Wealth and Want
... because democracy alone is not enough to produce widely shared prosperity.
Home Essential Documents Themes All Documents Authors Glossary Links Contact Us

 

Small Business

There is an important distinction to be made between those small businesses which engage in business, and those which engage in landlording. Our incentives should be designed to encourage entrepreneurship, not landlording or land speculation. To the extent that we fail to distinguish between genuine entrepreneurship and engaging in reaping a windfall from public investment in infrastructure, we fail to protect the commons from privatization, to our detriment.

It is said that small business is responsible for a large share of job creation in the US. That may be true, but the other half of the equation is seldom stated: that a large share of the unemployment in this country is also a result of small businesses which suffer downturns. Sometimes the downturn is as simple as the landlord increasing the rent for a retailer or other small business which depends on being in a site accessible to customers, employees and inventory. The landlord may not provide any more amenities within the building or property than he did last year, but he can raise the rent, making it unaffordable to the small business. And his rent increase comes because he thinks the market can take it — that either this tenant or some other will be willing to pay the increased price because of the quality of the location. We tend to forget, though, that it is the community's investment in public services — roads, bridges, sanitary and stormwater sewers, city water, parks, schools, emergency services, transportation systems, hospital emergency rooms, etc., — and the private sector's presence, which makes his site valuable.

Small businesses which own their sites can go on for generations, even when the business would not be viable if the owner had to pay market rent to a landlord or to the community for the value of the site. A diner remains in the middle of a downtown business district, rather than being replaced by a midrise or highrise building with a coffeeshop on the street level. The owner gets to continue his business, uninterrupted by a year of construction — but the effect on his town is to force growth to the fringe — otherwise known as sprawl.

H.G. Brown: Significant Paragraphs from Henry George's Progress & Poverty: 12. Effect of Remedy Upon Various Economic Classes (in the unabridged P&P: Part IX: Effects of the Remedy — Chapter 3. Of the effect upon individuals and classes)

When it is first proposed to put all taxes upon the value of land, all landholders are likely to take the alarm, and there will not be wanting appeals to the fears of small farm and homestead owners, who will be told that this is a proposition to rob them of their hard-earned property. But a moment's reflection will show that this proposition should commend itself to all whose interests as landholders do not largely exceed their interests as laborers or capitalists, or both. And further consideration will show that though the large landholders may lose relatively, yet even in their case there will be an absolute gain. For, the increase in production will be so great that labor and capital will gain very much more than will be lost to private landownership, while in these gains, and in the greater ones involved in a more healthy social condition, the whole community, including the landowners themselves, will share.

  • It is manifest, of course, that the change I propose will greatly benefit all those who live by wages, whether of hand or of head -- laborers, operatives, mechanics, clerks, professional men of all sorts.
  • It is manifest, also, that it will benefit all those who live partly by wages and partly by the earnings of their capital -- storekeepers, merchants, manufacturers, employing or undertaking producers and exchangers of all sorts from the peddler or drayman to the railroad or steamship owner -- and
  • it is likewise manifest that it will increase the incomes of those whose incomes are drawn from the earnings of capital.

Take, now, the case of the homestead owner -- the mechanic, storekeeper, or professional man who has secured himself a house and lot, where he lives, and which he contemplates with satisfaction as a place from which his family cannot be ejected in case of his death. He will not be injured; on the contrary, he will be the gainer. The selling value of his lot will diminish -- theoretically it will entirely disappear. But its usefulness to him will not disappear. It will serve his purpose as well as ever. While, as the value of all other lots will diminish or disappear in the same ratio, he retains the same security of always having a lot that he had before. That is to say, he is a loser only as the man who has bought himself a pair of boots may be said to be a loser by a subsequent fall in the price of boots. His boots will be just as useful to him, and the next pair of boots he can get cheaper. So, to the homestead owner, his lot will be as useful, and should he look forward to getting a larger lot, or having his children, as they grow up, get homesteads of their own, he will, even in the matter of lots, be the gainer. And in the present, other things considered, he will be much the gainer. For though he will have more taxes to pay upon his land, he will be released from taxes upon his house and improvements, upon his furniture and personal property, upon all that he and his family eat, drink and wear, while his earnings will be largely increased by the rise of wages, the constant employment, and the increased briskness of trade. His only loss will be, if he wants to sell his lot without getting another, and this will be a small loss compared with the great gain. ...

In short, the working farmer is both a laborer and a capitalist, as well as a landowner, and it is by his labor and capital that his living is made. His loss would be nominal; his gain would be real and great. In varying degrees is this true of all landholders. Many landholders are laborers of one sort or another. This measure would make no one poorer but such as could be made a great deal poorer without being really hurt. It would cut down great fortunes, but it would impoverish no one.

Wealth would not only be enormously increased; it would be equally distributed. I do not mean that each individual would get the same amount of wealth. That would not be equal distribution, so long as different individuals have different powers and different desires. But I mean that wealth would be distributed in accordance with the degree in which the industry, skill, knowledge, or prudence of each contributed to the common stock. The great cause which concentrates wealth in the hands of those who do not produce, and takes it from the hands of those who do, would be gone. The inequalities that continued to exist would be those of nature, not the artificial inequalities produced by the denial of natural law. The nonproducer would no longer roll in luxury while the producer got but the barest necessities of animal existence. ... read the whole chapter


Henry George:  The Land Question (1881)

Even if universal history did not teach the lesson, it is in the United States already becoming very evident that political equality can continue to exist only upon a basis of social equality; that where the disparity in the distribution of wealth increases, political democracy only makes easier the concentration of power, and must inevitably lead to tyranny and anarchy. And it is already evident that there is nothing in political democracy, nothing in popular education, nothing in any of our American institutions, to prevent the most enormous disparity in the distribution of wealth. Nowhere in the world are such great fortunes growing up as in the United States. Considering that the average income of the working masses of our people is only a few hundred dollars a year, a fortune of a million dollars is a monstrous thing – a more monstrous and dangerous thing under a democratic government than anywhere else. Yet fortunes of ten and twelve million dollars are with us ceasing to be noticeable. We already have citizens whose wealth can be estimated only in hundreds of millions, and before the end of the century, if present tendencies continue, we are likely to have fortunes estimated in thousands of millions – such monstrous fortunes as the world has never seen since the growth of similar fortunes ate out the heart of Rome. And the necessary correlative of the growth of such fortunes is the impoverishment and loss of independence on the part of the masses. These great aggregations of wealth are like great trees, which strike deep roots and spread wide branches, and which, by sucking up the moisture from the soil and intercepting the sunshine, stunt and kill the vegetation around them. When a capital of a million dollars comes into competition with capitals of thousands of dollars, the smaller capitalists must be driven out of the business or destroyed. With great capital nothing can compete save great capital. Hence, every aggregation of wealth increases the tendency to the aggregation of wealth, and decreases the possibility of the employee ever becoming more than an employee, compelling him to compete with his fellows as to who will work cheapest for the great capitalist – a competition that can have but one result, that of forcing wages to the minimum at which the supply of labor can be kept up. Where we are is not so important as in what direction we are going, and in the United States all tendencies are clearly in this direction. A while ago, and any journeyman shoemaker could set up in business for himself with the savings of a few months. But now the operative shoemaker could not in a lifetime save enough from his wages to go into business for himself. And, now that great capital has entered agriculture, it must be with the same results. The large farmer, who can buy the latest machinery at the lowest cash prices and use it to the best advantage, who can run a straight furrow for miles, who can make special rates with railroad companies, take advantage of the market, and sell in large lots for the least commission, must drive out the small farmer of the early American type just as the shoe factory has driven out the journeyman shoemaker. And this is going on today. ... read the whole article

Henry George: Thou Shalt Not Steal  (1887 speech)
The relation of employer and employed is a relation of convenience. It is not one imposed by the natural order. People are brought into the world with the power to employ themselves, and they can employ themselves wherever the natural opportunities for employment are not shut up from them.

People do not have a natural right to demand employment of another, but they have a natural right, an inalienable right, a right given by their Creator, to demand opportunity to employ themselves. And whenever that right is acknowledged, whenever the people who want to go to work can find natural opportunities to work upon, then there will be as much competition among employers who are anxious to get people to work for them, as there will be among people who are anxious to get work.

Wages will rise in every vocation to the true rate of wages — the full, honest earnings of labor. That done, with this ever increasing social fund to draw upon, poverty will be abolished, and in a little while will come to be looked upon — as we are now beginning to look upon slavery — as the relic of a darker and more ignorant age. ...  read the whole article

 

Henry George: The Wages of Labor
It is often assumed that the labor question is a question between wage-workers and their employers; but working for an employer is not the primary or exclusive occupation of labor. Primarily men work for themselves without the intervention of an employer. And the primary source of wages is in the earnings of labor, the man who works for himself and consumes his own products receiving his wages in the fruits of his labor.

Are not fishermen, boatmen, cab-drivers, peddlers, working farmers – in short, all the many workers who get their wages directly by the sale of their services or products without the medium of an employer – as much laborers as those who work for the specific wages of an employer?

In considering remedies these workers are seldom thought of. Yet in reality the laborers who work for themselves should be first considered, since what men will be willing to accept from employers depends manifestly on what they can get by working for themselves.

It is assumed that all employers are rich men, who might raise wages much higher were they not so grasping. But is it not the fact that the great majority of employers are as much pressed by competition as their workmen – many of them constantly on the verge of failure? Such employers could not raise the wages they pay, however they might wish to, unless all others were compelled to do so.

It is assumed that there are in the natural order two classes, the rich and the poor, and that laborers naturally belong to the poor. It is true that there are differences in capacity, in diligence, in health and in strength, that may produce differences in fortune. These, however, are not the differences that divide men into rich and poor. The natural differences in powers and aptitudes are certainly not greater than are natural differences in stature. But while it is only by selecting giants and dwarfs that we can find men twice as tall as others, yet in the difference between rich and poor that exists today we find some men richer than others by the thousand-fold and the million-fold! ...  read the whole article

Rev. A. C. Auchmuty: Gems from George, a themed collection of excerpts from the writings of Henry George (with links to sources)

CAPITAL, which is not in itself a distinguishable element, but which it must always be kept in mind consists of wealth applied to the aid of labor in further production, is not a primary factor. There can be production without it, and there must have been production without it, or it could not in the first place have appeared. It is a secondary and compound factor, coming after and resulting from the union of labor and land in the production of wealth. It is in essence labor raised by a second union with land to a third or higher power. But it is to civilized life so necessary and important as to be rightfully accorded in political economy the place of a third factor in production. — The Science of Political Economy unabridged: Book III, Chapter 17, The Production of Wealth: The Third Factor of Production — Capital abridged: Part III, Chapter 10: Order of the Three Factors of Production

IT is to be observed that capital of itself can do nothing. It is always a subsidiary, never an initiatory, factor. The initiatory factor is always labor. That is to say, in the production of wealth labor always uses capital, is never used by capital. This is not merely literally true, when by the term capital we mean the thing capital. It is also true when we personify the term and mean by it not the thing capital, but the men who are possessed of capital. The capitalist pure and simple, the man who merely controls capital, has in his hands the power of assisting labor to produce. But purely as capitalist he cannot exercise that power. It can be exercised only by labor. To utilize it he must himself exercise at least some of the functions of labor, or he must put his capital, on some terms, at the use of those who do. — The Science of Political Economy unabridged: Book III, Chapter 17, The Production of Wealth: The Third Factor of Production — Capital abridged: Part III, Chapter 10: Order of the Three Factors of Production

THUS we must exclude from the category of capital everything that may be included either as land or labor. Doing so, there remain only things which are neither land nor labor, but which have resulted from the union of these two original factors of production. Nothing can be properly capital that does not consist of these — that is to say, nothing can be capital that is not wealth. — Progress & Poverty — Book I, Chapter 2: Wages and Capital: The Meaning of the Terms

THUS, a government bond is not capital, nor yet is it the representative of capital. The capital that was once received for it by the government has been consumed unproductively — blown away from the mouths of cannon, used up in war ships, expended in keeping men marching and drilling, killing and destroying. The bond cannot represent capital that has been destroyed. It does not represent capital at all. It is simply a solemn declaration that the government will, some time or other, take by taxation from the then existing stock of the people, so much wealth, which it will turn over to the holder of the bond; and that, in the meanwhile, it will, from time to time, take, in the same way, enough to make up to the holder the increase which so much capital as it some day promises to give him would yield him were it actually in his possession. The immense sums which are thus taken from the produce of every modern country to pay interest on public debts are not the earnings or increase of capital — are not really interest in the strict sense of the term, but are taxes levied on the produce of labor and capital, leaving so much less for wages and so much less for real interest. — Progress & Poverty — Book III, Chapter 4: The Laws of Distribution: Of Spurious Capital and of Profits Often Mistaken For Interest

CAPITAL, as we have seen, consists of wealth used for the procurement of more wealth, as distinguished from wealth used for the direct satisfaction of desire; or, as I think it may be defined, of wealth in the course of exchange.

Capital, therefore, increases the power of labor to produce wealth: (1) By enabling labor to apply itself in more effective ways, as by digging up clams with a spade instead of the hand, or moving a vessel by shoveling coal into a furnace, instead of tugging at an oar. (2) By enabling labor to avail itself of the reproductive forces of nature, as to obtain corn by sowing it, or animals by breeding them. (3) By permitting the division of labor, and thus, on the one hand, increasing the efficiency of the human factor of wealth, by the utilization of special capabilities, the acquisition of skill, and the reduction of waste; and, on the other, calling in the powers of the natural factor at their highest, by taking advantage of the diversities of soil, climate and situation, so as to obtain each particular species of wealth where nature is most favorable to its production.

Capital does not supply the materials which labor works up into wealth, as is erroneously taught; the materials of wealth are supplied by nature. But such materials partially worked up and in the course of exchange are capital. — Progress & Poverty — Book I, Chapter 5: Wages and Capital: The Real Functions of Capital

... go to "Gems from George"

Mason Gaffney:  George's Economics of Abundance: Replacing dismal choices with practical resolutions and synergies

It makes landownership more available to small business, and new businesses, by lowering the market price of land. It substitutes a deferred annual charge for a high price up front. This has the same effect as extending credit to all market agents on identical terms, thus offsetting the otherwise overpowering bias of credit rationing and discrimination in lending. Large surpluses of land are released to the market as the tax cost of withholding land forces it to be sold. Read the whole article

Walter Rybeck: The Uncertain Future of the Metropolis
The single element that makes me apprehensive about the future of our cities is our land system. Tentacles of our misguided land policies are choking almost every vital aspect of metropolitan life. This is doubly worrisome, because the full dimensions of the land problem have barely surfaced in the public consciousness. To put it in the vernacular, most of us don't know what's eating us.

We have scarcely begun to identify the causes of today's city land problems. This is not to denigrate the legions of good folk -- officials and citizens alike -- who are trying desperately to cope with the daily disasters. But without a better notion of what is producing these disasters, we are unlikely to stem the flood.

A major problem, certainly, is our distorted land system that operates around the clock and around the calendar, and under the full sanction of the law. It rips off the poor, saps small business, and deprives municipalities of their rightful revenue.

The people as a whole create land values, not only by their presence, but also through participation in government, as taxpayers. Schools, firehouses, streets, police, water lines -- the whole gamut of public works and services that enhance a neighborhood are converted into higher land values. The taxpayers of the entire country, through federal aid for our multi-billion-dollar Metrorail project, have been boosting Washington, D.C. land values mightily.

Not all land values are manmade. Inherent qualities also give land special advantages: fertile soils in farming districts, scenic views in residential areas, subsurface riches of coal, oil, and minerals. None of us, as landlords, tenants, or governments, can lay claim to having created these values. The people who have been drawing up an international law of the Seas have characterized these natural endowments as "the common heritage of mankind", where no people, individually or collectively, produce these land values, it is difficult to argue with the conclusion that they belong to all people equally.

If the institution of private property has a sound foundation, and I believe it does, then it rests on the principle that people have a right to reap what they sow, to retain for themselves what they themselves produce or earn. Land values, produced by all of society, and by nature, do not conform to this prescription. ...

Decade after decade, billions of dollars in urban land values are being siphoned off by a narrowing class that has no ethical or economic claim to them. To be outraged when a few ghetto dwellers, in an occasional frenzy of despair, engage in looting on a relatively miniscule scale, but to remain indifferent to this massive, wholesale looting, is worse than hypocritical. It is to ignore a catastrophic social maladjustment, more severe, I believe, than anything the U.S. has experienced since slavery. ...

But I sense that we are drifting rapidly towards a landlord-dominated society. ...

Before that happens, the opportunity awaits to see whether a reasonably free economy can still be made to work. Unless we tackle the land question, and the looting of America, that game may be forfeited.

The future of the metropolis is uncertain. The choice is ours. We can intervene in the way society is now headed, to preserve the American dream. Or, we can continue along the present path and await the American nightmare.  Read the whole article

Jeff Smith and Kris Nelson: Giving Life to the Property Tax Shift (PTS)
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. ...

Might the PTS fall heavily on low-income land holders and elderly homeowners? The land-rich, money-poor old widow could suffer if society were to levy sites. Eventho' the vast majority of poor people would come out ahead, there probably will be the rare exception. To deal with "the widow on a valuable lot", the new policy could include deferments.

Just as some poor could pay more, some rich could pay less, such as the owners of a skyscraper that'd be the highest (literally) and best use of a site. While a PTS could be a tax break for a few, the intent of the shift is not so much to whittle away fortunes as it is to promote prosperity, equity, and sustainability. Were society to attain such goals, letting some fortunes escape unscathed is a small price to pay. Also, putting a site to best use, while profitable, also benefits the community by providing convenient employment, bringing money into the local economy, and by precluding less efficient development, such as sprawl.

Since the shift is progressive, then the rich are footing the bill for everyone else. To answer this charge that one group will pay more (those who can afford it), proponents could note that the amount one pays is scaled according to the value of what one takes -- a parcel of nature. The payment is for exclusive use to our common heritage. Those who exclude the rest from the best must expect to pay the most.

An obvious loser is a resource extractor such as an Oregon timber harvester (Weyerhauser is the biggest landowner in the state). All the rent that society now allows them to retain, they'd lose. Perhaps there is a silver lining to corporate mergers and diversification and interlocking stock holding; the huge corporations holding resources would have other profitable lines to turn to.

An obvious winner, balancing the losses of the extractor, are the service-providing companies located off the beaten path, like a neighborhood cafe. After centuries of just getting by, smaller enterprises would gain by competing on a level playing field. What they'd gain (that is, retain) is the fruit of their labor. Conversely, what big business would lose is the commonwealth generated by all. ...

Two other groups who have yet to fly the PTS banner but who stand to gain substantially are small businesses and service businesses (often the same). For a small business (this writer used to work in his father's), taxes are a double levy -- the tax owed and the fee for the accountant. Big companies have an easier time absorbing the costs of recording, verifying, and paying taxes. The simplification of taxation inherent in the PTS could appeal to small business people.

The other potentially supportive businesses -- service providers -- do not consume much in the way of resources or prime locations. Even service providers on valuable sites, were they to pay more, could still come out ahead in the better business climate of zero taxes on sales, on paid wages, on customers' income, and of less onerous mortgage. Presently taxes and mortgages consume about 65% of the average worker's income, drastically reducing discretionary spending.

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


Mason Gaffney: Oil and Gas Leasing: a Study in Pseudo-Socialism
All that may sound familiar to students of 19th Century American history, and the privatization of the vast Federal domain. It is a long story of conflict between cash sales and more democratic means of placing lands. Those with cash and bank connections naturally favored cash sales. President Jefferson saw the merit in credit sales, so from 1801-20, sales were on credit. The system was badly administered, but so were all other systems of land disposal tried in that era. Collections became a problem, yet landownership was democratized. It enabled Andrew Jackson to proclaim on Thanksgiving Day, 1835, "We thank Thee for the absence of unemployment which in the King-ridden countries of the world is causing widespread suffering among the toiling masses and has led to riots ... (and that) there will be none to freeze, starve, or be beset by the fear of want this winter or the winters yet to come."

Following the period of credit sales, the return to cash sales re-introduced front-money bias. Small owners still had ways of fighting back at the state and local levels. States and counties and their subdivisions relied mainly on the property tax. They used this with good effect, often quite deliberately, to induce absentee speculators to release large holdings for sale and settlement. The impact of land taxes is analogous to that of credit sales. The specter of future taxes is capitalized into lower current land prices. They in turn let one buy cheaper up front, in return for a higher level of deferred payments. The net effect is like extending permanent credit on equal terms to all potential buyers, something private credit markets never do or could be expected to do.

Thus, the property tax, especially on land, is twice effective as an instrument of Distributive Socialism.
  • First, it rifles in on the rent surplus and socializes it.
  • Second, it democratizes the ownership and operating control of land.

Thus it achieves something akin to the "worker control" that is an ideal avowed by many modern Socialists, melding egalitarian distribution with egalitarian management and control. To be sure, it does so in a small-business framework, an ideal that is traditionally Populist, not Marxist. However, in this new post-Communist age, when Socialists are seeking new ways to express their yearnings for the good society, they might want to reconsider the value of this approach to worker control. Perhaps Marx, like other reformers of his generation, was oversold on the economies and inevitable triumph of large scale capital and organization, and the substitution of capital for labor. Perhaps small is beautiful, after all.

Today's industry is faced less with the property tax than the income tax. Most state property taxes are applied only at low levels to mineral-bearing lands. Worse, the most active leasing today is on the OCS, outside the tax reach of any state or county, and so exempt from property taxation. ... Read the whole article



Mason Gaffney: Property Tax: Biases and Reforms

The invisible, pervasive change is due to Proposition 13, which makes it possible to hold land at negligible tax cost. In 1945 land was taxed at 3 percent every year, building a fire under holdouts to turn their land to use. Today that same tax cost is well below 1 percent. Using Gwartney's Rule of Thumb (see below under #2, A, "Reassessing Land Frequently") it is about 1/8 of 1 percent: a rate of 1 percent applied to 1/8 of the true value.

Landowners are only taxed now if they use their land to hire people and produce something useful. Then they are confronted by the drag of our high business and employment and sales taxes, necessitated by the fall of property taxes. A handful of oligopolistic landowners control most of the market; small businesses are squeezed out. This helps us segue from being at the cutting edge of industrial progress to a third-world economy - from the NH model to the AL model - with little relief in sight.

What was different then? We had high property tax rates, but they were more focused on land than now, less on new buildings. Another obvious difference was the lower burdens of sales tax, business tax, and income tax. California was more hospitable to Georgist thinking than perhaps any other state, shown by its long run of Georgist political action in the prior thirty years. Most people today are totally ignnorant of this subject. It has been deleted from our history books. Here is a brief review. ... ... Read the whole article

 
Michael Hudson: The Lies of the Land: How and why land gets undervalued
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
SUMMARY 

Tax favouritism for real estate was defended in Congress on the ground that it was in the public interest to provide a special inducement to the real estate industry to build more homes and office buildings. But as Adam Smith observed, every industry represents itself as serving the public interest. Can one really say that investors borrowing 70 percent of private-sector loans to ride the wave of asset-price inflation are more in the national economic interest than favoring direct investors to build new plant and businesses that employ labor rather than pricing homes, office buildings and industrial sites further and further out of reach of those who must earn their income by increasing society's productive powers?... read the entire article


Michael Hudson and Kris Feder: Real Estate and the Capital Gains Debate
WHAT IS MISSING FROM 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. ...

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. ...

Reported capital gains in real estate were understated as a result of exclusions. On the other hand, much direct investment included the cost of land, commercial buildings, and plant and equipment. Taking this into account, we estimate that roughly 70 percent of the capital gains calculated by the IRS for 1985 probably represent real estate. Even this estimate may understate the role of land and real estate. In 1985, anticipating the planned 1986 tax reform which would raise the capital gains tax rate from 20 to 28 percent, many investors sold their securities that had registered the largest advances. Some 40 percent of the capital gains reaped by selling these stocks probably represented real estate gains. A major spur to the LBO movement driving up the stock market was an awareness that real estate gains were not being reflected in book values and share prices;36 as land prices leapt upward-funded in part by looser regulatory restrictions on S&L lending against land -- raiders bought publicly traded companies and sold off their assets, including real estate, to pay off their junk-bond backers. In effect, not only were rental income and profits being converted into a flow of interest payments; so also were capital gains.   Read the whole article



To share this page with a friend: right click, choose "send," and add your comments.

Red links have not been visited; .
Green links are pages you've seen

Essential Documents pertinent to this theme:

Home
Top of page
Essential Documents
Themes
to email this page to a friend: right click, choose "send"
   
Wealth and Want
www.wealthandwant.com
   
... because democracy alone hasn't yet led to a society in which all can prosper