rental income mortgage interest deduction tax expenditure public schools

Workers Pay Twice the Income Tax of Landowners
tif abatement earn land value tax

Tax Bias Hurts Homebuyers, Helps Speculators -- Study

Raw data show owning much more rewarding than working, yet some voice reform. We trim, blend, and append five 2012 articles from: (1) #1 MMT site on the web, Jun 13, on rent by M. Norman; (2) MarketWatch, Jun 13, on rates by J. Hough (writes the By The Numbers column for SmartMoney); (3) ClawBack, Jun 22, on TIF by G. Leroy; (4) Telegraph, Jun 26, on taxing rent by D. Knowles; and (5) Mancunian Matters, Jun 7, on taxing land by C. Bennett.

by Mike Norman, by Jack Hough, by Greg Leroy, by Daniel Knowles, and by Charlie Bennett

For 35 years following WWII rental income as a percent of GDP was trending down. Then came Reagan and the beginning of the "financialization" of our economy.

From the mid-1980s rental income started to trend higher and in the 1990s, it literally exploded to the upside as a percentage of GDP.

Then we had the financial crisis and it dropped, briefly.

But now it's higher than ever. This means that more and more of our national income comes from people doing nothing more than extracting rents from assets (property). Sadly, incomes from actual production of goods and services is a declining percentage of GDP.

I am tempted to invoke Keynes here and say, "Euthanize the rentiers!!" (I guess I just did.)

To read more

JJS: And if getting to keep the socially-generated value of land is not enough of an undue boon, here’s another.

More than $10 billion a year in the mortgage interest deduction meant to assist house buyers may instead be adding to the profits of lenders.

Homeowners may deduct the cost of their mortgage interest from their taxable income each year, thereby trimming their tax bills.

Yet consumer subsidies raise demand for goods, thereby shifting prices higher. With mortgages, the “price” is the interest rate.

Between 9% and 17% of the value of the mortgage interest deduction is captured by lenders in the form of higher interest rates rather than homeowners in the form of savings.

The mortgage interest deduction is a “tax expenditure” because the reduced tax revenue must be either made up with higher taxes elsewhere or added to the debt. This year the deduction is projected to cost taxpayers $98 billion, or around $800 per household.

Through 2016, between $466 and $881 per household will go to lenders rather than homeowners.

Without the mortgage interest deduction, the rate would likely be closer to 3.3%.

Researchers at the London School of Economics and Kansas State University found the mortgage interest deduction to be an “ineffective policy” with “no discernible impact” on broad homeownership rates.

The Tax Foundation, a conservative think tank, says the deduction is a giveaway for those with high incomes and big houses.

To read more

JJS: Canada does not exempt mortgage interest and enjoys a higher home ownership rate than America. Below is yet another favor for insiders.

For the first time in 16 years, local funding (65 percent of which comes from property taxes) provided the greatest share of school funding. That reverses a long-term trend in which state funding has become a larger share of the pie (with federal support accounting for only a small share).

Now long-term property tax abatements, routinely granted to large companies in the name of economic development, hurt schools more than ever. The same can be said for tax increment financing (TIF) districts, which can divert huge sums of property taxes (and sometimes others) for decades.

When an employer considers relocating to an area (and moving key personnel), the first thing those key employees want to know is: how good are the schools? And the HR director wants to know: we will be able to hire well-educated new-hires? And they will also ask: has school quality been lifting home [site] prices?

To read more

JJS: Great Britain debates public recovery of site values.

If you inherit a house, worth a million pounds, and rent it out for £50,000 a year, should you pay more tax or less than someone who works for the same salary? I think that you should pay more. You've done nothing to earn that money -- you simply own a property that somebody else finds useful.

If you rent out a property, you only pay income tax on the rent received. If you work for a wage, you pay three income taxes, the other two being national insurance and employers' national insurance. That brings the effective tax rate paid on PAYE income up to 40pc for basic ratepayers, compared to 20pc on non-PAYE income. The worker pays a higher tax rate than his landlord.

Most people living on non-work income are not rentier landlords but elderly people living on pensions. Over 40 per cent of pensioners are now in the top half of the income distribution -- up from 25 per cent 20 years ago. While most working people (including many poorer pensioners) have to pay rent, or mortgages, and to raise children, most of the wealthiest elderly own their own property -- often bought in the 1970s, before prices began their catastrophic rise.

A house is subject to depreciation as the building gets ropier with age, but location value goes up with population growth. Which is why a land value tax makes a lot of philosophical sense.

To read more

JJS: His sensible conclusion is finding more support.

Land value tax got Twitter in a flutter, yet many Mancunians support the proposal.

Unlike levies on mansions and capital gains, land value taxation (LVT) may be unfamiliar to most Western readers since the use of land rents as a principal source of revenue is mostly limited to former British colonies, including Australia, Singapore, New Zealand and Hong Kong. (where the land is nationalised).

LVT deducts bricks and mortar, so vacant or derelict site can be valuated the same as a more bustling area if the two are in close proximity of each other.

Everyone pays rent as usual, but the landowner is now clobbered with a higher tax burden.

While de-taxing buildings will obviously alleviate homeowners and businesses, proponents of LVT claim that the price of land will decrease as well.

To read more

JJS: One could add many more benefits from public recovery of socially-generated site values. Just look at the places that have shifted their property tax from buildings to locations or by other means redirected rents into the public treasury. This geonomic policy works so well, you could pay residents a dividend!

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Editor Jeffery J. Smith runs the Forum on Geonomics and helped prepare a course for the UN on geonomics. To take the “Land Rights” course, click here .

Also see:

When the value of good land rises …
http://www.progress.org/2011/mccourt.htm

Veteran who called some major market junctures
http://www.progress.org/2011/russell.htm

Fed balance sheet hits another record size as ...
http://www.progress.org/2011/nobleman.ht

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