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Investment

When people must spend a large share of their net worth to pay off the previous landholder for something the individual landholder didn't create, they have little left for other spending, whether it be furnishing that house or condo or outfitting a retail, manufacturing or other commercial property.

Investing in land doesn't create anything new. A better word for "investing" in land is speculation.

The difference is between ownership and possession. If what we need is the use of the land, then let's arrange that.

Investing in equipment, however, is a very different matter. That leads to jobs and the creation of something. Let's arrange things to facilitate that sort of investment.


Michael Hudson and Kris Feder: Real Estate and the Capital Gains Debate

Capital gains taxation has been a divisive issue in Congress at least since the debates surrounding the Tax Reform Act of 1986, which, aiming to eliminate tax loopholes and shelters and preferences, repealed preferentially low tax rates for long-term gains.1 To bring effective capital gains tax rates back down again was President Bush’s “top priority in tax policy.“2 In 1989, Senate Democrats blocked a determined drive to reduce effective tax rates on the part of Bush, Republican Senators Packwood, Dole and others, and a few Democratic allies.3 The administration argued that the tax cuts would stimulate economic growth and induce asset sales, thereby actually increasing federal tax revenues; Congressional Democrats countered that the plan benefited mainly the wealthy, and that tax revenues would in fact decline.4 The Joint Committee on Taxation projected that budget shortfalls beginning in 1991 would sum to about $24 billion by 1994 --  and that most of the direct benefits would go to individuals with over $200,000 in taxable income. House Speaker Thomas S. Foley said that a third of the savings would be enjoyed by those with gross incomes over one million dollars.

WHAT IS MISSING FROM THE CAPITAL GAINS DEBATE?

The most frequently heard arguments for reducing capital gains taxes are:
(1) to reduce the “lock-in” effect, by which high tax rates at realization deter asset sales;14
(2) to relieve a disproportionate burden on homeowners;
(3) to compensate for the erosion of capital gains by inflation, as an alternative to indexing;15
(4) to end alleged double taxation of both capital stocks and income flows;
(5) to spur productive enterprise and investment; and
(6) to generate more tax revenue from the consequent growth in asset sales and productivity.
14 Some argue that eliminating step-up of basis at death would do more to reduce lock-in than a rate cut. See Joint Committee on Taxation (1990), p. 2 1; Gaffney (1991).
15 For an analysis of the case for inflation indexing, see Gaffney (1991).

This report calls attention to a neglected aspect of the capital gains issue --  one which bears importantly on the fifth- and sixth-named consequences.

Much of the capital gains debate today focuses on the stock market. Business recipients of capital gains are characterized as small innovative firms making initial public offerings (IPOs). In recent years such firms have been responsible for a disproportionate share of new hiring. It is hoped that corporations will be able to raise money to employ more labor and invest in more plant and equipment if buyers of their stocks can sell these securities with less of a tax bite. Stock market gains thus are held to stimulate new direct investment, employment, and output.

Typical of the campaign to reduce capital gains taxes is a Wall Street Journal editorial, “Capital Gains: Lift the Burden.” Author W. Kurt Hauser argues that when the capital gains tax rate was increased from 20 percent to 28 percent in 1989, the effect was to deter asset sales, causing a decline in the capital gains to be reaped and taxed. He refers, however, only to stock market gains, and specifically, to equity in small businesses. Citing the example of yacht producers, he suggests that taxing capital gains on stocks issued by these businesses “locks in” capital asset sales, thereby deterring new investment and hiring, and reducing the supply of yachts.16

Others contend that new productive investment is relatively insensitive to capital gains tax rates, arguing, for example, that most of the money placed in venture-capital funds come from tax-exempt pension funds, endowments, and foundations.17

What is missing from the discussion is a sense of proportion as to how capital gains are made. Data that is available from the Department of Commerce, the IRS, and the Federal Reserve Board indicate that roughly two thirds of the economy's capital gains are taken, not in the stock market -- much less in new offerings -- but in real estate.   Read the whole article

Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent

Some may wonder why anyone would own land if most of the rent is taxed away. One would own land for the same reason people rent land: in order to use it. Ownership also gives the title holder rights of possession, the ability to control the use of the site indefinitely.

Today there is also a speculative motive for owning land, to profit from the increase in its price. With most of the geo-rent tapped for public revenue, the speculative motive would be dampened. That would benefit the economy, since with a lower price of land, funds that now go to buy land would instead go to build more capital goods, hire more labor, or provide better training.

The tax on the geo-rent would be borne by the owner, not the tenant. If a landlord, who was already charging what the market could bear, tried to pass on the tax, he would face vacancies. Some say that since the tax would be invisible to renters, the link between using public services and paying for them would be broken. But productive public services increase the geo-rent, so that link is there. If government revenue is wasted, then indeed this does not generate rent, and a land value tax without corresponding benefits would reduce land value. Pressure for a productive use of public revenue would come from the landowners more than from the tenants. But that is no different than the situation today; poor folks pay little or no income tax and no property tax, and typically they get government assistance. This is an argument not against the use of rent, but in favor of privatizing government programs. In the private sector, the link between ownership and control is stronger. ... read the whole document


Mason Gaffney: The Partiality of Indexing Capital Gains

We surely agree with Roberts et al. that domestic capital formation is a crying current need; and the means is to foster saving and investing (but properly defined, as below). We also agree there is a strong, bi-partisan case for raising investment flows of the income-creating, work-activating kind. Here, however, we meet the problem of distinguishing new capital from old assets, especially land.

Land is not formed, like capital, by saving and investment; land is not reproducible. For that very reason land tends to appreciate, and therefore has to be a major source of what are misleadingly called "capital" gains. Again for that very reason, there is no supply-side kick in untaxing gains. Most of them are land gains, and should be called that. To use land as a store of value is macro-economically unproductive at best, and on balance counterproductive and destabilizing (considering its effect on financial institutions like the S&Ls).

To handle this matter we need two semantic distinctions which often are lost in the word-fencing of debate. Walter Heller, whose policies still enjoy bi-partisan support, thought and spoke in a Keynesian framework where "investment" means "investing," an affirmative, job-making action. It is a process, not a store of value; an economic flow, not a fund. It is not the asset held: this "investment" is a noun, macro-economically static and sterile. [Land may appreciate, and one may call this "investment," but the appreciation employs no one and creates no new wealth (although it may reflect the externalities of wealth created by others).]

To signalize these differences I use the present participle "investing," rather than the ambiguous noun "investment."  [Webster's 9th New Collegiate defines investment both ways: it is an action, (the Keynesian usage); it is also an asset being held, a store of value. Such a two-faced word is a natural medium for double-talk, and has been so exploited, to the detriment of general understanding.]

Every Keynesian also knew in 1961 that investment means net, positive-sum investing. It does not include buying and selling existing assets like land: these are zero-sum transactions, macro-economically non-functional and barren. [Keynes, although careless of consistency, generally took care to distinguish old and new assets. " ... the competition of a high interest-rate on mortgages may well have had the same effect in retarding the growth of wealth from current investment in newly produced capital-assets as high interest rates on long-term debts ... " [General Theory, 1936, p. 241.] The old macro-economists generally refer to investing in newly produced assets as "income- creating expenditure," which is clear and correct, but too much of a mouthful.]

I use "investing" only in the sense of net, income-creating, job-making spending. [Note the difference between real turnover and mere ownership turnover. Ownership turnover generates no income (except for brokers and M&A personnel) and creates no capital. Real turnover also creates no capital, but does forward supplies of goods to consume, and flows of investing to produce replacement goods. Most of gross investing is reinvesting funds received or anticipated from sales of old capital (including inventories, which turn fast, and "fixed" capital which turns slowly as it depreciates and the funds are reinvested).]

