WHEN THE BUBBLE BURSTS

A housing CHOICE?

 

Life would be greatly improved for a vast number of Australians if they were able to keep themselves out of unnecessary debt.

Land prices are unnecessary. Title for exclusive possession of a home and land could be given on payment of a sum for the house and any other improvements, on the basis of an agreement to continue to pay the annual rent for the site. This would be on the reciprocal arrangement that the purchaser(s) were not to pay income tax, GST, nor any other form of tax, as long as the annual site rent is paid into the public coffers after sale of the property. The federal government would pay the site’s value to a vendor as they sold off their property to a purchaser who signed such a commitment.

The average residential site currently comprises some 75% of the total price of a property in Australia, therefore, as people took up the option—which is not to be forced, as they could continue to pay the land price to vendors and existing taxes if they chose to do so—Australia’s land prices would decline substantially and remain ‘flat’.

As capital prices of homes and debt levels declined, the productive side of the economy would resurrect, and wages would increase.

The best time to introduce such a home owner’s option is, of course, when the present real estate bubble and land prices collapse and mortgage debt has been written back to market anyway (as President Obama promised, but failed, to do in the USA in 2008). Politicians and banks, currently wed to a perceived need to keep land prices inflated because “banks are too big to fail”, would be less resistant to this home-owners’ policy initiative in the scenario of a collapsed market.

Potential benefits for Australia would be extraordinary: banking would assume its role as a servant of people and the economy, instead of their master; real estate speculative activity would decline, and; real wealth-creating productivity must increase as a result.

Threats? Well, the 0.1% who currently have both sides of the political spectrum protecting them at the moment, together with a rampant banking and real estate sector invested in inflating land prices at the expense of the community and productivity. Rent-seeking interests have been “dividing and ruling” the political system and the economy as people have increasingly become debt-slaves to them.

Do I speak of new world in which publicly-generated land rent is captured publicly – thereby bringing people together instead of continuing to divide them? Yes, I do.

Just saying.

WSJ: REALTORS TAKE A TAX HOSTAGE

The Realtors Take a Tax Hostage, Wall Street Journal editorial, Oct. 18, 2017.

They want to keep middle-class rates high to save their subsidy.

Republicans had hoped to mute opposition to their tax blueprint by preserving the deduction for mortgage interest, but no bad policy goes unpunished. The Realtors are still howling that the reform will hurt homeowners, and they’re trying to take a central element of reform as a political hostage.

One goal of the GOP framework is to simplify the tax code by eliminating preferences that distort economic behavior. Most itemized deductions other than mortgage interest and charitable contributions would be nixed. But the individual standard deduction would increase to $12,000 from $6,350 ($24,000 for married couples) to reduce taxes for most Americans.

The Realtors are upset because they say this middle-class tax cut would make fewer taxpayers use the mortgage-interest deduction. The National Association of Realtors trashed the framework in a statement, saying it “would all but nullify the incentive to purchase a home for most, amounting to a de facto tax increase” and ensure “that only the top 5 percent of Americans have the opportunity to benefit from the mortgage interest deduction.”

Where to begin? The brokers are right that the reforms would reduce the utility of the mortgage-interest deduction for many middle-income earners who currently itemize. But this is a virtue, not a bug. While only those with large mortgages and charitable contributions would likely continue to benefit from the break, this doesn’t mean other homeowners would be worse off.

Two-thirds of all income-tax filers already take the standard deduction. Increasing it to $12,000 would mainly affect homeowners earning between $50,000 and $100,000 who on average itemize $7,000 in mortgage interest and $6,342 in local and state taxes. Some of these middle-income itemizers—particularly those with smaller mortgages who live in lower-tax states—would instead take the standard deduction. But if their overall tax liability is reduced, they’re still better off. The Realtors want to keep taxes higher on all Americans so they can keep their subsidy.

The well-to-do with large mortgages could still itemize deductions—the average mortgage-interest deduction for those earning more than $250,000 is $15,500—but the subsidy’s value would diminish due to a decline in marginal tax rates. But that is also the point of reform—to lower rates across the board rather than subsidize one form of economic or social behavior (like owning a home) over another.

The Realtors say the GOP framework would reduce the incentive to buy and own homes. This is highly doubtful. Home-ownership is higher in countries with no deduction such as Canada (69%) and the United Kingdom (71%) than in the U.S. (64%). The U.S. also heavily subsidizes housing in other ways, such as the low-income housing tax credit and Fannie Mae and Federal Housing Administration loan guarantees.

The subsidies get baked into higher home prices, thereby making ownership less affordable for lower- and middle-income earners. California, Washington, D.C., New York and Hawaii have among the largest mortgage-interest tax deduction claims per return but the lowest home-ownership rates. On the other hand, taxpayers in Southern and Midwestern states with high home-ownership derive less benefit from the deduction.

Taxpayers in coastal states that benefit most from the state and local tax break also reap some of the biggest gains from the mortgage-interest deduction. Many of these states have higher home prices due to scarcity of land and restrictive zoning. Homes in California’s coastal metros are four to five times more expensive than in most of the rest of the country, but the disparity in rents is about half as large.

This is another way of saying that the mortgage-interest deduction subsidizes housing consumption for the upper and upper-middle class. Republicans could help tax fairness if they reduced the current $1 million cap on the size of a deductible loan to $500,000. The Tax Foundation estimates this would raise about $300 billion in revenue over 10 years, which could be used to lower tax rates. GOP tax writers should do this if the Realtors insist on partially restoring the state and local tax deduction.

Like other carve-outs, the mortgage-interest deduction favors some taxpayers over others and distorts economic decisions. Tax reform would benefit all Americans in lower rates and faster economic growth, and Republicans should hold fast against the housing lobby’s self-serving tax flimflam.

Appeared in the October 18, 2017, print edition.

GUIDE TO REALITY IN AGE OF DECEPTION

If you’re interested at all in economics and what’s happening to us, you really do need to read this!

“The focus of classical economics was to free society from rent seeking and exploitative prices being charged, not to celebrate these as investment opportunities.”

DEBT DEATH & DEADWEIGHT: DOWNLOAD FREE

A collection of excellent essays on health and poverty, edited by Fred Harrison, to be presented at a seminar hosted by two All-Party Parliamentary Groups, in cooperation with Taxpayers Against Poverty, at Portcullis House, Westminister 18 October 2017.

Click on the booklet cover to download the essays free.

POVERTY’S ROOT CAUSE

There is a cause for this poverty; and, if you trace it down, you will find its root in a primary injustice. Look over the world to-day—poverty everywhere. The cause must be a common one. You cannot attribute it to the tariff, or to the form of government, or to this thing or to that in which nations differ; because, as deep poverty is common to them all the cause that produces it must be a common cause. What is that common cause? There is one sufficient cause that is common to all nations; and that is the appropriation as the property of some of that natural element on which and from which all must live.

Now, think of it—is not land monopolisation a sufficient reason for poverty? What is man? In the first place, he is an animal, a land animal who cannot live without land. All that man produces comes from land; all productive labour, in the final analysis, consists in working up land; or materials drawn from land, into such forms as fit them for the satisfaction of human wants and desires. Why, man’s very body is drawn from the land. Children of the soil, we come from the land, and to the land we must return. Take away from man all that belongs to the land, and what have you but a disembodied spirit? Therefore he who holds the land on which and from which another man must live, is that man’s master; and the man is his slave.

SPECULATION

Every age has its peculiar folly: Some scheme, project, or fantasy into which it plunges, spurred on by the love of gain, the necessity of excitement, or the force of imitation.”  Charles Mackay (1814-1889)

AUTHOR, AUTHOR!

THE AGE letters today

Banking on profits

How ironic that CBA boss Ian Narev is concerned that global wage growth has been “relatively weak” (‘CBA boss says sorry over ATM scandal’, The Age, 7/10).  Adam Smith noted in Wealth of Nations that privatised land rent adds one-third to costs. (“This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land, and in the price of the greater part of commodities, makes a third.”)

The American social philosopher Henry George agreed with Smith that land rent needs to be publicly captured if wages and earned profits were not to suffer at the hands of those who seek to extract what amounts to unearned, publicly generated land rent.

What greater rent-seeker could there be than our banks who, by generating “super-profits” out of land price-inflated mortgages, have thereby leeched from the incomes of labour and capital?

Bryan Kavanagh, Mount Waverley