Property Tax: Biases and Reforms
|June 6, 2002||Posted by Staff under Archive, Progress Report, The Progress Report|
Tax Expert Urges Reforms
Property Tax Reform Priorities
by Mason Gaffney, Ph.D.
PART NINE (Parts 1 – 8 are still available)
Priority #5: Make Landowners Pay Their Taxes
The solution is to make the regressive taxes pinch landowners. The income tax, when new, was designed to do exactly that. Georgists like Congressman Henry George, Jr. and Warren Worth Bailey took the lead in shaping it to do so. Over time, though, it has changed into mainly a payroll tax, and as it changed it became increasingly popular with landowners. It served their greed and became the clarion call of their constant clamor for “property tax relief.”
In 1942 Congress excluded 50 percent of “capital” gains from taxable income, and broadened the definition of “capital” assets. As top-bracket rates on “ordinary” income rose above 50 percent, Congress capped capital gains rates at 25 percent. Meantime, wage-taxwithholding was sold as a wartime measure – “We must all do our duty.” College professors were dutifully indoctrinating their students that the income tax is the perfect tax: fair, progressive, allocationally neutral, all at once.
Then income tax rates went wild, going as high as 92 percent on “ordinary” income (but capped at 25 percent for capital gains). Federal and state income taxes became the mainstay of public finance. Owners of income property soon learned to avoid almost all income taxes by claiming short tax lives by which fictitious inflated depreciation write-offs offset all their cash flow. Once a property has exhausted its depreciation “basis,” owner A sells the property to owner B, who depreciates it all over again, and so on through several rounds. The only “recapture” of this excess depreciation is when A sells to B for a capital gain; in effect, the rent of income property shows up as “capital gains.” This tax burden is minimized by keeping rates low on capital gains.
Many who think of themselves as “Georgists” have shut their eyes to this important matter. Some simply declare a pox on all forms of income tax. Others even join the hue and cry for exempting capital gains, specifically and preferentially, from income tax. These positions are, I submit, foolish. So long as we have an income tax that treats land income kindlier and gentler than wage and salary and interest income, so long will we have perpetual clamor for “property tax relief” by shifting the burden to incomes, until no burden remains to shift – a condition we are approaching in half the states.
Landowners and their advocates are ahead of us, and will remain so until we wake up. They are already lobbying to replace or supplement income taxes with what they miscall “consumer” taxes: various excise taxes, allegedly “general” retail sales taxes, income taxes with expensing allowed for all capital outlays, cash flow taxes, et hoc genus omne.
These taxes are mislabelled because they all exempt land-consumption from the base. Land-consumption is holding land without its earning any cash. A true, comprehensive consumer tax would include such land-consumption. At the same time it would exclude retail purchases of necessities used to form and maintain “human capital.” It would, in short, look more like a land tax than the present retail sales tax. It is only by bending the meaning of words to a class-biased goal that the apologists of private rent-taking and land-hoarding have sold sales taxes and VATs as taxes on “consumption.”
To turn back the drive for more consumer taxation, we must insist that the base include land-consumption, Then either the drive would accomplish a Georgist goal, or more likely, the rent taking, land hoarding apologists would turn tail.
We cannot accomplish those ends if we fight only for local property tax reform. We have to marshal our forces where they will do the most good.
In the late 18th century and most of the 19th, revenue to operate govemment came mainly from the sale of land.
Throughout history – and even today – wealth and privilege has been based upon ownership of land and monopoly. Economics, unchecked and in ignorance of the land and rent question, remains “the caveman’s law, the law of the sharpest tooth, the angriest brow and the greediest maw.” (so said Al Smith, Governor of New York and presidential candidate during the 1920s)
But we know there is a better way. The recognition that “territoriality” may be necessary as the law of survival for lower species is not borne out for mankind; for humanity there is a higher order. The human condition, the dignity of man and the aspiring benevolence that are made material by way of man’s free association and the free exchange of labor and its handmaiden – capital.
Land rent is socially created, it is the fruit of the loins of unfettered labor and capital. Monopoly and privilege are the highwaymen who rob us of the means to end poverty, slums and depression. This is the promise of LVT. This is the big idea. The hope. Something to believe in – its time surely has come.
This concludes the series. We will feature an interview with the author, Dr. Mason Gaffney, on Thursday, May 7.
(Gaffney’s paper was originally presented at a property tax reform conference at the Jerome Levy Institute at Bard College, New York, November 3, 1995.)
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