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Measurement, Statistics and Decision-MakingMichael Hudson and Kris Feder: Real Estate and the Capital Gains Debate
... Now do us both a favor, please. Pause and savor that comparison. Let it linger, as though you were testing a slow sip of wine from Fredonia's famous grapes. Roll it on your tongue, mull sensually over its aroma and bouquet, and, getting back to business, mull cerebrally over its full import. The house that shelters the very rich family is worth 2.8 times the house of the modest family; but the land under the house of the very rich is worth 17.5 times the land of the modest. Seventeen and one half times as much! Again, it is lot value, more than building value, that divides the rich from the poor. Seldom will you find an economic rule more strongly supported by data. It's just a matter of presenting the data so as to test and bring out the rule.
— Mason Gaffney, The Taxable Capacity of Land
What we don't measure at all, or don't measure accurately, we cannot manage and we cannot use to make intelligent decisions. And we can even ignore it — at our peril (four examples: poverty, pollution, land rent, capital gains on land).
We put our heads in the sand. Many free lunches for privileged classes result from this behavior! Figure out what the questions are, and gather the appropriate data to answer them. We'll make better decisions. Use this website to figure out what else we need to be measuring — and start gathering the data which will help us make better decisions for the common good.
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debates surrounding the Tax Reform Act of 1986, which, aiming to eliminate tax loopholes and shelters and preferences, repealed preferentially low tax rates for long-term gains.1 To bring effective capital gains tax rates back down again was President Bush’s “top priority in tax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.18
18 Federal Reserve Board, Flow-of-Funds Statistics, Balance Sheets for the US Economy. See section 5 regarding capital gains on land and buildings.
The Federal Reserve Board estimates land values at some $4.4 trillion for 1994. Residential structures add $5.9 trillion, and other buildings another $3.1 trillion. This $13.4 trillion of real estate value represents two thirds of the total $20 trillion in overall assets for the United States economy.19 Real estate accounts for three-fourths of the economy's capital consumption allowances. It also is the major collateral for debt, and generates some two-thirds of the interest paid by American businesses. Real estate taxes are the economy's major wealth tax, although their yield has declined as a proportion of all state and local revenues, from 70 percent in 1930 to about one-fourth today.
Capital gains statistics are much harder to come by. One cannot simply measure the increased value of the capital stock, for part of the rise represents investment--production of new capital -- rather than appreciation of existing capital and land. The IRS conducts periodic sampling of capital gains based on tax returns, and its Statistics on Income presents various analyses of the shares of total capital gains reported by the economy's income cohorts, from the richest five percent down. The samples are admittedly asymmetrical, however, and some of the categories overlap. Significantly, for instance, stock market gains include a large component of land and other real estate gains.
This policy brief seeks to elucidate the role of real estate in the capital gains issue, indicating the quantitative orders of magnitude involved.. We offer two main observations.
A central conclusion of our study is that better statistics on asset values and capital gains are needed -- or, more to the point, a better accounting format. The economic effects of a capital gains tax depend upon how the gains are made.Walt Rybeck: What Affordable Housing Problem?
The measurement problem is exacerbated by assessment bias in many states and localities. Particularly where land values are trending upward, overestimates of building values relative to site values reflect the steady under-assessment of land. Note that as a larger share of real estate value is imputed to buildings, a larger share of cash flow can be claimed as depreciation. In effect, assessment bias allows investors to partly depreciate land, at no cost to local government budgets.
Official statistics should provide a sense of proportion as to how the economy works. Especially when it comes to real estate, however, national income statistics tend to obfuscate more than they reveal. They are the product of income-tax filings, and hence are distorted for both administrative and political reasons; they do not reflect fundamental categories of economic analysis. One searches in vain, for example, for an estimate of the distribution of total income among land, labor, and capital, or for an accounting of how rentier claims on revenue and output are layered upon directly productive enterprise. Read the whole article
In the 1980s, Washington, D.C., was concerned about its growing army of homeless. At that time I found there were 8,000 boarded-up dwelling units in our Nation's Capital -- more than enough to accommodate some 5,000 street people. I also found there were 11,500 privately owned vacant lots in the District of Columbia, mostly zoned for and suitable for homes or apartments. Decent housing on these sites held in cold storage would have provided an alternative for the many low-income families squatting in places that were overcrowded, overpriced, overrun with vermin and overloaded with safety hazards.