As to borrowing on land, that can be worse than barren when the financial system rises and falls on a land bubble, as it has and is.  ... read the whole article

Nic Tideman: Market-Based Systems for Assigning Rental Value to Land

Consequences of Foreseeable Increases in Rental Value

If the value of a site is expected to rise in the future, bidders for the current use of the site will take that into account in their current offers. A potential user who wishes to make long-lasting improvements to the site, of a sort that cannot take full advantage of the future higher value of the site, will offer less for the site this year than if the site did not have future prospects that will raise future offers from competing uses. On the other hand, a potential user who wishes to use a site as something like a parking lot, requiring very little in durable improvements, will be virtually unconcerned with the prospect of higher future rents. Thus, to the extent that bidders can foresee future bids, sites where optimal use requires a change in use in the near future to achieve greatest efficiency will tend to be acquired by users who can relinquish use without suffering loss.

Of course, the future cannot be seen perfectly. People will sometimes experience losses as a result of unanticipated rises in the rent of the land under their durable improvements. To compensate for this risk, people who wish to use land for durable improvements will reduce, to some extent, their bids for land. They may also seek to purchase insurance against rent increases, just as they now purchase fire insurance.2 The practice of setting each year's rent at the amount that someone is willing to pay in that year for the use of a similar site ensures that some profit-oriented person (either the investor or the seller of insurance) has an incentive to estimate carefully the opportunity cost of a site in future years before the site is committed for a long span of time to a particular durable improvement. ... read the whole article

Arthur J. Ogilvy: A Colonist's Plea for Land Nationalization (about 1890)

LET us begin by taking the unearned increment in its simplest and clearest form.

Suppose I buy Government land at £1 per acre, and quietly holding on while roads are being pushed forward, settlement extending and land values rising, refuse offer after offer till the price reaches £2, when I sell out. Of these £2, one I have acquired by direct purchase; £1 worth of money for £1 worth of land; but the other I have done nothing to acquire.

It is not interest on the purchase-money, for interest is payment for the use of capital, and comes out of the use. Who would expect interest on money tied up in an old rag? There has been no use here.

It is not compensation for risk, for the land could not disappear or deteriorate, and was sure to be wanted.

It may be quite right for all that, that I should have it. That is not the point at present. The point at present is simply to explain the term, and to show not only what it directly means, but what it indirectly implies, for it implies a great deal much more than most people have any idea of.

I have neither done anything to create this increase of value nor rendered any service in return for it. If a sovereign were suddenly to drop into my pocket from the sky, it would not be more completely unearned.

But it has not only been unearned. If that were all, it would be no great matter. If, like the sovereign, it had dropped from the sky, then, though I might be undeservedly the richer nobody else would be the poorer. My gain would be a clear addition to the sum total of human wealth, out of which others besides myself would in one way or another derive benefit; and, whether or no whatever benefits one without injuring another is fair subject for congratulation.

But it has not only been unearned; it has been drawn from the earnings of others. My gain is others' loss. ...

The value of land, as of everything else, will oscillate within certain limits, and even in some exceptional cases, as in the sudden diversion of traffic, fall for an indefinitely prolonged period; but these occasional or exceptional perturbations are but as the advance and recession of the waves in a flowing tide. The tide still comes in.

In every country which has any enterprise and progress, land values must rise. The movement may be fast or slow, continuous or interrupted, but it is up not down.

There is not a single factor in a nation's progress that does not add to the value of land. Every road improved and railway laid down; every machine invented and process perfected; every opening of new markets; every improvement in fiscal policy, in order and good Government, in the knowledge and skill, in the morals, manners, and even numbers of the people, every conceivable element, in short that adds to the productiveness of industry, adds to the value of land, and increases the tribute which monopoly can wring from industry; which the man who merely owns the land can exact from him who uses it for the mere permission to use it.

This is why the gradual rise of land value or rent (ground rent only, remember), is called the unearned increment

... read the whole paper.

 

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