important for a discussion of land taxation to address both question of efficiency and questions of ethics.
This monograph will first address the efficiency case for taxing land, because that is the less controversial case. The efficiency case for taxing land has two main parts. ...
To estimate the magnitudes of the impacts that additional taxes on land would have on an economy, one must have a model of the economy. I report on estimates of the magnitudes of impacts on the U.S. economy of shifting taxes to land, based on a mathematical model that is outlined in the Appendix.
The ethical case for taxing land is based on two ethical premises: ...
The ethical case for taxing land ends with a discussion of the reasons why recognition of the equal rights of all to land may be essential for world peace.
After developing the efficiency argument and the ethical argument for taxing land, I consider a variety of counter-arguments that have been offered against taxing land. For a given level of other taxes, a rise in the rate at which land is taxed causes a fall in the selling price of land. It is sometimes argued that only modest taxes on land are therefore feasible, because as the rate of taxation on land increases and the selling price of land falls, market transactions become increasingly less reliable as indicators of the value of land. ...
Another basis on which it is argued that greatly increased taxes on land are infeasible is that if land values were to fall precipitously, the financial system would collapse. ...
Apart from questions of feasibility, it is sometimes argued that erosion of land values from taxing land would harm economic efficiency, because it would reduce opportunities for entrepreneurs to use land as collateral for loans to finance their ideas. ...
Another ethical argument that is made against taxing land is that the return to unusual ability is “rent” just as the return to land is rent. ...
But before developing any of these arguments, I must discuss what land is. Read the whole article
Nic Tideman: Basic Tenets of the Incentive Taxation Philosophy
Creating a More Productive Economy
The ideas we espouse are attractive not only for their embodiment of principles of justice, but also because they can be expected to lead to a more productive economy.
Economists agree that the imposition of taxes generally retards an economy. The reason for this is that with almost all taxes, it is possible for a tax payer to reduce total tax collections by doing less of whatever is taxed--work less, spend less, save less, etc. This means that taxes generate an incentive to be less productive.
With fees for the use of government-assigned opportunities, on the other hand, the only thing that a person can do to reduce the amount of money that he or she pays is to use fewer of these opportunities. But then the opportunities can be used by someone else, who will pay the fees, and total public revenue will be unchanged. There is no possibility reducing total government revenue by being less productive. Thus these fees can be collected without dragging down the economy in the way that existing taxes do.
Our ideas provide for the natural financing of any worthwhile public expenditure that makes a particular area more attractive or productive--parks, freeways, subways, sewer systems, etc. These public expenditures raise the rental value of land in their vicinity, and thereby raise the fees that can be collected for using the land. If the activity is worthwhile, the increase in rental values will be sufficient to pay for the activity.
Another way in which our ideas promote a more efficient economy is by eliminating the opportunity grow rich by having government promote one's own interest at the expense of others. Such distortions of the political process can occur either by persuading a government agency to spend money in a way that raises the value of land that one owns while others foot the bill, or by persuading a government agency to prohibit others from doing what one is permitted to do. In both kinds of cases, the person who promotes his or her own interest has no reason to take account of the costs that are thereby imposed on others, and typically these costs to others are greater than the self-seeking benefits. This makes the economy less productive.
Furthermore, the very possibility
of growing rich by manipulating
government action draws talented people into the effort to manipulate
government decisions, when they could be employed doing something
useful.... Read the whole article
Nic Tideman: Applications of Land Value Taxation to Problems of Environmental Protection, Congestion, Efficient Resource Use, Population, and Economic Growth
Recognition of the equal rights of all to natural opportunities, through land value taxation and its extension to charges for the use of other resources, is not only just and efficient, but has the capacity to make a major contribution to economic growth. This occurs through a variety of paths.
The most important path is that public collection of the value of exclusive use of natural opportunities provides revenue that makes it possible to remove taxes from the earnings of labor and capital. When people are taxed less, they earn more. Using data that emerged from changes in U.S. tax rates, Feldstein has estimated that the elasticity of earnings with respect to the fraction of income not taken at the margin by federal taxes is at least 1.0 (and more for workers in higher tax brackets).6 When the entity that removes a tax on labor is less than global, this action also attract labor to the region.
