Buffett says tax me as trillions evaporate
Pensioners lose, builders win, no bottom in sight
| Pensioners lose two trill while builders get taxes back and recession looks to deepen, so Warren says to up his taxes. We trim, blend, and append five 2008 articles: on pensions from the Associated Press on Oct 7 by Julie Hirschfeld Davis, on home prices from Reuters on Sept 30, on tax refunds from the New York Times on Oct 3 by Michael Corkery, on a deepening downturn from the Financial Times on Oct 2 by Alan Beattie, and Warren Buffett on the Charlie Rose PBS show. |
by Jeffery J. Smith, October 2008
AP: Americans' retirement plans have lost as much as $2 trillion in the past 15 months, estimated Peter Orszag, the head of the Congressional Budget Office. Public and private pension funds and employees' private retirement savings accounts -- like 401(k)'s -- have lost some 20 percent since mid-2007, leading Americans to hold off on major purchases. One in five workers 45 and older has stopped putting money into a 401(k), IRA, or other retirement savings account during the past year, and nearly one in four has increased the number of hours he works. Unlike Wall Street executives, America's families don't get a golden parachute.JJS: For most families, their main asset keeps depreciating.
Reuters: Prices of US single-family homes plunged a record 16.3 percent in July from a year ago according to the Case-Shiller Index. Since the peak of the housing boom in July 2006, the index has dropped 19.5 percent. From June to July, their index of 20 cities fell 0.9 percent; losses in their index of 10 cities were somewhat greater. The pace of home price declines since May has slowed to about a third of the rate of the two previous three-month periods.
JJS: However, land must become affordable again for the next business cycle to begin. Meanwhile, ouch. Unless you’re a big builder.
Corkery: D.R. Horton, the nation's largest homebuilder by unit volume, is unloading land across California at big discounts.
By selling property at a loss, Horton, which built nearly 53,000 homes at the peak of the housing boom in 2006, is reaping tax refunds. Horton expects to receive a tax refund of $519 million over the next two years. At the end of last year, Lennar Corp. pocketed a $200 million tax refund after taking a 60% discount on its sale of 11,100 house lots.
As new-home sales sank to a 17-year low (keeping within the 18-year land-price cycle), builders can no longer count on doubling their investments by buying undeveloped parcels, preparing the property and selling the homes on it.
Horton two weeks ago sold about 2,000 house lots in Desert Hot Springs, a blue-collar community in the far reaches of Southern California's Inland Empire, for $7.8 million; Horton had paid about $110 million for the land before spending to prepare the property for development by grading and installing infrastructure such as sewers. Horton also recently sold a four-acre parcel in Escondido, near San Diego, for $4.4 million, about 25% of what it paid for the property in 2005.
Expect more such tax-motivated fire sales of undeveloped land this year. That could set a new low for land prices in California and other sluggish housing markets.
Lenders have completely cut off credit to most small builders, forcing many to file for bankruptcy protection. Analysts expect more than half of the nation's small and midsize builders will fold during the housing downturn. Once the dust settles, only the biggest will still be around.
Over the next few years, builders will likely build smaller developments closer to large metro areas, where house prices are expected to recover faster than in the far-flung regions. Homebuyers, figuring in the rising cost of gasoline, prefer to shrink trip distances. More compact development would spare some nature.
JJS: Builders and the rest of us will need to take even more defensive measures if the IMF has guessed right.
Beattie: The US economy is highly vulnerable to a sharp downturn if previous experience of financial crises is any guide. An IMF study released ahead of the fund’s annual meetings shows that recessions are more likely to follow financial turmoil when it is preceded by surges in house prices and credit. The IMF looked at a variety of episodes of financial turmoil from recent decades, including the stress in the Nordic countries, the US and the UK in the early 1990s, and the Japanese banking crisis that dragged on throughout the 1990s.
JJS: Not only the IMF but our species’ wealthiest member also underscores the role of speculating in land.
Charlie Rose PBS interview: Warren Buffett, the world’s richest man at $65 billion, called the current crisis an economic Pearl Harbor, requiring immediate action. Its biggest single cause, he explained, was the real estate bubble.
As far back as 2003, Buffett had warned that bundled mortgages and debt swaps were “financial weapons of mass destruction.” In the Rose interview he said: “Beware of geeks bearing formulas.”
To help pay for the rescue, the government should raise taxes on the wealthy, Mr. Buffett suggested. “I’m paying the lowest tax rate that I’ve ever paid in my life,” he said. “Now, that’s crazy.”
JJS: If income is enormous, to some extent it is probably unearned and would fairly merit a tax, especially if such a tax were to capture “rents”, our spending on goods never produced by anyone’s work or investment, goods like land and resources. If such a tax were pledged to the debt, then it’d expire automatically when the debt is paid off. Such an arrangement might be both just and politically feasible.
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Jeffery J. Smith runs the Forum on Geonomics.
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Also see: How Far Will the Crash Go and What Do we Do Now? Part III of III
Housing+credit crisis crunches jobs, incomes, and looks to worsen.
Special Privileges for Corporations Make Individual Tax Burden Heavier |
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