These issues spurred my research described in a 1988 report, "Affordable Housing -- A Missing Link." Evidence from the Census Bureau, Bureau of Labor Statistics and other sources over a 30-year period revealed the following average cost increases of items that go into the building and maintenance of housing:
Why do those statistics not seem to jibe with what you have been told, seen with your own eyes, and felt in your own pocketbooks?
Look Out Below
The answers would be obvious except that, so far, I have not mentioned what happened to the price of the land that housing sits on. Many of those who talk and write about housing conveniently overlook the fact that housing does not exist in mid air but is attached to the land, and that the price of this land has gone through the stratosphere.
In contrast to those 11- to 14-percent annual increases in housing-related costs, residential land values nationwide rose almost 80 percent a year, or almost 2000 percent over those three decades. To cite a few state examples, residential land prices in 30 years rose 1501 percent in Maryland, 1737 percent in Texas, 2806 percent in New Hampshire. 
 It's been suggested that this study of housing and land prices be updated, but it would be almost impossible to duplicate now. It relied in large part on the data-rich Census of Government studies begun in the 1950s and continued every five years, showing taxable property values of land and buildings nationwide and in every state. The administration of President Reagan (his funeral oratory might almost excuse one for calling him Saint Reagan) killed this Census Bureau series. Reagan's team also erased years of my own work under Congressman Henry S. Reuss of Milwaukee to create a national land price index. Certain landholding interests apparently want to keep the public in the dark about the behavior of land and housing markets.... Read the whole article
Bill Batt: Painless Taxation
Bill Batt: The Merits of Site Value Taxation
The place to start is taking advantage of what economists and tax theorists have learned over the course of the past three hundred years about a government's role in the economy. Far from assuming that the economy works best by a total "hands-off" policy as Adam Smith was falsely believed to have advocated by his invocation of an "invisible hand," policy leaders need to recognize that certain values we hold dear are outside the economy, and are threatened by our failure to price them properly. That we treat certain goods and "services" in nature as "free" means that we overuse them and our environment is degraded. Clean water and air, for example, aren't given any value in our economic system, and when they are degraded by agricultural runoff, industrial pollutants, or auto-emissions, those who are "using up" these resources go untaxed. The notion that the economy is a self-regulating system, operating according to defined laws and in ongoing equilibrium, is no longer entertained by serious students of economic and fiscal policy. The debate rather is over which government interventions are constructive and which ones are dysfunctional. The best place to start correcting property tax inequities and environmental degradation is by the right kind of taxes.Mason Gaffney: Property Tax: Biases and Reforms
Tax theorists evaluate revenue structures according to the criteria of economic neutrality, efficiency, equity, administrability, simplicity, stability, and sufficiency. ... Read the whole piece
One of assessors' greatest problems today is the strong pressures from owners who want to allocate as much value as possible to buildings that they may depreciate for federal income tax purposes. Here is where we must study how the parts form the big picture. Here is where federal and local tax policies intersect. Some Georgists have neglected or misunderstood the income-tax treatment of land income. Let us see how this works.
Congress and the IRS let one depreciate buildings, but not land, for income tax. This important distinction harks back to when the income tax was new, and Georgist Congressmen like Warren Worth Bailey, from Johnstown, PA and Henry George Jr., from Brooklyn were instrumental in shaping it.
When a building is new, the depreciable value is limited to the cost of construction. The non-depreciable land is the bare land value before construction. So far, so good. Over time, however, building owners have converted this into a tax shelter scheme. Owner A, the builder, writes off the building in a few years, much less than its economic life, and sells it to B. "A" pays a tax on the excess of sales price over "basis." The basis is reduced by all depreciation taken, so any excess depreciation is "recaptured" upon sale. It is defined by Congress as a "capital gain," and given the corresponding package of tax preferences:
Thus far, any tax preference goes to A, the builder, and may be seen as a wellconsidered building incentive. Watch, however, what happens next. "A" sells to B and B depreciates the building all over again, from his purchase price. To do so, B must allocate the new "basis" - i.e., his purchase price - between depreciable building and non-depreciable land.
