GRATTAN SPEAKS THE TRUTH

john-daley

 

How refreshing! Let’s trust Treasury and governments listen up!  –> http://www.smh.com.au/federal-politics/political-news/grattan-institute-blames-treasury-forecasts-for-convincing-federal-government-to-pin-hopes-for-a-budget-surplus-on-future-economic-conditions-20150701-gi2ly9.html

 

 

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LAND TAX IS *NOT* REGRESSIVE!

Housing, Income, and the Progressivity of Taxing Property

by Mason Gaffney

Many pundits and economists tell us we should abate the property tax because it is “regressive”. Their case has several parts, which I have dissected and refuted elsewhere (see www.masongaffney.org  –> “The Property Tax is a Progressive Tax”). One method is to pretend the property tax falls just on homeowners, assuming away all the corporate, and other industrial, commercial, rental, recreational, mineral, utility, and speculative property, which constitute more than half the base. Then the pundits paint the homeowner as an average Joe or Jane, a struggling little guy or widow, in debt, overtaxed, needing all our sympathy and support. To spare these poor we must spare the rich in their mansions with wide grounds. To do so we tax instead sales, incomes, payrolls, utility customers, and business activity. We are also to starve the schools, hospitals, parks, mass transit, and other public services, a view that the Howard Jarvis Taxpayers’ Association, now led by Jon Coupal, earnestly champions.

Our focus here is on homeownership. Many basic economics texts tell us that shelter costs are over half the budgets of the very poor, and as we step up to higher income brackets, shelter costs rise by smaller steps. In economese, they write that “the income-elasticity of demand for housing is less than one” – in English that means that if income rises by x%, housing outlays rise by less than x%. Goods like that are labeled and classed as “necessities” as opposed to “luxuries”.

Ernst Engel, a Prussian official and statistician, long ago observed this rule for food (“Engel’s Law”) by studying real data on household budgets. Many later writers have simply assumed this Law also applies to shelter, that being another “necessity”. Charles E. McLure, Jr., for example, in a work edited by Richard Musgrave, calls the property tax on housing “highly regressive”, with no need for proof. Most such allegations are a priori, unsupported by observation, except sometimes by cherry-picked examples that run against the major trend of the data, which we really should look at in the whole, as we do later in this paper. The municipal government of the District of Columbia has issued several reports, over the years, alleging that higher-income people spend a lesser share of their incomes on housing. One of them, by Daniel Lucas, was actually based on HYPOTHETICAL housing data. Yet economists all over the country cited it for support, an astounding travesty of scientific method.

Liberal reformers who would repeal Prop. 13 and its clones in other states have accepted this belief, at least politically, and proposed a kind of 2-rate property tax that applies a low rate to homes and a higher rate to “business”. Robert McIntyre of Citizens for Tax Justice, a union lobby, has long pushed this view. Leo McCarthy launched it in California years ago; Rob Reiner and Lenny Goldberg tried again in 2006, in vain. Skeptics have asked what’s the point of attracting more residents while driving away jobs.

This idea that all or most consumer spending rises slower than incomes has a long history, over-generalizing from Engel’s Law. It was a centerpiece of Keynes’ early analysis, taught as gospel to every student of economics after 1946, labeled pretentiously as “the consumption function”. This “function” is a line on a graph showing consumption, measured on the vertical, related to income, measured on the horizontal. It slopes upwards to the right as income rises, but at less than 45 degrees, becoming an ever smaller fraction of income.

A problem with the function is that consumption cannot start from zero, even when income is zero or negative. People must consume something to survive. It turns out that when you rank people by income, those in the lowest bracket consume about twice as much as their incomes. How can people do that, year after year? They can’t and they don’t, for many reasons other than charity and welfare. For example:-

  • Many have highly variable incomes over life: medical students training to be brain surgeons; actors; athletes; hedge-fund managers (“shooting stars”); building contractors; etc. When you catch them in a bad year, they are consuming from past good years, or expected good future years
  • Many retired people live on savings
  • Many people borrow on their equity in appreciated lands, and consume the proceeds. Appreciation is not counted with current income (it should be, but isn’t)
  • Some trust-fund babies consume lavishly for years without working
  • Middle-aged people may squander savings today, expecting to inherit tomorrow
  • Some live in the old family home, whose imputed income is not included in measured income, letting them spend more on measured and recorded “consumption”
  • Probably most weighty, many high-income people are clever at concealing their taxable income, and economists, who should know better, take their income data from the IRS and pretend the data are valid. Garbage-in Garbage-out, anyone?

To ignore such matters can make almost any tax or charge on consumption look “regressive”, because consumption exceeds income in the lowest bracket. As measured incomes rise, consumption necessarily rises slower, from that high starting point. Good statistics books warn against the error, calling it part of “regression fallacy”. Most economists and other analysts go right on spreading the fallacy, however, with respect to housing.

Henry George, without benefit of a statistics course but using his eyes and common sense, saw through the fallacy. “(I know) a man … who used to boil his own beans, … (but now) has got rich, maintains a town house that takes up a whole block, … two or three country houses with extensive grounds, a large stud of racers, a breeding farm, private track, etc.” (Progress and Poverty, pp. 247-49). Higher incomes raise demand for land faster than incomes rise. Land for shelter and recreation is a luxury. It is also, of course, a good hedge against inflation, an investment, a long-term speculation, and a short-term one in most years (but not in all years – witness 2007!).

Later, when touring the British Isles, George saw nobles keeping vast country estates in those “overcrowded” isles. To get a little more hunting and fishing and riding space they evicted whole villages of people, who could go press on the means of subsistence elsewhere. Today we see the same process in the U.S.A., lacking the nobility but having the essentials: money and power.

Chicago School economists, to their credit, saw through the “regression fallacy” in Keynes’ “consumption function”. They were most sensitive to the life-cycle bias. To get away from it, they saw that you don’t need to follow individuals over their whole lives. Rather, in most towns you have people in all stages of the life cycle, so just compare figures on income and consumption between one town and another. It’s called “cross-sectional” as opposed to “time-series” analysis. The towns are called “instrumental variables”. One Chicago economist, Margaret Reid, did this specifically for housing, and found that housing is a luxury good.

We can do it too, right here and now. As we go from poor to rich areas (be they states, counties, cities, or neighborhoods) incomes rise, but home values rise faster. Here are some examples.

  • Rancho Santa Fe, in San Diego County, has the highest p.c. income in the U.S., yet the ratio of housing values to p.c. incomes there is 10/1, compared with about 2.5/1 or 3/1 for the whole U.S. (in the boom-bust cycle the ratio changes from year to year)
  • In Beverly Hills, the ratio is 11/1; and so it goes for several other famously rich cities like Coronado, Malibu, Santa Monica, Greenwich, Sag Harbor, Woodstock (VT), Nantucket, etc.
  • In Honolulu the ratio is 5.5, compared with 1.7 in Wichita, Peoria, Buffalo, Rochester, and many other low-income cities

In addition, housing density falls as incomes rise: the U.S. Census reports that half the homes larger than 3,000 square feet are occupied by couples living alone, a meager 2 persons per house. In Indian Wells, CA, wealthiest in Riverside County, there are fewer than one person per house, compared with 5 or more in Home Gardens, a poor civil division jammed between Riverside and Corona. In Santa Ana, another refuge for the poor, there are 5 legal persons per home, and many, many more illegally. In several classy places like Belvedere and Beverly Hills the average is two persons per home. Actor Nick Nolte, a prosperous single gentleman, occupies 6 acres in Malibu. Brad Pitt has a compound of houses atop one of the Beverly Hills.

John Talbott in 2003 published data on income and home values for some 123 U.S. cities. If we rank them by income the top 10 have a home/income ratio of 3.7; the bottom 10 of 2.5. Ranking by income is stacking the cards against showing the main trend. We can stack the cards the other way, too, ranking the data by home value. Then the top 10 cities have a ratio of 4.9; the bottom 10 of 1.9. Either way, though, the trend is clear: housing values rise faster than incomes. We could massage the numbers in myriad other ways, as econometricians love to do ad tedium, but not change the basic finding.

Comparing California with the U.S., incomes are a little higher and home values much higher. National and state associations of realtors publish regular “Affordability Indexes” by region, comparing home values with the incomes of potential buyers; California, Hawaii, and other areas of high incomes always rank hear the bottom in affordability, meaning the higher incomes are not enough to make up for the higher home prices. In 2004, a boom year, the ratio of home prices to median annual income was 3.4 for the U.S.A., and 6.4 for California.

Comparing state to state across a wide nation raises questions about other variables, so let’s compare counties in one state. The Affordability Index (percentage of households able to afford the median price) in Riverside County, California, is 56%, compared with 35% in neighboring Orange County, although Orange County has much higher incomes (1999 data). Riverside County has the “cheap dirt”, as the locals put it – although it is not so cheap compared with Oklahoma or Kansas.

Comparing old central cities with suburbs yields consistent findings. A 1990 study of Philadelphia and its suburbs found the ratio of home value to income was 1.6 in the City, and 2.8 in the Pennsylvania suburbs. In Milwaukee the ratio is 1.4, while in abutting Ozaukee County, its highest-income suburb, the ratio is 2.2.

Next, let’s compare cities inside one county, starting with Orange County, CA. Going from blighted Santa Ana through middle class Costa Mesa to upscale Newport Beach, income per household rises by 42%, from $55k to $78k, while house values rise by 222%, from 1.8 times the U.S. average to 5.8 times.  In Cook County, IL, the Chicago ratio is about 2.5/1, but in its suburb Kenilworth, also in Cook County, the median income in 2004 was $200k, and the median home sale price was $1.3 millions, a ratio of 6.5/1.

Oakland, CA, and its neighboring upscale enclave of Piedmont are both in Alameda County. From Oakland to Piedmont, median home values rise from $240k to $615k, or 2.6 times as much, while incomes rise a lot less. Note two factors that make Piedmont home values even higher than those numbers show. First, the MEAN Piedmont value is higher than the MEDIAN, because values are highly skewed, even though the population is small. The highest selling price in Piedmont in 2002 was $2.5 million, or 4 times the median, while in Oakland the highest sales price was just 1.5 times the median, even though the population is much bigger. Second, most dwellings in Piedmont house many fewer people than most dwellings in Oakland.

A third factor, not even mentioned yet, is that well-housed people in places like Piedmont also own second, and often multiple homes and recreational lands elsewhere. We do not include the income properties (office, retail, industrial, farm, residential, mineral, warehousing, etc.) they own and whose rents help them afford Piedmont, for here we focus just on real estate they use personally. Who but they own the duck blinds, shoreline cottages with docks, horse farms, game preserves, airstrips, hunting and fishing resorts, hobby farms with vineyards and groves and ranchos, country-club memberships, pieds-à-terre in glamorous cities and cultural centers like Lenox, MA, mountain retreats, ski lodges, dachas, villas, manors, polo fields, and other such rural and lacustrine playgrounds of the rich? The Assessor of Pitkin County (Aspen), Colorado, sends most of his tax bills out of state. Vilas County, Wisconsin (Eagle River, lakes) and Walworth County (Lake Geneva) have the highest land values per resident in the State, mostly owned by outsiders like, for example, residents of Kenilworth, mentioned earlier, who may also own stables in horsey Barrington in the vast playgrounds northwest of Chicago. In Newport Beach, CA, 11% of the houses are vacant at any one time, and not from poverty or lack of demand: the owners are elsewhere.

Finally, the richer places have much higher land/building ratios. In Beverly Hills it’s about 3/1, while in a desperately poor place like the colonias and labor camps of the sweltering inland valleys the bare land has hardly any value which the shacks and trailers, miserable as they are, easily outvalue. The writer has published data (“The Taxable Capacity of Land”, in www.masongaffney.org) from the Lower Mainland region of British Columbia showing the land fraction of real estate value varying from a high of 80% in the posh University Endowment Lands of Point Grey (now being snapped up by Hong Kong billionaires) down to 35% or so in some outlying rural districts. Later data reveal land fractions below 10% in more remote inland towns like little Pouce Coupe, (the Canadian Podunk), Revelstoke, and Dawson Creek. (Both data sets are from the B.C. Assessment Authority, one of the best assessing agencies in North America.)

Putting it together, a property tax based on the value of land in residential and recreational land alone would be progressive. We should impose it for reasons of equity as well as the well-known reasons of efficiency – making it part, of course, of a tax on lands however used.

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ACIL ALLEN REPORT SPOUTS NONSENSE

MacroBusiness has today shredded in detail ACIL Allen Consulting’s fatally flawed report for the property industry which favours the negative gearing of investment property.

Seems you can get people to write anything if you pay them enough?  Or, maybe all their mistakes were quite innocent?  :)

Either way, the report is wrong.  Oh, and about that “$10,000 extra rent if negative gearing were to be axed“?  So wrong!  Grrrr!

 

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CORRUPTION

RENT-SEEKING:  THE RENTAL INCOME FLOWING TO LAND AND NATURAL RESOURCES THAT WE ALLOW TO BE CAPTURED PRIVATELY, DESPITE IT BEING OWED EQUALLY TO ALL INDIVIDUALS (AND THEREFORE THE NATURAL SOURCE OF REVENUE) 

Foundations are set up by rent-seekers to blame anything or anyone for being the main political stumbling block.  Anything or anyone, that is, except the main culprit, private rent-seeking in the public’s assets.

By definition, rent-seekers have the money to be able to do this; their foundations have the funds to pay very high emoluments, so they’re extremely influential in disguising the practice of rent-seeking – to the extent that most people don’t even understand the term.

The major political parties are completely under their thrall: they won’t oppose rent-seeking for fear of retribution.

But sometimes rent-seekers go too far in setting up their stooges and having a laugh at our expense:-

George Dubbya Bush Quotes from Wikipedia

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General

  • “They misunderestimated me.”[9] — Bentonville, Arkansas; November 6, 2000
  • “I know the human being and fish can coexist peacefully.”[10] — Saginaw, Michigan; September 29, 2000
  • “There’s an old saying in Tennessee—I know it’s in Texas, probably in Tennessee—that says, ‘Fool me once, shame on…shame on you. Fool me — you can’t get fooled again.'”[11] — Nashville, Tennessee; September 17, 2002
  • “Too many good docs are getting out of the business. Too many OB-GYNs aren’t able to practice their love with women all across this country.”[12] — Poplar Bluff, Missouri; September 6, 2004
  • “I’m going to put people in my place, so when the history of this administration is written at least there’s an authoritarian voice saying exactly what happened.”[13] (Announcing he would write a book about “the 12 toughest decisions” he had to make. Presumably “authoritative” was intended.)
  • “See, in my line of work you got to keep repeating things over and over and over again for the truth to sink in, to kind of catapult the propaganda.”[14][15]
  • “I’ll be long gone before some smart person ever figures out what happened inside this Oval Office.” —President George W. Bush, in an interview with the Jerusalem Post, Washington, D.C., May 12, 2008[16][17]

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Foreign affairs

  • “I’m the commander, see. I don’t need to explain — I do not need to explain why I say things. That’s the interesting thing about being the President. Maybe somebody needs to explain to me why they say something, but I don’t feel like I owe anybody an explanation.”[18]
  • “Yesterday, you made note of my—the lack of my talent when it came to dancing. But nevertheless, I want you to know I danced with joy. And no question Liberia has gone through very difficult times”- Speaking with the president of Liberia, Washington, D.C., Oct. 22, 2008 [19]
  • “This is still a dangerous world. It’s a world of madmen and uncertainty and potential mental losses.” (missile launches?)[20]
  • “Our enemies are innovative and resourceful, and so are we. They never stop thinking about new ways to harm our country and our people, and neither do we.”[14][21]
  • “I’m telling you there’s an enemy that would like to attack America, Americans, again. There just is. That’s the reality of the world. And I wish him all the very best.” —Washington, D.C., Jan. 12, 2009[22]
  • “Well, I mean that a defeat in Iraq will embolden the enemy and will provide the enemy – more opportunity to train, plan, to attack us. That’s what I mean. There – it’s – you know, one of the hardest parts of my job is to connect Iraq to the war on terror.”[23]
  • “I just want you to know that, when we talk about war, we’re really talking about peace.”[24]
  • “See, free nations are peaceful nations. Free nations don’t attack each other. Free nations don’t develop weapons of mass destruction.”[25]

dubya-yell

Economics

  • “You bet I cut the taxes at the top. That encourages entrepreneurship. What we Republicans should stand for is growth in the economy. We ought to make the pie higher.”[20]
  • In January 2000, just before the New Hampshire primary, Bush challenged the members of the Nashua Chamber of Commerce to imagine themselves as a single mother “working hard to put food on your family.”[20]
  • “You work three jobs? … Uniquely American, isn’t it? I mean, that is fantastic that you’re doing that.” – Omaha, Nebraska, Feb. 4, 2005[26][27]

Bush_the_pet_goat

Education

  • “Rarely is the question asked: Is our children learning?”[4] — Florence, South Carolina; January 11, 2000
  • “You teach a child to read, and he or her will be able to pass a literacy test.”[14][26]
  • “As yesterday’s positive report card shows, childrens do learn when standards are high and results are measured.”[28]

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THE BANKING PROBLEM’S CRUNCH TIME

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OPEN SLATHER: 2 MIN 15 TO 4 MIN 24 :)


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NOT JUST HENRY GEORGE – ADAM SMITH, DAVID RICARDO, JS MILL

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SAD BUT TRUE

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LOOKING FOR THE REAL STORY BEHIND HIGH HOME PRICES

Brian Feeney in Independent Australia

The recent Senate housing inquiry has missed the real story behind high home prices leaving many would-be first home buyers still out in the cold writes Brian Feeney.

With high home prices now a hot political issue, the recent Senate inquiry on affordable housing was timely.

The inquiry’s final report contains 40 recommendations, but few if any of these will have a positive effect.

The report recommends improving capacity to pay by phasing out stamp duty on home purchases, reducing the impact of infrastructure charges on the price of new housing, better targeting of the First Home Owners’ Grant, and reviewing the impact of investor tax rules on housing affordability.

This familar story, unfortunately, glosses over some important evidence. I believe there is another story to be told, one bout developers drip-feeding the market to keep prices up, and where capital gains created by the community are mostly retained by individual owners. It’s a story that goes something like this:

1. Developers largely control supply

A shortage of supply is commonly blamed for high prices. However, housing is not a homogenous product. Buyers are choosy about housing type, features and (particularly) location. More importantly, the housing market is not truly competitive because private developers have a considerable influence on supply (see also here and here).

Consequently, the usual rules of supply and demand do not necessarily apply. Even with more government land releases, developers largely control what is brought to market to keep prices high. This is unsurprising but rarely acknowledged.

Governments do not directly increase supply as was done in the past, but there are several ways governments could influence the price buyers are prepared to pay.

2.   Housing costs what buyers are prepared to pay

In the current situation with supply largely controlled, the price of housing is ‘demand determined’. Even if supply were increased, it is far from clear that this in itself would reduce prices much.

The Reserve Bank has acknowledged that higher home prices are mainly due to lower interest rates and the resulting greater purchasing power. As well, investors have incentives to pay more than owner-occupiers because of negative gearing and a discount on capital gains tax.

3.   Buyers expect to make capital gains

The inquiry report put little emphasis on the expectation of future capital gains as a driver of higher prices.

While an investment property often makes a loss for a number of years, the buyer expects the initial loss (tax deductible through negative gearing) will be offset by capital gains.

The attraction of future capital gains has been even greater since a 50 per cent discount was applied to capital gains tax in 1999.

4.   Banks are fuelling property investment

Banks and other finance providers are now “eager to lend to households” for property investment. Interest only and low equity loans have been readily available, with the family home as collateral.

The number of property investors has grown substantially over the last five years. See graph below:

5.   Negative gearing isn’t increasing housing supply

Negative gearing has not stimulating much new housing construction, with more than 90 per cent of residential investment mortgages being for established housing.

Economist Saul Eslake notes that few other developed economies have negative gearing but most have higher rental vacancy rates’ than Australia.

6.   What can be done?

To put it starkly, home prices need to fall — relative to incomes initially, and then in absolute terms over time. Because developers largely control supply, reforms are needed to reduce the price buyers are prepared to pay.

Fundamental to this is reducing future capital gains expectations, especially for investors. The price investors pay needs to be based on expected rental returns not future capital gains.

At the heart of the issue is this question:

Who is entitled to the increases in land value created by general expansion and development of town and cities?

The 19th century political philosopher John Stuart Mill called these increases ‘unearned increments’. While a champion of individual freedom, Mill nevertheless believed unearned increments rightly belonged to the community rather than the individual landowner. Winston Churchill agreed.

The existing capital gains tax recoups some of these land value increases. This tax needs to levied at a relatively high flat rate on the inflation-adjusted increase in the unimproved capital value of the land.

Owner-occupied housing also benefits from unearned increments, and should be subject to a flat-rate capital gains tax, although the rate could be lower than for investment housing.

Negative gearing on established homes should be removed for reasons set out here and here.

The lending practices of mortgage financiers would also need more regulation, for example by limiting loan to valuation ratios.

These reforms should be “grandfathered” and/or phased in over an extended period, probably after the current overheated conditions moderate.

7.   Shelter or investment?

Recouping more of J S Mill’s unearned increment for the community is likely to subdue home prices, especially if negative gearing were limited to new housing construction.

In this way the current imbalance between those wanting the security of home ownership and those seeking easy capital gains would be corrected.

You can read more about Brian Feeney’s research on this issue here.


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LOVING ALL THE EUROPEAN STABILITY?

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