Land Tax Article in Harpers Magazine

[Emer O'Siochru]

Harpers November 2008 issue
Michael Hudson is Distinguished Professor of Economics at the University of Missouri–Kansas City and the author of many books, including Super Imperialism: The Origin and Fundamentals of U.S. World Dominance. His last article for Harper’s Magazine, “The New Road to Serfdom,” appeared in the May 2006 issue.


Tax the land By Michael Hudson
To save industrial capitalism, we might begin by looking at changes sought by classical economists. Reformers from Adam Smith to John Stuart Mill to Thorstein Veblen hoped to streamline industry and increase economic competitiveness by doing away with the special privileges inherited from feudalism; namely, “economic rents” earned from longstanding land, monopoly, and banking rights. Income from these entitlements added to the cost of doing business but neither produced anything tangible nor spurred technological innovation. Classical economists contended that the tax burden needed to be shifted off of industry and labor and onto that which was taken from nature or granted by government decree—what Mill called the “unearned increment” that landlords extract “in their sleep.”

In the United States, progressive-era reforms advanced many of these ideas, and by World War I the nation was well on its way toward achieving what John Maynard Keynes would call “euthanasia of the rentier.” The federal government passed its first income tax in 1913, at a time when even more wealth than today was either inherited or derived from insider dealings. Steeply progressive, the tax was levied on only the wealthiest 1 percent of the population (households earning more than $83,000 in today’s dollars), with their income taxed at a marginal rate of 77 percent by 1918. Capital gains were taxed at the same level, on the reasoning that they added to net worth just as earnings and savings did.

These policies helped create a middle class in America, while similar measures did much the same in Europe. But the class that Franklin D. Roosevelt called “economic royalists” fought back and over time (and particularly after 1980) re- versed these progressive tax policies. The top marginal tax rate for personal income has been slashed, from a high of 94 percent in 1944 to roughly 35 percent today. Capital- gains taxes are now capped at 15 percent, and this tax is not even collected on the vast ma- jority of real estate sales, since commercial owners are not taxed if they use their sales proceeds to buy new property. As a sop to homeowners, residential price gains have been made tax-free for the first $500,000. Rental income also has been rendered free from taxation by the accounting sophistry that property is depreciating rather than rising in value, even when actual market prices are soaring. At the state and local levels, prior to 1930 some 70 percent of public revenue came from property taxes; today, only 21 percent does, with the difference made up primarily in increased taxes on income and sales. These tax breaks on property and capital gains, along with the tax deduction for interest payments, provide a powerful incentive for buyers to go into debt; that is, to pay mortgage interest to bankers for property they hope to sell at a gain. Thus, the income that governments have relinquished through property-tax cuts ends up being paid by new buyers to banks as interest. Rather than funding new develop- ment projects, most savings have been turned into bank loans for housing that already exists,“post-industrializing” the economy and burdening it with an overhead of non-production costs. We are far from the wealth of nations that Adam Smith imagined.

As reform-minded economists have long argued, we must tax the rentiers. Taxing their privilege would yield as much as the present income and sales taxes combined, without eating into the earned income of wages and profits. For example, roughly half of the estimated $1.4 trillion rental value of all residential and commercial real estate comes from the land on which buildings sit. The idea is to tax not the buildings but this land value— sites that are provided by nature and that in- crease in value incidentally when a rail line or a Starbucks is built nearby. By taxing only the land, we would no longer be penalizing new construction and would discourage speculative hoarding. Indeed, in both 2006 and 2007 the market price of land went up by $2.5 tril- lion. This increase in balance-sheet valuation was not earned, since landlords did not have to make an investment to create it; moreover, taxing these sites could help cover the costs of new development and would not reduce the supply of land.

A related reform would abolish the tax deduction for interest payments. In 2006, property owners paid $742 billion in mortgage interest, accounting for 84 percent of the total interest collected by the financial sector. Assuming a 33 percent overall tax rate, this deduction alone cost the Treasury a quarter trillion dollars. (By encouraging debt financing rather than equity investment, this subsidy to mortgage lenders helped fuel the real estate bubble.)

The public also should own—or at least be able to collect rental revenue on—the nation’s infrastructure and the monopolies for which only one provider makes economic sense. The broadcasting and communications spectrum is just one example of immense private wealth that has been carved out of the public domain. (As with England’s land barons, broadcasters received their right on the condition that they fulfill specific public obligations, which, over time, they came to resist.) I estimate that the broadcasting spectrum, recently valued at $480 billion, accounts for another $100 billion in free economic rent. Other privatized natural resources lose perhaps $250 billion more.

The total lost tax revenue on property, capital gains, interest, and infrastructure is likely upwards of $1 trillion, a significant share of America’s $12.4 trillion national income in 2007. Instituting these taxes on land would make it harder for property buyers to take on that would ultimately drive down the cost of housing. Additionally, the money that was being funneled to banks in the form of inflated loan payments would now go to the government as taxes, thereby allowing income and sales taxes to be radically reduced.

In all, a considerable net gain for Americans. In our country and elsewhere, the transition from a feudal economy to a modern one remains incomplete. Hereditary estates and monopolies still retain huge privileges; taxes on property and rents remain at historic lows. Taxing these “unproductive” incomes would help to unburden labor and enterprise, and these changes would go a long way toward fixing what ails our economic system. ❖

[Brian O'Hanlon]

Good article by Tom Dunne here:

http://www.tribune.ie/business/news/art ... rty-taxes/

Bill Nowlan's articles here:

http://www.wkn.ie/index.php

Go to the media section of the wkn website.

[Emer O'Siochru]

See my comment on Tom Dunne article in www.smarttaxes.org.

Please note everybody that I am using the Smart Taxes blogsite for postings on land value tax, other taxation issues and related issues such as pensions, citizen dividend and government financing. I invite you to sign up and comment - it is a much more user friendly format

Emer

[John Goodwillie]

I can go part of the way with Emer O'Siochru in her critique at http://smarttaxes.org/ of Tom Dunne's article. A reform of local government structures and boundaries, though desirable, is in no way a necessary preliminary to the introduction of LVT.

But she advocates LVT being an entirely centralised tax. She writes: "It is also needed to replace commercial rates and development levies but this can be achieved by remitting some of the LVT income back to the local authorities as per an agreed formula." But local authorities have decided democratically on specific rates and levies, some leaning more heavily than others. The central government cannot be expected to pay over to different authorities amounts, drawn from central taxation, which replicate these varying burdens. No formula, it seems to me, can do this justly.

In any case, I don't see the difficulty which she assumes. It is for the central government to establish the valuation system. Each local authority can then decide on the percentage of the valuation which it will levy, just as they do with commercial rates.

It is desirable that local authorities be able to levy at differing percentages. One can decide on heavy spending and a high rate, another on light spending and light taxation. In this way they can compete for residents. The advantage of tying LVT to local authorities is that their spending is largely tied to residence, e.g. water, sewerage, roads, and people change their residence infrequently; whereas if local authorities were financed by a spending tax, people could shop over the local authority border and take advantage of a low tax rate, thus depriving their home authority of needed revenue.

Emer feels that variation is a bad thing: "An unwise, ultimately unproductive and self defeating policy of beggar-thy-neighbour may ensue as local authorities seek to attract high value activities by reducing LVT rates." But since LVT is payable on the land value, not on the high or low value of the activities, it is difficult to see that this makes a great deal of difference. In any case the problem can be met by an equalisation fund so that local authorities can start from a level playing field.