When taxes are removed from capital, the effect is even more powerful, as long as the entity removing the tax is less than global. Capital is extremely mobile in response to regional changes in net returns. It is highly counterproductive for any locality or nation to tax capital, because there will be virtually no effect on the return to capital after taxes. Capital will merely be driven from the taxed region until the return after taxes matches what can be obtained elsewhere. If the whole world removes taxes from capital, the resulting increase in the rate of return to capital will increase the rate of saving, but the adjustment will occur over some years.
Taxing land has an additional effect that increases the stock of capital. A tax on land represents a redistribution from living adults to the young and unborn, who will now be born with rights to land. Unless there is a perfectly offsetting reduction in the desire to accumulate assets to transfer to the next generation, this redistribution will induce the living, who now have fewer assets, to accumulate at a more rapid rate than they would otherwise do. That is, saving and capital accumulation will increase.
Taxing land also increases the efficiency with which land is used. This occurs through three paths.
Psychologically, explicit costs
tend to be more effective in
motivating efficient behavior than implicit ones.... Read the entire article
Nic Tideman: The Structure
of an Inquiry into the Attractiveness of A Social Order Inspired by the
Ideas of Henry George
A. People own themselves and therefore own what they produce.II. Ethical Questions
B. People have obligations to share equally the opportunities that are provided by nature.
C. People are free to interact with other competent adults on whatever terms are mutually agreed.
D. People have obligations to pay the costs that their intrusive behaviors impose on others.
A. What is the relationship between justice (as embodied in the ethical principles) and community (or peace or harmony)?III. Efficiency Questions
B. How are the weak to be provided for?
C. How should natural opportunities be shared?
D. Who should be included in the group among whom rent should be shared equally?
E. Is there an obligation to compensate those whose presently recognized titles to land and other exclusive natural opportunities will lose value when rent is shared equally?
F. Can a person who is occupying a per capita share of land reasonably ask to be left undisturbed indefinitely on that land?
G. What is the moral status of "intellectual property?"
H. What standards of environmental respect can people reasonably require of others?
I. What forms of land use control are consistent with the philosophy of Henry George?
A. Would public collection of the rent of land provide enough revenue for an appropriate public sector?Jeff Smith and Kris Nelson: Giving Life to the Property Tax Shift (PTS)
B. How much revenue could public collection of rent raise?
C. Is it possible to assess land with sufficient accuracy?
D. How much growth can a community expect if it shifts taxes from improvements to land?
E. To what extent does the benefit that one community receives from shifting taxes from buildings to land come at the expense of other communities?
F. What is the impact of land taxes on land speculation?
G. How, if at all, does the impact of shifting the source of public revenue to land change if it is a whole nation rather than just a community that makes the shift?
H. Is there a danger that the application of Henry George's ideas would lead to a world of over-development?
I. How would natural resources be managed appropriately if they were regarded as the common heritage of humanity? Read the whole article
John Muir is right. "Tug on any one thing and find it connected to everything else in the universe." Tug on the property tax and find it connected to urban slums, farmland loss, political favoritism, and unearned equity with disrupted neighborhood tenure. Echoing Thoreau, the more familiar reforms have failed to address this many-headed hydra at its root. To think that the root could be chopped by a mere shift in the property tax base -- from buildings to land -- must seem like the epitome of unfounded faith. Yet the evidence shows that state and local tax activists do have a powerful, if subtle, tool at their disposal. The "stick" spurring efficient use of land is a higher tax rate upon land, up to even the site's full annual value. The "carrot" rewarding efficient use of land is a lower or zero tax rate upon improvements. ...Jeff Smith: What the Left Must Do: Share the Surplus
To send a clear message to new businesses that their growth will not be unnecessarily impeded, government can permanently shift taxes off sales, income, and buildings and onto land. Since taxing land lowers its cost, business could pay this greater land tax from what otherwise would be spent on purchasing land. This higher land levy would remain affordable as long as owners use their land efficiently.
Developers argue that abundant land lowers its price and thus the property tax burden. While true, newly-available land need not be current open space. Without baring the countryside to new development, both land price and the property tax can be lowered. The price of land drops when the tax rate on land is raised. And yet this higher rate, if coupled with a lower or absent rate on buildings, does not swell the property tax burden of most residents. Indeed, this property tax shift (PTS) is progressive, providing relief for most residents. And by taxing land, society impels owners who had been speculatively withholding or underutilizing theirs to develop or offer their parcels for development. Hence the newly-available land comes from recycled sites, not from open space. ...
PTS Improves the Economy
Land that is higher taxed is lower priced. Cheaper land reduces buyers' debt. Less demand for loans lowers the lending rate. Cheaper capital means more investment and more employment. In Australia, in the province around Melbourne, some towns levy the regular property tax, others tax only land. Those with the same rate for sites and structures suffer more bankruptcies; those with one rate for land enjoy more successful business start-ups.
The PTS encourages investing in high-yield use of parcels. Developing land generates jobs in construction. As those construction workers spend their incomes, they generate more business for local merchants. For the few years that New York exempted buildings in the 1920s, the city boomed more than any other US city. In New Zealand, over 80% of the towns tax land, not buildings. Before the 70's oil shock hit, they enjoyed over a decade of employment at 99%.
A stable source of revenue is a virtue in the eyes of any government. When recession strikes, governments that tax income or property must borrow more to make ends meet. The disincentives built into ordinary taxes deepen and prolong the recession. When taxes upon effort are eased, the economies can recover.
The PTS can cure local recessions. Spurring building, while not burdening it, keeps a web of regional suppliers, installers, architects, financiers, and others in greater demand. In the 17 Western Australian cities in the Perth area that had shifted to land taxation, new construction increased by 34% from 1971-76, while nine localities with ordinary property taxes saw a .02% decrease. From 1974-84, a period marked by recession in the latter half, towns near Melbourne that tax land alone saw the number of businesses increase by 11%, whereas cities without land taxation witnessed a drop of 20% (Cord 1998). Similarly, in the early 1990s, Connellsville and Washington, Pennsylvania, turned to the PTS; both enjoyed more new construction and housing (CSE 1997). Such examples illustrate the stable growth unleashed by the PTS.
A big problem needs a big solution which in turn needs a matching shift of our prevailing paradigm. Geonomics -- advocating that we share the social value of sites and natural resources and untax earnings -- does just that. Read the whole article
TAXING EARNINGS DOESN’T WORKJeff Smith: What To Do About the Real Estate Bubble
As taxing land spurs employment, taxing labor and capital does just the opposite. Taxing salaries makes it more expensive to hire people. Taxing earned profits makes it more expensive to invest in firms that hire people. If you want jobs, don’t tax them. Demanding jobs while taxing wages is irrational. When we tax (or in other ways reduce) one’s efforts, most people naturally produce less. Less output not only shrinks private assets but also the formation of public assets downstream.
Unlike taxing earned incomes, which shrinks the pie, collecting rent grows the pie. While taxes on effort lessen the motivation to produce, charging people rent for what’s already been provided, by definition, does not diminish the motive to produce. Instead, recovering rent removes the private profit from speculating in land and resources. And once we redirect revenue from sweetheart deals (e.g., Pentagon contracts), tax breaks (e.g., depletion allowances), and subsidies (e.g., agri-business support) into a general dividend, then why bother currying favours from the state? Finding rent-seeking from both nature and the legislature less profitable, investors would turn to improving production: new technology and worker re-training, providing society more from less. Read the whole article
What’s bubbling, and until when?Michael Hudson and Kris Feder: Real Estate and the Capital Gains Debate
Sellers are happy. So are developers and speculators. Real estate has gone all bubbly, and that bubble has gone ballistic. What goes up, however, must soon do something else. ...
Actually, it’s not housing whose price has entered the stratosphere. Buildings age – get older, more worn out. What’s getting more valuable is the land, the location – whether it has a building on it or not. Buildings you can make more of, but land you can not, especially locations along the coasts or on the good side of town. None of that would matter if you could ever get buildings to hover around in the air. Meanwhile however, speculators are happy.
... What’s seemingly good for landowners is not necessarily good for the economy. As people spend more on land, something nobody produced, they spend less on output, things people do produce. As producers get less money spent on their products, eventually they take the hint and produce less. "Produce less" is another way of spelling recession.
Plus, more expensive land means heavier borrowing to buy it. More debt means more inflation and less stability. When producers cut back, borrowers have a much harder time paying back their debts. As people go bankrupt, they drag others down with them. A collapsing house of cards is another way of spelling depression.
If land values didn’t get inflated, of course they would not have to get deflated.Call it mutual compensation for deprivation from part of our common natural heritage. While in rhythmic systems, prices must rise and fall, but they need not boom then bust; they could climb then glide. What would temper economies, preventing bubbles? Rather than let a few lucky owners collect land values, neighbors would have to recover land values for themselves. Nobody made land, and no lone owner made its value; the presence of society in general did that. Plus, for excluding everyone else from their sites, owners owe everyone else, as each one of us owes everyone for excluding them.
To recover land value, government could either transform the property tax into a land tax or replace it and other taxes with land dues or land use fees or an annual deed fee. ...
To pay the land dues, owners use their land efficiently; owners who had been speculating get busy and develop. No longer allowed to tax anything that moves, local governments, too, which presently let acres of abandoned urban land and buildings lie fallow, get busy, too, and make sure to get those acres into the hands of ambitious owners who’ll pay land dues. More locations put to use and more buildings put up increases supply, which dampens price.
Better still, as government recovers land rent, that leaves owners with less land rent to capitalize into land price. Hence buyers need not borrow so much. ...
Land would still rise in value. With every discovery of a nearby natural resource. With the opening of every new bridge. With every techno-advance, as silicon wafers did for Silicon Valley. With every jump in income and drop in crime, land value rises. But no longer into a bubble. Because every rise would find its way – via land dues and rent dividends – into everyone’s pockets. ...
If the 18-year average holds for this cycle, then real estate still has a few more years of sucking all the investments and purchasing power out of the rest of the economy. Land is still able to soak it all up, and lenders are still willing to pump more in. So despite the premature panic (markets almost never do what everybody says they’re going to do), Mankiw’s 2007 would be the earliest that the current bubble would burst, and 2008 is just as likely.
Then land prices will fall for a few years. Since the run-up was steep, the drop will be, too – after correcting for inflation, maybe as much as 50%. Which will be an enormous relief for the economy – just what the doctor ordered. With land affordable again, a new cycle can get under way. Whether the new one will be boom and bust or climb and glide is up to us, whether we’re willing to practice geonomics, to forego taxes and subsidies in favor of land dues and a Citizens Dividend.
While I don’t mind the current gambling, I do mind the widening of the cavernous gulf between haves and have-nots, and I boil over while workweek grows more onerous, and just seethe watching vacant lots and abandoned buildings push development out from urban cores to sprawl on suburban farmland. To reverse that, let’s let go of the individual owner’s hold on land rent and share Earth’s worth equitably among us all. We’ll all be glad we did. ... Read the whole article
Much of the public discussion of capital gains policy has been conducted with little reference to empirical research as to their actual character and composition in the US economy. Capital gains, and savings in general, are defended on the assumption that they are automatically transformed into new direct investment. Yet the more layers has the debt pyramid, the smaller is the proportion of savings used to finance direct investment. Moreover, our investigation suggests that a large and expanding share of the economy's capital gains -- as they are defined, measured and taxed -- has little discernible impact on net investment or employment.
IRS estimates of capital gains measure only the small proportion that individuals are obliged to declare after all the exemptions and exclusions have been utilized. There is no estimate of the volume of capital gains generated each year, and no adequate breakdown as to where these gains occur. This statistical lacuna means that the economic cost of assorted tax loopholes is not being calculated. There is no sound statistical basis for calculating the total returns being taken by investors, or the proportion of those returns paid in taxes.
When statistics are lacking, it often is because some interest groups are benefiting in ways they prefer not to see quantified and publicized. If land assessments lag behind actual increases in market value, for instance, land speculators, as well as homeowners, will pay less than their legislated tax share. Also -- and of direct relevance to our thesis -- the failure to distinguish statistics on land values and other real estate gains from non-real-estate capital gains in industry and finance makes it easier for the real estate industry to get its own taxes reduced along with industries in which capital gains tax cuts do indeed tend to spur productivity.
Academic economists likewise have been remarkably slow to address this shift away from earned income to capital gains. It is true that nineteenth-century land reformers such as John Stuart Mill and Leon Wahas defined land-value gains as an “unearned increment,” and urged that they be collected by the community at large, whose economic activity was, after all, responsible for creating these gains. Ever since Henry George brought matters to a head in Progress and Poverty42 (1879), however, economics has largely dropped the analysis of land-value gains, and indeed, of land itself
Wealthy investors have won congressional support for real estate exemptions in large part by mobilizing the economic ambitions of homeowners. Most families’ major asset, after all, is their home. Two Federal Reserve studies trace the rise in gross house value from 26 percent of household wealth in 1962 to 30.1 percent in 1983 (falling back to 28.5 percent in 1989).43 Household real estate assets substantially exceeded holdings of stocks, bonds and trust funds (20.5 percent in 1989), liquid assets (17 percent) and total debt (14 percent).44 The giveaway to real estate interests is thus presented ostensibly as a popular middle class measure. The real estate industry (and the financial sector riding on its shoulders) have found that the middle classes are willing to cut taxes on the wealthy considerably, as long as their own taxes are cut even lightly. It is no surprise that President Clinton’s first major concession to the pressure for cutting capital gains taxation is directed at homeowners, despite the fact that preferences for home ownership cannot be justified as a boost to entrepreneurial investment. Such is the foreshortened economic perspective of our times.
43 1962 Survey of Financial Characteristics of Consumers, and its subsequent Survey of Consumer Finances for 1983, 1986, 1989, and 1992.
44 Details are reported in Bureau of the Census (1988).
The LBO movement epitomizes the real estate industry‘s strategy, applying the developer’s traditional debt-pyramiding techniques to the buying and selling of manufacturing companies. Raiders emulated developers who borrowed money to buy or construct buildings and make related capital improvements, agreeing to pay interest to their mortgage bankers or other lenders, putting down as little equity of their own as possible. Having set things in motion, the landlord uses the rental income to carry the interest, principal, taxes and maintenance charges while he waits for a capital gain to accrue. The idea is to amortize the loan as slowly as possible so as to minimize annual carrying charges, while paying them out of the CCA.
For many decades securities analysts have pored over corporate balance sheets in search of undervalued real estate whose book value does not reflect gains in market value. From the merger and acquisition movement of the 1960s through the takeover wave of the 1980s, the raider’s strategy has been to borrow money to buy the target company’s stock, and then sell off its real estate and other assets to repay the creditors, hoping that something will be left for himself after settling the debts incurred in the process. For the bankers and other creditors, LBOs were a way to put savings to work earning higher rates of interest. The ensuing junk bond commotion pushed interest rates over 15 percent for high-risk securities, whose major risk was that quick capital gains and the cash flow available from re-depreciating properties would not cover the interest payments to the institutional investors rounded up by Drexel Burnham and the other investment bankers who underwrote the takeovers.
The object of building, like buying and selling companies, is thus by no means only to earn rental income. Most cash flow is pledged to lenders as debt service in any case. In a world of income taxation subject to loopholes, sophisticated investors aim not so much to make profits as to reap capital gains -not only in the stock and bond markets, but also in real estate, other natural resources, and the monopoly privileges that have come to underlie much of the pricing of securities today.
As developers borrow money to finance real estate purchases, lenders, for their part, use the real estate sector as a market to absorb and service the economy's mounting stock of savings, applying most of the rental cash flow to pay interest to savers. The end result is that most total returns are taken by the wealthiest ten percent responsible for nearly all the economy's net saving. Viewing US economic statistics from this perspective shows that not to calculate capital gains in the national income accounts alongside directly “earned” income helps foster the illusion that more equality exists among Americans than actually is the case. The fact is that earned income is more equally distributed than unearned gains.
This distinction between real estate (and by extension, other natural resource industries and monopolies) and the rest of the economy helps explain the familiar economic rule that inequalities of wealth tend historically to exceed inequalities of income. The reason is that the wealthiest layers of society control even more of the economy's assets -- and the capital gains on these assets -- than they do its income. They also obtain a larger proportion of cash flow and other non-taxable income than they do of taxable “earned” income.
This phenomenon has long been known, but not well explained. Edward Wolff has shown that wealth is more unequally distributed than income, but he leaves capital gains out of account in explaining how the American economy has grown more top-heavy.45 It is unequal wealth that is primarily responsible for generating inequality of incomes. The more the returns to wealth can avoid taxation by being categorized as capital gains, the faster this inequality will polarize society.
43 Wolff (1995), p. 27. “The top one percent of wealth holders has typically held in excess of one-quarter of total household wealth, in comparison to the 8 or 9 percent share of income received by the top percentile of the income distribution.”
Tony Vickers: From Zee to Vee: using property tax assessments to monitor the economic landscape
Given the current US depreciation laws and related institutions, to lower the capital gains tax rate across the board is to steer capital and entrepreneurial resources into a search for unearned rather than earned income. It rewards real estate speculators and corporate raiders as it shifts the burden of taxation to people whose primary source of income is their labor. The budget crisis aggravated by such a policy also ends up forcing public resources to be sold off to meet current expenses -- sold to the very wealth-holders being freed from taxation. In this way wealth consolidates its economic power relative to the rest of society, and translates it into political power so as to shit? the tax burden onto the shoulders of others. The first element of this strategy has been to defer revenue into channels that are taxed only later, as capital gains. The second has been to tax these gains at a lower rate than earned income -- a fight that has broken out in earnest following the 1996 presidential elections. Read the whole article
The ‘real world’ in which human society exists is not confined to natural, physical phenomena. From earliest times, human beings have interacted socially and economically. As they do so, they have specialised and traded in goods and services which are the products of combinations of labour, capital, enterprise and the fourth – often forgotten but distinct – factor of all production: land.
Land comprises all natural resources, not just ‘terra firma.’ It is the universe minus man’s products. Even the simplest of human activities, sleep, requires each of us to occupy exclusively a space, a location, preferably a bed in a home of our own. But that word ‘own’ conjures emotions and political postures. ...
The Nobel-winning economist William Vickrey said that the property tax is actually two different taxes (Vickrey 1991). That is because buildings are capital, not land, in the economic sense – even if, in most legal codes, there is no distinction between land and improvements made to it which are all lumped together as ‘landed property’ or real estate. Buildings and other improvements to land all depreciate over time unless further capital is expended. Eventually the market value of such improvements may become negative, owing to the costs that would need to be incurred by someone wishing to redevelop the site for an alternative use. But that does not necessarily take away the rental value of the site.
Much urban blight is caused by these so-called ‘brown field’ vacant and under-used sites. However they are often in valuable locations, with good transport connections. It may be that owners are speculating that land prices will rise and enable them to sell at greater profit in the future than now, or it may be that there is genuinely no market for sites in a particular location unless the cost of remediation is subsidised as a form of public investment. Such investment, according to Vickrey and other followers of Henry George, can be entirely funded from LVT. In a lecture given in 1991, first published last year, Vickrey claimed:
“Cities have the capacity to be fully self-financing without dependence on either federal assistance or on general taxes that are unrelated to benefits received.”
The proviso, according to Vickrey, is to replace the tax on buildings with a tax on land value alone – LVT:-
“The property tax combines one of the best and one of the worst taxes we have. The portion that falls on sites or land values is the only major tax that is reasonably free of distortionary effects and is not intolerably regressive”.
Taxing buildings and work done to improve them discourages such work. Un-taxing them and taxing land more highly, irrespective of its actual state of development but based upon its highest and best immediate potential use, will encourage owners to maintain their sites and buildings in such a way as to maximise their income. A remote site or one with conservation or other restrictions will have a low site value, hence attract low taxes, whereas a high value city centre derelict site will very soon be redeveloped. The extra property tax revenue from extending the tax base to sites that are currently under-taxed (because the tax is based primarily on building/rental value not site/owner value), ensures public infrastructure projects can be funded without resource to general taxes or excessive borrowing on the financial markets. Read the whole article
Herbert J. G. Bab: Property Tax -- Cause of Unemployment
... it would be difficult to contend that we have solved the twin problems of full employment and economic growth. The truth is that we have lived all these postwar years on borrowed time.
What have these considerations to do with property taxation? The purpose of my talk is to show that the relation of property taxation to unemployment and lack of economic growth is that of cause to effect. I shall try to explain why I believe that property taxation is one of the two chief villains in the drama we are witnessing today in these United States. The other villain is the monetary policy pursued by the government, which has increased the cost of borrowing to a point where it stifles the growth of the economy. In this context however I shall be concerned only with property taxation.
Two schools of thought have emerged as to the merits or defects of property taxation:
The apostle of land taxation is Henry George. In his famous book Progress and Poverty he develops his single tax theory. He tries to show that poverty and unemployment and other evils are caused by the land monopolists. Henry George's theory is similar to that developed by John Stuart Mill. Land values are based on ground rents which are created by the community and not by the land owners. Therefore the community is justified in recapturing these rents by a single tax on land. ...
Three criteria are generally used to judge the merits of a tax.
When analysing property taxes we shall distinguish between that part of the tax which is assessed on improvements and that part which is assessed on land.
That part of the tax that is assessed on buildings penalizes everybody who improves his land, his buildings or intends to construct residential, commercial or industrial property. The most serious incidence of property taxes is on new housing. When rental property or houses are newly constructed these taxes add 15 to 20% to the annual cost depending on assessment practices and tax rates.
To the extent that property taxes discourage residential construction and the improvement and modernization of homes they create unemployment. The housing construction industry employed about 2,200,000 people in 1962, that is about 1.4 persons per housing unit. Any change in the direction of home building employment is multiplied 2.57 times. Thus an increase in housing starts by 50% would give employment to 2.8 million persons. An increase by about 66.6% or by 2/3 would create about 3.6 million jobs. These figures do not take into consideration the investment in public utilities, streets, schools etc., that would be required to service these additional housing units. ...
A defect of our property tax system that is seldom mentioned is that it puts a premium on obsolescence and penalizes new housing. This is so because property taxes are ad valorem taxes. Every piece of real estate except land is subject to depreciation. Thus the owners of old and obsolete real estate will pay little in taxes, while newly constructed buildings will bear the brunt of the tax.
This characteristic of the property tax is obscured by the rising trends of land values, which in many cases offset the loss in value of the improvement. Increases in tax rates and differences in assessment procedures and practices further hide the fact that ad valorem taxes favor obsolete real property.
Let us now turn to that part of the tax that is assessed on land. Increases in population, immigration from the farms and other forces have led to a rapid increase in the population of our large cities and metropolitan areas. Population pressure is bound to increase the value of urban land. Yet an adequate system of land taxation could have prevented the steep rise in urban land values.
Economists agree that taxes on land can not be shifted but are capitalized. For instance a lot having a value of $10,000 -- will have an imputed or expected income of $500 -- assuming a 5% rate of capitalization. A 2-1/2% yearly "ad valorem" tax would reduce the imputed income by $250 -- or 50%. Such a tax would naturally reduce the value of the land by the same percentage.
For these reasons increases in land values can be prevented by taxing land at an appropriate rate. Yet urban land values have increased tremendously during recent years. For instance in Los Angeles county the assessed value of land increased from $1,972 millions in 1952 to $4,002 millions in 1962, an increase of a little over 100%. The assessed values, are supposed to represent 25% of the market value. Thus the unearned increment in land values during this period amounted to not less than $8 billions. Even this figure is an understatement because it is based on assessed values and land is greatly underassessed. While land values have risen by about 10% yearly, property taxes assessed on land averaged about 1.5%. Thus a person owning vacant or underimproved land would have earned about 8 1/2% per year just by withholding land from its proper use.
A higher tax on vacant or unimproved land would make it unprofitable to hold such lands. It will tax land into better use and it will lead to a spurt in construction activity. While all other taxes are deterrents to employment and economic growth, though to a varying extent, land taxes are the only genuine incentive taxes.
Inflated land values must necessarily increase the cost of new homes, the cost of home-ownership and rentals. It discourages residential construction, prices many families out of the housing market and aggravates the housing shortage. ...
The most serious defect in the administration of property taxation is the continuous, widespread and enormous underassessment of land. A survey made recently found that in 9 California counties, vacant lots and acreage were assessed at only 5.3% of the cash value, while residential property was assessed at 19.3% of its value. The illegal underassessment of land deprives local governments of millions of dollars of revenues. Moreover, it further aggravates the serious defects of property taxation.
We have analyzed the effects of property taxation on improvements as distinguished from those caused by the incidence of these taxes on land.
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper