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Mason Gaffney: The Property Tax is a Progressive Tax (1971)
The Need to Correct for Regression Fallacy, or Which Top 10% Do You Mean?
Most studies of property tax regressivity stumble squarely into the pratfall of regression fallacy. The problem in brief is this. Income and property are positively related but the scatter of points is loose, with great individual residuals from any fitted curve, and a high error of estimate. We want to know which rises faster as they rise together. The answer depends on which we arbitrarily select as the ranking variable. Let us say we rank by income on the abscissa and find the top 10% have 30% of the income and 25% of the property (a hypothetical number). It looks as though the property tax is regressive. But now rank them by property on the ordinate. The top 10% are now a different group -we have taken a stratum of points at right angles to the original column. Some of the humble have been exalted, and the mighty laid low. This top 10% has say 50% of the property and 25% of the income, and the property tax looks progressive (in terms of income).(31)
When the Census of Housing ranks families by income, rent payments do not keep up with income.(32) But ranking them by value of dwelling units, value quintuples while income only doubles.(33) That is the difference a technical detail or two can make.
So which top 10% do we mean? Most studies have uncritically chosen income as the proper ranking variable, by assumption, thus practically preordaining the conclusion - and largely invalidating it.
The Chicago school of permanent income hypothesizers have counterattacked sharply on the housing salient. Margaret Reid (34) undertook to narrow the scatter of points by removing random year-to-year income changes. She related housing to a definition of permanent income, and came up with income-elasticity of demand for housing well above unity.
One of Reid's methods of avoiding regression fallacy was the interarea comparison, where data are grouped by a neutral variable (neighborhood) which is neither housing nor income. Brodsky has repeated this for Census Tracts of the District of Columbia. His findings strike me because he is a geographer who is not concerned with the permanent income or regressivity question and presents his findings just as interesting facts. He finds residential improvement values rise with the 1.3 power of income; land values rise with the 1.8 power.(35) Muth has refined and expanded Reid's method!;. He now suggests 1.2 or 1.3 as correct income-elasticities of demand for housing.(36) Lee has criticized Reid's methods and come up with an elasticity of about .81. However, Lee's data were too small a sample to lean on heavily, and more important they excluded land. We have seen that land is the most progressive share of housing, so this biases Lee's findings downwards. ...
But these are only glancing blows. The central question is, why rank by income at all -any concept of income? When we do that we accept income-fundamentalism, a kind of philosophical imperialism where Adjusted Gross Income on Form 1040 is the basic reference datum against which to measure and judge everything. "Similar circumstances" mean similar AGI, and similar circumstances deserve similar taxes. In effect this means we judge the property tax on the basis of how closely it resembles the income tax, in every detail. Since nothing resembles the income tax so much as the income tax, the property tax looks inferior.
Again, the concept called "income-elasticity of demand for wealth" contains implicit income - Chauvinism. It implies one-way causation: income causes wealth. But wealth also causes income, and as Klein points out that changes the rules for relating them.88 No longer can income be the simple ranking variable.
If the property tax had no rationale of its own we would be forced to accept income fundamentalism. But if the property tax has a rationale, then it is legitimate to rank by wealth, and fault the income tax for failing to tax large properties adequately. Here is an outline rationale for the property tax.
1. "Ability-to-pay" derives from wealth as well as current income. James Tobin, Arnold Zellner, Taylor and Houthakker, Harold Somers, and others have stressed this lately. The old cliche that "taxes are paid out of income" is as empty as the one that we consume "out of income." We spend money, and it is not labelled.
2. The property tax asserts a public equity in land which was won and is defended by joint efforts, and whose value derives from public works and spillovers, not from the owners' efforts. It exempts human effort, thus rewarding service to the community and denying the state any equity in the bodies of its citizens whose freedom and dignity is thus enhanced in their capacity as human beings, as distinct from owners of wealth.
3. Property taxes reduce the differential effect of inherited wealth on the current generation. They strike directly at concentration of economic and other power based on wealth, promoting competition and equal opportunity. Property as collateral is a source of invisible income (credit rating). Taxing property reduces the differential advantage of the rich in credit rationing.
4. Property income of a given dollar value places the receiver on a higher welfare plane than labor income, because he needn't work for it. $10,000 a year received by dint of working long hours in a coal mine with black lung disease is not the same as $10,000 plus a life of ease.
5. The property tax is needed to plug loopholes in the income tax, which is inexorably devolving into a payroll tax.
If one finds that rationale compelling, then the proper approach is to rank by wealth. Doing so, one finds that property is used regressively, i.e., the larger holdings generate less taxable sales and income per dollar of wealth. Thus in the Milwaukee industries reported in Table 1, ranking by value, the top 10% who have 89% of the value have only 69% of the employees.
If one likes the property tax rationale partly but not wholly, then he may follow Wallis and Roberts (39) who tell us that to avoid regression fallacy a valid way to compare two populations is to compare their standard deviations or other measure of variability. If there is less income than property in the upper groups, the variability of the income distribution will be less. But we have already seen that is so (Table 1). Table I only gives the top group, but in each case I have computed Gini (or Lorenz concentration) ratios for the entire distribution, and they are as you would expect much higher than for income. (The Gini ratio is, in my experience, closely correlated with the coefficient of dispersion.)
The more we correct for regression fallacy, then, the more progressive the property tax looks.
On Defining Income and Wealth
Dick Netzer, like others, uses AGI as the reference standard against which to match the property tax and find it regressive.(40) A certain citizen in 1970 reported no AGI, but heavy property taxes, which might make the property tax quite regressive were it not Ronald Reagan. Yet he is not alone, and it seems harsh to select a measure that makes the property tax regressive because it is the only tax many rich men pay. General Oppenheimer has written a fine set of manuals on how to reach Zero AGI by losing money farming,(41) and they work so well that taxable farm income is down to about $3 billions while the USDA estimates farm income at $14 billions.(42) I do not think that AGI will do.
It is not just farming. Property is the paramount tax shelter. How does it cover thee? Let me count the ways. There is
At the same time, property is a large source of income that is not counted in AGI. Unrealized accruals and imputed income are the most obvious, and each is a huge item.
Thus the ownership of property tends on a large scale to reduce AGI and increase real income. When we rank by AGI, property owners move into lower brackets than they belong; non-owners move into higher brackets. Property tax payments move into the lower brackets, pre-ordaining a finding of regressivity which is totally illusory.
At least two studies have sought to correct for the Reagan Effect. Both corrected only partially, and with spectacular results.
Another common method is to define property tax payments as only the net burden after deducting payments from taxable income. This is to impute a regressive feature of the income tax to the property tax. That would be wrong at best, but more so when one is comparing the property tax with the income tax itself.
If one does choose to evaluate the two taxes jointly, he should note above all that the Federal Government has moved far toward abandoning the taxation of property income. That is the cumulative effect of a hundred loopholes, available to property but not to the poor stiff with his W-2 Form. Equity suggests that state and local treasuries move in on this unpreempted tax base.
Definition of the property tax base is also a source of serious error in a number of studies based on cash rents. Netzer for example assumes that property taxes are proportional to rents. They aren't. The base is not rent but capital value. The poor live in declining neighborhoods and buildings nearing abandonment, where capital value is a very low multiple of rent. Rents include high costs for collection, turnover, damage, loss of status, maintenance and repairs, and general unpleasantness. In Milwaukee's "Inner Core" or slum area the rule of thumb is you pay 30 months' rent to buy a dwelling unit. Tenant incomes are low, but higher than such capital values. The rich live in new buildings of long future life in appreciating neighborhoods. Incomes are high, but normally less than half of lot or acreage plus house values.
It is true that slums are often
overassessed, but again,
maladministration is the fault of administrators. The property tax
in concept is progressive precisely because it is based on capital
value. Owners of appreciating property often complain that capital
value as a base hits them harder than would current income or service
flow as a base, and they are right. That is precisely what makes the
property tax, correctly administered, so progressive. ... read the whole article
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper