DC fixer-uppers become tax ruins or renewals?
|March 22, 2009||Posted by Jeffery J. Smith under Progress Report, The Progress Report|
DC fixer-uppers become tax ruins or renewals?
Breaking in on the rent seekers
When the US capitols city government doubled its property tax rate to 10% for unoccupied residential buildings and vacant lots, land-rent hoarders claimed it would backfire; it would force owners not to develop but to abandon sites (Washington Times, Mar 2). Actually, they could be right, if the tax exceeds the rental value of the location. Thus the tax should not be set politically but economically — enough to recover the site’s rent — then be left alone. Owners would content themselves with the income from any improvement. To balance taxing land, government should de-tax buildings permanently. Then DC could prosper as has every other city that shifted its property tax off buildings, onto land, including Sydney. To put this powerful tax shift into the bigger picture, we run this 2009 op-ed from Australias main daily, The Age, Mar 11. The author is a research associate with the Land Values Research Group.
by Bryan Kavanagh
“Put to the vote: as many are of the opinion that a public tax upon the land ought to be raised to defray the public charge, say ‘yea’ ”
- Philadelphia’s first tax law, January 30, 1693
“ Carried in the affirmative, none dissenting.”
Today’s rent seeker argues theres never a good time to tax land. When land prices rise, the tax rises. When prices fall, he has no money; the last thing he needs is property taxes causing more “damage”. He seems to require property tax relief both on the upside and the downside.
The truth is that the public capture of publicly generated land rent never does harm to society. Lately it may be dawning on politicians and analysts that the real estate bubble was the inevitable result of inadequate land-value capture. They may even consider extending and fortifying council rates and state land taxes in order to prevent damaging real estate bubbles from developing again in the future.
Unlike the late 17th-century Philadelphians, much of local government doesn’t appreciate the ingenuity of the reasoning behind the rating system by which it is mainly funded. Therefore, it often won’t defend it against those hostile ratepayers who attack it because they can. (Ratepayers are rarely to be seen knocking on the door of the federal treasurer, protesting against their income taxes!) Meanwhile, state governments reduce state land taxes, acceding to powerful landed interests whose property values must apparently be allowed to achieve nosebleed heights unfettered by land-based taxation.
The big end of town has been adept at capturing the rent created by public infrastructure, even combining with government in unholy alliances against the interests of the public by privatizing Australia’s highways, airports, and public utilities. Governments of all persuasions have allowed cobwebs to settle on the old idea of capturing part of the uplift in land values that public infrastructure projects endow. But times may be changing: recent losses by new tollways in the states of New South Wales and Victoria attest to people’s growing concern about losing the long-standing principle of the freedom of the highways and byways.
Favored by a tax system doling out bountiful handouts to rent seekers, real estate became the name of the game throughout the first decade of the new millennium; over eight years from 1999, the bubble developed remorselessly. As we caught the contagion, land rent became privately capitalized into sharply increased land prices. The obscene levels of mortgage interest paid largely signified the land rent lost to banks.
Subsequent inquiries into housing affordability always managed to turn a blind eye to the option of directing lost land rent into the public purse. Increasing the level of land-value capture would, however, contain the rate of land-price escalation. The property lobby seems always able to contain public opinion.
Australian Bureau of Statistics notes we collected less than $40 billion from taxes on “property” in 2007. Although publicly generated land rent was $325 billion, we chose to fine labor and capital to the extent of some $285 billion for daring to work, and allowed 86% of Australia’s land rent to be privately capitalized into the bubble — thereby establishing the conditions necessary for an extraordinary financial collapse.
Presumably on the advice of the same gormless economic high priests who have been advising them, governments now throw huge sums of public funds into the economic vortex in the forlorn hope of rekindling a fast-foundering economy. It may soon become clear to the dullest of economists, though, that taxation policy failure has been the catalyst for this financial implosion, and that the road to recovery does not lie in ritually sacrificing further government funds into an abyss. The question instead becomes whether Australians can be re-educated in time to reassert an old economic verity.
Land rent represents community, in so far as it is generated by the community and its assets, not by any individual. If we are to turn our parlous situation around quickly, we need not only to rid ourselves of those taxes penalizing thrift, industry, and exchange, but to re-establish the principle of public capture of publicly generated land rent. As it has for centuries, it still represents the best interests of the public.
Jeffery J. Smith runs the Forum on Geonomics.
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Getting to the Heart of America’s Economic Crisis
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