Don’t leave socially-generated values on the table
Restructuring how Government Raises Revenue
The huge wealth gap, the huge tax burden, and the huge top-heavy debt are related problems with a basic solution. The author is retired from Fannie Mae in Philadelphia.
by Edward J. Dodson, January 2008For most of the history of the United States, the government at every level was relatively modest. That changed as free land disappeared, as the cities became heavily populated with poor immigrants, and as politicians established a permanent military after the Second World War. Now our local, state, and federal governments spend over $5 trillion annually. Unable to raise this amount via taxation, governments sell bonds. When the next President takes office, the federal debt will be $10 trillion. At an interest rate of 5%, the federal government must raise $500 billion annually just to service this debt.
Well over half of all households in the United States receive little or no income from passive sources, such as the ownership of stocks, bonds, money market funds, or investment properties. Our income tax system is neither progressive nor simple. Moving to a “graduated flat” tax -- higher rates imposed on higher ranges of income -- would solve both problems.
For example, if the national median is $50,000, incomes greater than $50,000 up to $100,000 could be taxed at 5%; greater than $100,000 up to $250,000 at 10%; greater than $250,000 up to $500,000 at 15%; greater than $500,000 up to $1 million at 20%; and greater than $1 million at 25%. These could be adjusted to meet budgetary requirements. The tax rates adopted by state governments could be proportionately lower.
Just 300,000 US citizens collectively received as much income as the bottom 150 million. Much of this wealth comes from inheritance and/or passive investment of inherited financial resources. State and federal tax rules make no distinction between earnings from investment in job-creating capital goods or unearned payoffs from rent-seeking.
Opponents of the estate tax argue that such taxes would dismantle the nation’s family-owned farms. While the historical evidence reveals that inflated land prices and excessive debt drive families from farming, there is no validity to the charge that estate taxation is a factor. Because of the current level of tax exemption, nationwide only 65 farms faced any estate tax.
Half of those on the Forbes 400 list of wealthiest individuals inherited wealth or inherited the businesses they manage. Out of 121 million US households, only around 9 million have a net worth above $1 million. The median net worth of all households is only around $60,000. Thus, a federal estate tax that exempts even the first $1 million in value would be highly progressive.
The national debt can be significantly reduced by replacing maturing bonds with fully amortizing bonds that repay both interest and principal. The amount required to service this debt would be included in a requirement for a balanced budget.
Land values are socially-created by aggregate pubic and private investment. A long line of economists have argued the case for public collection of location rent.
(1) To ensure property assessments are kept current and equitable throughout each state, the responsibility for assessment should be taken over by a state agency. Assessments by county agencies and/or local assessors are almost everywhere influenced by political interests or are simply never updated. The worst cases involve failure to reassess undeveloped or underutilized land parcels based on current market values, leading to long-term holding of land off the market for speculative gain.
(2) Gradually exempt property improvements from the tax base, so that at the end of, say, 7-10 years, all revenue raised by taxing real estate would come from land values only. This rewards property owners for developing land to its highest and best use and, by greatly reducing the financial rewards for speculating in land, result in the gradual lowering of land prices.
(3) To address displacement of long-term residents due to rising property taxes, allow homeowners to cap their annual tax based on an affordability formula. The unpaid amount would accrue as a lien against the property (at a modest rate of interest) to be paid at time of resale or transfer of ownership.
Public funding of schooling should be paid for by state government. Presently, many high-income households with children in the public schools are subsidized by households with much lower income and no children. To address this inequity, institute a needs-based tuition voucher. Low-income households with children would receive vouchers sufficient to cover their childrens’ educational expenses, with the amount of voucher decreasing with rising household incomes.
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