How shall B allocate the new basis? Enter the local tax assessor. Here is where local assessment intersects with Federal income tax policy. The IRS does not try to assess land and buildings. Instead, IRS instructions tell taxpayers they may use locally assessed values to allocate basis between depreciable buildings and non-depreciable land. The IRS accepts this allocation as conclusive. As a result, local owners of income property press their assessors to allocate as much value as possible to buildings, and as little as possible to land. This does not affect their local taxes, but lowers their federal taxes. It lets them depreciate land.
Local revenues are not immediately affected. Local assessors have little reason not to accommodate their constituents, local landowners, to help them depreciate land for federal and state income tax purposes. They have little reason to use the correct "building-residual'' method of allocating value, and a compelling reason to use the wrong method that understates land value. Thus they convert non-depreciable land value into depreciable building value. It is the modern version of "competitive underassessment." In the process, they also convert the local property tax from a land tax into a building tax.
After a while B sells to C, who in turn sells to D, so each building is depreciated many times. So is a large part of the land under it, tame after time, although it should not be depreciated at all. This is carried so far that real estate pays no federal or state income taxes at all.
The solution to this lies with the U.S. Congress. The need is to limit depreciation to one cycle only. It is a most urgent problem for both federal and local treasuries. We all have Congressmen. Write to them and raise their consciousness. They are brokers who respond to public opinion. It is we who are derelict. ... Read the whole article
Mason Gaffney: The Taxable Capacity of Land
The taxable capacity of land is camouflaged in our times by a consistent modern tendency to underassess it, relative to buildings. There are several studies in point. The most general one is the quinquennial Report of the U.S. Census of Governments. It actually understates the tendency a lot, by omitting the class of land most underassessed, that is, raw acreage in and near cities. ...
The relevant rule we need here is just that people's house values are more alike than their lot values. It is lot value, more than house value, that divides the rich from the poor.
Now do us both a favor, please. Pause and savor that comparison. Let it linger, as though you were testing a slow sip of wine from Fredonia's famous grapes. Roll it on your tongue, mull sensually over its aroma and bouquet, and, getting back to business, mull cerebrally over its full import. The house that shelters the very rich family is worth 2.8 times the house of the modest family; but the land under the house of the very rich is worth 17.5 times the land of the modest. Seventeen and one half times as much! Again, it is lot value, more than building value, that divides the rich from the poor. Seldom will you find an economic rule more strongly supported by data. It's just a matter of presenting the data so as to test and bring out the rule. ... Read the whole article
Mason Gaffney: Geoism, Recession and Control of Monopolies
Recessions (and depressions) may occur when there are massive shocks to the system (e.g., the OPEC producers withholding supplies and doubling and tripling prices of a commodity that could not be readily substituted for). Recessions may also be prolonged and accelerated by unwise public policy choices made by people who have no idea of the consequences of their actions or inactions. Now, in the activist area where I am working, there is still a strong cry for a Constitutional amendment to balance the U.S. Federal budget. Some of the economists in and out of government are saying this would be a disaster, using the same sort of "if GDP is growing, don't worry be happy" pronouncement you refer to above. When GDP is adjusted for the dollars spent on the criminal justice system and clean-up costs for preventable environmental disasters, then I might have some faith in this as a bellwether of wellbeing. ... read the entire article
Karl Williams: Social Justice In Australia: ADVANCED KIT - Part 2
LIES, DAMNED LIES AND ...
"Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital." - Aaron Levenstein
Part of the reason we're being misled and confused by economics is due to the way it's being expressed, and particularly the statistical methods of summarising economic performance. Thankfully, the environmental movement has done much in recent years to expose governmental fraud in window-dressing statistics to misrepresent economic performance.
The main cause behind the skewing of statistics is the failure to properly take into account natural resources. There's a huge wealth of "natural capital" that we can either preserve or run down, but conventional economic statistics never measure the contents of this vital storehouse. Our economic guardians prefer to look at their measures of income and expenditure, and largely exclude the balance sheet side of the ledger. In other words, measures of national income fail to account for whether our natural resources are being preserved or run down.
BEANCOUNTERS IN CHARGE
Accountants rule! Nowadays, income is just assumed to equate to human well-being, and what nonsensical activities are measured to reflect income! It will reportedly increase if, for example:
And what wealth is being ignored? - our storehouse of minerals, oil, topsoil, ozone shield, fish, forests, biodiversity, clean air and water, urban parkland, stable climate etc. The consequence is that our highly-paid professional statisticians and economists tell us that we're achieving (their calculation of) positive economic growth while completely ignoring how such natural resources might be plundered on a wholly unsustainable basis. Geonomics would instead provide the statistical and qualitative data that would greatly assist us to better measure, guard and preserve our natural resources, as well as collecting resource rents from those to whom access to such resources has been granted. The very nature of Geonomics concerns itself with this sort of valuation and resource rental. That is why so many robber barons fought to suppress Henry George's work, supplanting Geonomics with conventional, academically driven economics.
Many of us are aware of how unemployment figures are fudged to understate real levels of unemployment and underemployment. Deliberate falsifications also occur with that other important economic indicator, the Consumer Price Index (CPI). In 1998 the federal government directed the Australian Bureau of Statistics to remove three very significant components of the CPI that had been escalating alarmingly, namely:
So if you think you're working harder but getting less for your efforts, don't swallow government claims to the contrary! One important indicator that cannot be fudged is the rarely-publicised, declining percentage of Australian homeowners.Mason Gaffney: Land Rent in a Tax-free Society (Outline of remarks by Mason Gaffney, for use at Moscow Congress, 5/21/96)
A NATURAL PARTNERSHIP
Geonomics can work hand-in-glove with some excellent alternative indexes of well-being, most notably the GPI (Genuine Progress Indicator). This seeks to take into account the level and health of our natural resources as well as qualitative factors such as health of the population, crime rate, quality of education, drug dependency, cultural integrity and/or diversity, artistic accomplishment, and so on. Up until now, our statisticians have applied a rule that says, "If it hasn't got a $ sign in front of it, we can't measure it" (and therefore, for all intents and purposes, it does not exist).
Is it any surprise that the GPI actually shows a decline in Australia and the USA over the last 30 years?
The failure to properly examine the nature of land has even led our bean counters astray with their captivating accounting standards. Accountants go to all sorts of lengths to count and properly value every last bean, but when it comes to land, guess what? Even though land is often the biggest balance sheet item, it is traditionally valued at "historical cost" (i.e. at the dollar figure for which the land was purchased). There are few legal requirements to perform regular revaluations of land, which often results in a grossly understated reporting of a company's net worth. For those with inside knowledge, this practice presents them with exclusive information on which they can capitalise (at others' expense) in share trading. Of course, such valuation problems could not exist with Geonomics.
"Economists are people who work with numbers but don't have the personality to be accountants." ... Read the entire article
The value of rent is huge. Every economy produces a large excess over wages. To be sure, not all of it is surplus. Some of it goes to replace capital that wears out each year. This is not part of the net surplus, nor income to the capitalist; it is a return of capital.
Second, some goes as a return to capital, over replacement. This is pure income. Income to capital is not a taxable surplus, but a functional incentive: it moves people to form and supply capital. This entails securing new capital (by saving, and borrowing) and conserving old capital (avoiding dissaving, and avoiding export of capital).
Capital income serves another useful function: it steers capital into the most productive uses. Steering capital to its best uses has the same useful function as securing new capital, and conserving old. Using capital effectively is as beneficial as securing more capital, and ever so much cheaper. The Great Transition in Russia now is learning to allow income on capital, to secure these benefits. The trick is to do it without allowing more than is needed.
The rest of the excess over wages is captured in the rent of land. It is a true taxable surplus. The amount is already huge, and will become huger yet when existing taxes are abated.
The size of
rent is not reported in capitalist nations,
except to trivialize it. Their national accountants, dominated by
landowners, neglect or conceal it artfully, to protect it from being
taxed. Local governments do, however, measure and tax property
value. More than half the value of property is land. In Vancouver,
B.C., 73% of the value of all property assessed for taxation is land,
even though much land there is exempt from tax, and not assessed at
all. In California's major cities it would be just as high if only we
assessed land here as accurately as they do there. ...
read the whole article
Turning land-value gains into capital gains
Hiding the free lunch
Two appraisal methods
How land gets a negative value!
Where did all the land value go?
A curious asymmetry
Site values as the economy's "credit sink"
Immortally aging buildings
Real estate industry's priorities
THE FREE LUNCH
* Its cost to citizens
* Its cost to the economy
YOU MAY THINK the largest category of assets in this countrly is industrial plant and machinery. In fact the US Federal Reserve Board's annual balance sheet shows real estate to be the economy's largest asset, two-thirds of America's wealth and more than 60 percent of that in land, depending on the assessment method.
Most capital gains are land-value gains. The big players do not want their profits in rent, which is taxed as ordinary income, but in capital gains, taxed at a lower rate. To benefit as much as possible from today's real estate bubble of fast rising land values they pledge a property's rent income to pay interest on the debt for as much property as they can buy with as little of their own money as possible. After paying off the mortgage lender they sell the property and get to keep the "capital gain."
This price appreciation is actually a "land gain," that is, it's not from providing start-up capital for new enterprises, but from sitting on a rising asset already in place, the land. Its value rises because neighbourhoods are upgraded, mortgage money is ample, and rezoning is favorable from farmland on the outskirts of cities to gentrification of the core to create high-income residential developments. The potential capital gain can be huge. That's why developers are willing to pay their mortgage lenders so much of their rent income, often all of it.
Of course, investing most surplus income and wealth in land has been going on ever since antiquity, and also pledging one's land for debt ("mortgaging the homestead") that often led to its forfeiture to creditors or to forced sale under distress conditions. Today borrowing against land is a path to getting rich -- before the land bubble bursts. As economies have grown richer, most of their surplus is still being spent acquiring real property, both for prestige and because its flow of rental income grows as society's prosperity grows. That's why lenders find real estate to be the collateral of choice.
Most new entries into the Forbes or Fortune lists of the richest men consist of real estate billionaires, or individuals coming from the fuels and minerals industries or natural monopolies. Those who have not inherited family fortunes have gained their wealth by borrowing money to buy assets that have soared in value. Land may not be a factor of production, but it enables its owners to assert claims of ownership and obligation, i.e., rentier income in the forms of rent and interest.
Over the past 40 years I have specialised in the study of the factors that raise or lower the nation's overall real estate prices -- rising income and savings levels, shifting interest rates and the financial sector's supply of mortgage credit, as well as changes in the tax laws and related market-shaping rules. This work for Wall Street banks and institutional investors was burdened by the absence of reliable data on the value of land and buildings. The official nationwide real estate statistics do suggest that a politically motivated asymmetry is at work in the economy, benefiting real estate, which I shall now attempt to identify.
Hiding the free lunch
BAUDELAIRE OBSERVED that the devil wins at the point where he convinces humanity that he does not exist. The Financial, Insurance and Real Estate (FIRE) sectors seem to have adopted a kindred philosophy that what is not quantified and reported will be invisible to the tax collector, leaving more to be pledged for mortgage credit and paid out as interest. It appears to have worked. To academic theorists as well, breathlessly focused on their own particular hypothetical world, the magnitude of land rent and land-price gains has become invisible. But not to investors. They are out to pick a property whose location value increases faster rate than the interest charges, and they want to stay away from earnings on man-made capital -- like improvements. That's earned income, not the "free lunch" they get from land value increases.
Chicago School economists insist that no free lunch exists. But when one begins to look beneath the surface of national income statistics and the national balance sheet of assets and liabilities, one can see that modern economies are all about obtaining a free lunch. However, to make this free ride go all the faster, it helps if the rest of the world does not see that anyone is getting the proverbial something for nothing - what classical economists called unearned income, most characteristically in the form of land rent. You start by using a method of appraising that undervalues the real income producer, land. Here's how it's done.
Two appraisal methods
PROPERTY IS APPRAISED in two ways. Both start by estimating its market value.
Note that the Fed's land-residual appraisal methods do not acknowledge the possibility that the land itself may be rising in price. Site values appear as the passive derivative, not as the driving force. Yet low-rise or vacant land sites tend to appreciate as much as (or in many cases, even more than) the improved properties around them. Hence this price appreciation cannot be attributed to rising construction costs. If every property in the country were built last year, the problem would be simple enough. The land acquisition prices and construction costs would be recorded, adding up to the property's value. But many structures were erected as long ago as the 19th century. How do we decide how much their value has changed in comparison to the property's overall value?
The Federal Reserve multiplies the building's original cost by the rise in the construction price index since its completion. The implication is that when a property is sold at a higher price (which usually happens), it is because the building itself has risen in value, not the land site. However, if the property must be sold at a lower price, falling land prices are blamed.
If it is agreed that any explanation of land/building relations should be symmetrical through boom and bust periods alike, then the same appraisal methodology should be able to explain the decline of property values as well as their rise. The methodology should be as uniform and homogeneous as possible. By that, I mean that similar land should be valued at a homogeneous price, and buildings of equivalent worth should be valued accordingly.
If these two criteria are accepted, then I believe that economists would treat buildings as the residual, not the land. Yet just the opposite usually is done.
THE DRIVING FORCE behind the anomalies is the political lobbying eager to depict real estate gains simply as "protecting capital from inflation." In reality, it helps land owners and their creditors get a free ride out of land asset-price inflation -- that is, The Bubble.
For many years Federal Reserve Board in its Flow-of-Funds, Balance Sheet of the U.S. Economy, broke down its estimates of economy-wide real estate values between land and buildings. The problem arose when the Fed discovered that its methodology produced nonsensical results -- a negative value of $4 billion for all land owned by non-financial corporations in 1993. This number resulted from imputing land values by subtracting the estimated replacement cost of buildings from overall property market prices. The "land residual" method left little room for land value, as replacement values continued to rise even when market prices were declining. In such downturns the calculated replacement value absorbed nearly all the market value of corporately owned real estate.
Increases in property values were explained as construction cost increases, original cost times the annual rise in the Commerce Department's construction price index, typically 3 percent. Its tendency to rise steadily appears to explain the rise in property values by wage inflation and rising costs of materials. On this logic real estate prices seem merely to keep up with inflation. There is no hint of unearned gains or a free lunch. ...
For hundreds of years property's value has been calculated by discounting its flow of rental income at the going rate of interest. The lower the interest rate, the higher the price a given rental stream will justify -- or as property owners express it, the more years' rent a property will bring. What is so striking about land values today is that they are rising for reasons independent of their earnings stream. The major new consideration is their prospect for future "capital" (that is, land-price) gains. In sum, the ultimate aim of real estate investors no longer is so much to seek income -- most of which is pledged to their bankers as interest payments on the property they acquire -- as much as to seek property gains. Politically opportunites abound. Merely changing zoning in New York City in the 1980s to allow using commercial loft spaces for residential purposes had the effect of multiplying asset values five or tenfold.
Whether the gains come from selling the property or from borrowing more money against it, the essential phenomenon is the rapid growth in asset values and real estate's uniquely favored tax treatment. That's why investors choose real estate instead of bonds or stocks, and much of the strategy underlying corporate takeovers has followed the strategies they developed over the past half century.
Nationwide the capital-gains dimension needs to be incorporated into the rental revenue statistics to measure real estate's total returns. This sector's nearly complete success in escaping the tax collector has placed an enormous tax burden on everyone else. read the entire articleJeff Smith Share Rent, Transform Society
If society decided to share among its members all the annual value of society's sites and resources and air space, what would happen?
... It doesn't matter who owns what. What matters is who gets the rent. We have millions of acres of forest we Americans own together, and we are losing rent on it. ...
The amount of rent has to total some amount. If you ask how much taxes are, you get a figure, or how much wages or interest are, you could get a figure. No one does a good job of keeping track of how much we spend or how much nature we use. In some of the best estimates, Ronald Banks in England estimates that the flow of rent is as great if not more than any of those other flows. Assuming that is true, if not allowed to collect in the wrong pockets, but redirected to everybody's pockets, we can expect a solution. ...
What other social relations might change? Increase land ownership participation in community and it benefits community, with town hall meetings and block parties. Those kinds of communities have less crime. Read the whole article
Correcting for downward bias in standard data (Items 1-3)
1. Standard data sources neglect and understate real estate rents and values. These standard sources include:
a. Assessed valuations used for property taxation. I will only enumerate, not elaborate much on the many reasons assessed values usually fall short of the market. This in itself is a dizzying experience, and you may want to skip ahead to point “b”. Scanning the bullets below, however, gives a clue as to how landowner pressure has subverted the property tax over the years.
b. Use of IRS data on reported rents
Many economists rely on data generated by the IRS, taken from tax returns, to tell them the sources of income in the U.S. This is an exercise in crediting bad data. The standard tax procedure of landlords is to deduct alleged “depreciation” from their net operating rents (“cash flow”) to arrive at taxable rents. They accelerate depreciation enough, usually, to report little or no taxable rent. This is what the IRS then aggregates and reports as the sum of all rents. To accept such fiction as fact is inexcusable, but economists do it anyway. Their credulity lends their authority to the IRS, while the IRS “official” status helps legitimize the economists -- mutual validation of mutual error, the curse of science.
When owner A has exhausted his tax “basis” by overdepreciating, he sells to B for a price well above the remaining basis. B then depreciates the same building all over again, then sells to C, who sells to D, and so on, so each building is tax-depreciated several times during its economic life. In any given year, most income properties in the U.S.A. are being tax-depreciated, even though most have already been depreciated once or more.
In addition, all owners after the original builder are in a position to depreciate some of the land value, as well. This is because the owners control the “allocation of basis” between depreciable building and non-depreciable land. The IRS has no defense against secondary owners who overallocate value to the depreciable building. Congress has never authorized the IRS to develop any in-house capacity to value land. The most the agency does, if it will not accept the word of the tax filer, is to look at allocations used by local assessors. These parties, in turn (with a few notable exceptions), underassess land relative to buildings, by using the erroneous “land-residual” method of dividing land from building value. This is partly to accommodate their local constituents - assessors are locally elected or appointed, and do not report to the IRS. A little math will tell you that to depreciate land just once is to achieve perpetual tax exemption. To depreciate it again and again is a continuing subsidy for holding land.
When A sells to B there is a large excess of the sales price over the remaining or “undepreciated” basis. This excess is, to be sure, taxable income. However, Congress has defined this kind of income as a “capital gain.” Most rents, therefore, show up as capital gains. These, in turn, are subject to lower tax rates, deferral of tax, forgiveness at time of death, constant pressure to lower rates to zero, and a dozen additional avoidance devices. These are known to every lawyer and accountant and Congressman, but not, apparently, to most economists, who lazily report from “official” data that rents are a low fraction of national income.
In addition, the IRS reports nothing at all for the imputed income of owner-occupied lands, because this kind of non-cash income is not taxable. Todd Sinai and Joseph Gyourko of the Wharton School report aggregate owner-occupied “house” values in the U.S. in 1999 were $11.1 trillions. The annual rental value of that, figuring at 5%, would be roughly half a trillion dollars a year -- quite a chunk to omit from the rental portion of national income. We also know that the prices of lands for both housing and recreation have risen sharply since 1999, perhaps by 50% or so, so that $11.1 trillion may be $16.7 trillion now. That means that the imputed rent income is 50% higher than half a trillion (i.e. ¾ trillion dollars), and also that the net worth of the owners has risen by about $5.6 trillion. Such silent gains are also a form of income from land. To all that, many economists remain blind, dumb, and curiously incurious.
Sinai and Gyourko’s treatment is superior to what one usually sees, with some effort made to treat land separately. However, even they, like others, write of the imputed income of owner-occupied “housing,” exclusively. That is doubly misleading.
The land, that is the space and location, does not depreciate physically, and so requires none of those expenses. Its rental equivalent is its net current income. Instead, it usually appreciates in value, and that annual increment is also a current income. So the “imputed income of owner-occupied housing” is mostly attributable to the land - but no one is saying so.
On the whole, Gaffney’s findings in Milwaukee bear out findings of the other studies, although the Milwaukee patterns are more complex. Goldsmith's transfer of the land share in a few new FHA residences to all urban real estate is a momentous error that dominates his estimates and destroys any value they might have.
Another Goldsmith error is to exclude subsoil assets. In cities overlying oil pools, like Huntington Beach, that would make a big difference. In most cities that may not matter, but is symptomatic of how insouciantly Goldsmith handled this whole matter of land values.
f. Ernest Kurnow’s work under Lincoln and Moley
Ernest Kurnow low-balled land and rent values in a chapter in Joseph Keiper, Ernest Kurnow, Clifford Clark, and Harvey Segal, 1961, Theory and Measurement of Rent (Philadelphia: Chilton Co.). In an introduction, the authors thank the Lincoln Foundation for financing their work, but then go on to thank David Lincoln and Raymond Moley personally for intellectual guidance. Then, extraordinarily, they omit the standard disclaimer absolving their advisors and taking full responsibility for the work that bears their names. This is a unique omission. Res ipsa loquitur: David Lincoln is speaking. That helps explain why researchers seeking full estimates of land values seek in vain at the Lincoln Institute, Lincoln’s alter ego.
Kurnow's basic source is tax assessments. He accepts their allocation of value between land and buildings. Errors are possible, but he dismisses them because "in all likelihood there is a tendency for such errors to cancel each other." We have seen how wrong and biased that is. He does not even correct for the assessment bias shown by sales assessment ratios of Manvel's Census of Governments, nor for the greater degree of underassessment revealed by mapping of land values. He does not consider any of the 17 bulleted points shown above.
Most modern economists who look into these matters rely upon standard sources a-f above, mindless, or perhaps even glad, of their downward biases, and unwilling to research the matter themselves. Young students are intimidated and awed, or at least impressed and convinced, by the “official”-looking auspices of the standard sources. ... Read the whole article
Mason Gaffney: The Red and the Blue
Pundits since November have noted an apparent anomaly: lower-income states voted red, and higher-income states voted blue. Within each state, lower-income counties voted red, and higher-income counties voted blue. In California, the inland counties went red, while coastal counties, plump with wealth and income, went blue. Depressed upstate New York went red, while rich New York City went blue.
On purely economic grounds, “it’s a puzzlement.” Why do poor people support the party of big corporations and the rich? ...
To understand the politics of New York City or San Francisco we need to begin by noting that they have about the highest residential rents and home prices in the U.S.A., along with the highest tenancy rates. It takes a high monetary income even to be poor in such places, unless you own land. Federal statisticians who publish the Consumer Price Index (CPI) delicately refrain from comparing different cities - they just compare different times, city by city. This helps them finesse tough questions about rents, and housing prices. Common observation, however, and various semi-popular publications, fill the gap. The C.O.L., especially its rent and home value elements, is a lot higher in the big glamorous cities, so real incomes there are a lot lower than they look - unless you own land. ...
Blue states and blue counties are generally those where land is out of reach of a high fraction of the people. ... Read the whole article
Fred Foldvary: Geo-Rent: A Plea to Public Economists
HOW LARGE IS THE GEO-RENT TAX-BASE?
One of the pitfalls surrounding the idea of tapping geo-rent is that it is closely associated with Henry George’s single-tax ideal society. Authors such as Mankiw (2004, 168) and McConnell and Brue (2005, 300) point out that geo-rent taxation alone could not cover the current levels of government spending. But that point works only as a criticism of eliminating all taxes aside from geo-rent taxation, not as a criticism of the principle of the idea of tapping geo-rent.
I have the further impression that many economists think that geo-rent is a tiny portion of GDP. That notion seems to lead some economists to figure that even if geo-rent taxation is efficient, it is empirically of small import. Dick Netzer (1998, 116) notes that the proposition that “the potential revenue from land value taxation” is insufficient “is widely held today.”
In a chapter entitled “rent, interest, and profits,” Salvatore and Diulio (1996) have an exercise, “What are the criticisms of the single-tax movement?” One criticism offered is that “rents in the United States today amount to just about 1% of GNP, while taxes are 25% of GNP” (355).
In the official GDP accounts by the Bureau of Economic Analysis in the Department of Commerce, the only category termed “rent” is "rental income of persons," which in 2004 was put at an annualized estimate of $150 billion, or less than 1.5% of GDP. This "rental income" is net of expenses such as property taxes and mortgage interest, but the bulk of such expenses are also returns on real estate which are being paid to lenders and the government! ... Read the entire article
Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent
The Methodology of Real Estate Appraisal: Land-Residual or Building-Residual, and their Social Implications http://www.michael-hudson.com/articles/realestate/0010NYURealEstate.html
How to lie with real estate statistics: The Illusion that Makes Land Values Look Negative; How Land-Value Gains are Mis-attributed to Capital http://www.michael-hudson.com/articles/realestate/01LieRealEstateStatistics.html
Where Did All the Land Go? - The Fed’s New Balance Sheet Calculations: A Critique of Land Value Statistics http://www.michael-hudson.com/articles/realestate/01FedsBalanceSheet.html
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper