photo of Shin Kong Life Tower from Wikimedia

Much like Korea, Japan, and other advanced countries, Taiwan has a land value tax which requires it to monitor land value regularly.  And they do, apparently pretty well, as indicated by this report that 2011 land values average 8.65% over the previous year. The land value tax could be one of the reasons Taiwan seems to be more prosperous than most countries, but that isn’t my point.

My point is that assessing land value is not exceedingly difficult, if one has competent and reasonably honest assessors.  The most valuable land in Taiwan is reportedly under the Shin Kong Life Tower, NT$1.21 million per square meter (about $4,000 per square foot, a figure probably never seen in Chicago).

Thanks to the Facebook LVT group for the link.

image credit: Rosalyn Davis via Flickr (cc)

David Bernstein and Noah Isackson have a pretty good article in Chicago Magazine, Gangs and Politicians in Chicago: An Unholy Alliance. Focusing mainly on Alderman but also including State and Federal legislators, they assert that “gangs” provide the money, votes, and workers that enable officials to attain and retain their office.  In exchange, the governments these legislators control provide funds and favors.

Isackson and Bernstein stop short of suggesting how to repair this problem, but reading thru the article it’s clear that the main way these “gangs” prosper is thru unauthorized distribution of drugs.  And one of the main favors aldermen provide is assistance in avoiding “law enforcement” efforts to arrest them. End the drug prohibition, most of the “gangs’” income will end, and candidates will no longer get “gang” money.  They’ll have to rely on crooked lawyers, lobbyists, etc.

Some of the drug money, of course, has gone into real estate, with “gang” members able to get favors such as rezoning and inspection waivers. A land value tax, by constraining real estate speculation, would be of assistance here.

image from Financial Times

Nick Boles

MP for Grantham and Stamford. New-intake MP and a key moderniser. Former Policy Exchange director and one of the Notting Hill set. Deemed close to the leadership. Tipped for bigger things

I assume this means he’s successful, British political terminology being rather unfamiliar to me. What’s really important is that

Nick Boles, The MP for Grantham and Stamford says a Land Value Tax should be introduced and use the proceeds to cut National Insurance – permanently.

He doesn’t want to do it exactly how I would want to do it, because he seems to want to exclude owner-occupied residential land and farmland, without limitation.  But the important thing is, he’s a successful politician, he gets elected, and he appears to want to move toward a sound economy. I’m just some guy with a blog.

I also don’t know how all this relates to the British custom of building homes on rented land far more commonly than Americans do. But it seems to be his top priority.

Source: FT via GN

Which is why I’m not pleased to learn that Cuba will allow the private purchase and sale of homes (including, apparently, both structure and land).  There will be limits (only Cuban citizens and permanent residents, and only two homes per person) “to prevent speculative buying and the accumulation of large real estate holdings,” tho one wonders how long-lived and how effective they’ll be.

There’s no question that Cuba’s struggling economy needs freer trade, and moves to allow buying and selling of cars, and an increase in the permitted size of private businesses, tend in that direction.   It’s unfortunate that the Cuban powers that be don’t seem to recognize that land is different, since by definition it will never be produced no matter how free or prosperous the economy.

“The new law requires that all real estate transactions be made through Cuban bank accounts so that they can be better regulated, and it sets a tax rate of 8 per cent of the assessed value.”  The need for more government revenue is one possible explanation for this change.  Another is that Cuban elites anticipate, after further easing of land ownership restrictions, the ability to accumulate at low prices sites which will become valuable in the future.  The least likely is that Cuban authorities just haven’t thought about what land is and its role in political economy.

But there are a couple of concerns:

• Since Hong Kong doesn’t collect all the economic rent, speculation can still drive up the cost of housing as well as any activity which uses land (and they all do).
• Wealthy mainland residents are moving to Hong Kong to take advantage of the increased liberties which HK residents get, further driving up costs for local people.

Now we read that every HK has declared a sort of citizens’ dividend, every permanent resident will get HK$6,000 (US$773, currently).  Bloomberg calls it a “handout,” but I think “share of economic rent” might be more appropriate.  Opponents of the move say it will be inflationary, and certainly it could lead to higher economic rent, with speculation driving land costs even higher. Of course, if people expected the government to collect all the economic rent, speculation would not occur. While the cost of living might still increase, giving an equal dividend to every resident would tend to flatten the income distribution, helping the poor much more than the wealthy.

A lot of details are missing from the source article, and so far I don’t know how to get the  study which it describes.

Thanks for Alanna Hartzok for the tip.

You could examine why housing is so expensive, and whether there’s a way to make more land available. Maybe that’s happened in Saudi Arabia, but recent news reports give no indication.  Instead, the Saudi solution is to encourage the mortgage industry and expand credit.  Will that make housing cheaper?  Will that make it easier for an underemployed population to get decent housing? Or will it drive up the price of land and feed what seems to be an already-building bubble?  It may be that the Saudi objective is to get more of their people into debt-slavery so they’ll faithfully serve the state.  I don’t know.

What really puzzles me is how mortgage interest fits into an Islamic-dominated state.  Possibly this is like the “Islamic Finance” offered by some U S banks, where no interest as such is charged, but either the price is inflated to compensate for the fact that it will be paid gradually, or the “homeowner” is technically a renter until enough rent has been paid to cover the cost plus what, to others, would be interest.

Bloomberg says the King pledged more than $82 billion for housing, but does not say whether this comprises direct government grants, or is simply some amount of debt which homebuyers will contract.  It also says that

Saudi Arabia’s mortgage law will change the way home finance is regulated, from registering mortgages to prosecuting police officers who refuse to carry out eviction orders.

This will be interesting to watch, preferably from a distance.

More about Saudi housing and morgages:

• Zawya
• Malasian Insider
• Gant Daily

“Let’s save the world by keeping our engineers out of finance,” says Vivek Wadhwa. [Well, they're not really our engineers, they belong to themselves, but we'll skip that for now.]  A fine idea, but how to do it?  One answer might be a financial transaction tax, a tiny levy on each financial trade which could remove the profit from “financial engineering.” It would have no real effect on “long-term” investors who hold a position for more than a day. Seems like a good idea, but of course there will need to be a definition of what is a “financial transaction” for tax purposes, and clever people will find a way to design a transaction which doesn’t meet the criteria.

Maybe a better approach is to eliminate or scale back some of the things that make financial engineering lucrative.  For instance, if a land value tax prevented private collection of land rent, the mortage/financial crisis we’re still in would have been much smaller, or perhaps not possible at all.  We might want to go back to the classical concept of usury, forbidding all transactions where interest is charged for the use of money.  (People can still get compensation for lending money, but it would be as some agreed share of the profits which the investment generates, keeping the lender conceptually closer to the borrower.)

Of course we could start with something simple, like having the government take over insolvent banks, prosecuting and imprisoning criminal executives, letting stockholders, bondholders, and others who have unwisely trusted the bank to absorb the financial loss.  That alone would make financial engineering a lot less appealing.

Separately, there is apparently a proposal to cut Congresspersons’ pay, and even one to reduce their pay every year that the government runs a deficit.

But these won’t work, for a very simple reason: Senators and Representatives aren’t doing the work for the salary.  It costs far more to get elected to these posts than the salary, plus expense allowance, that these people receive.  (Wikipedia  quotes a 2004 report that it cost $1,000,000 for a House seat and $6,000,000 for Senate, but surely those costs are higher now.)  Senators and Representatives may be in it for the money, but the money they’re in it for isn’t their salaries.  Rather, the power and prestige of the office can be monetized in various other ways.

So Congresspersons don’t care about their salaries, but they do wish to hold office.  In theory they can be voted out if they perform poorly, but this doesn’t seem to work very well.  What to do?

The Art Auble Plan

Many, many years ago,  I worked briefly for an economist named Art Auble.  The economics profession has come in for much-deserved criticism in recent years, but Art Auble was a wise and honest man.  This was during the era of the Vietnam War and the military draft, which were pretty unpopular around our neighborhood.  There could be such a thing as a just and necessary war, and we don’t want to hobble to efforts of our government to defend us, but how could we prevent a draft for a bad war?  Art Auble had a proposal:

Each year (I think it was annually, but perhaps he proposed some other period), while the draft was in effect, Congress would have to vote whether to extend it.  If they voted to do so, then every Congressman and Congresswoman would be drafted for the duration. Patriots would value the chance to serve in a real war to defend their country. Of course most of these folks aren’t fit for real military service, infantry or fighter pilot or tank  mechanic, but they’re all capable of doing something useful, whether office work or toilet cleaning or receptionist, everyone has something to contribute.  A special election would be held to fill the 535 vacant seats.  After a year, another vote, and if they extended the draft we’d need another election.

I thought it was a great idea, but of course it didn’t happen. I don’t know whether fear of the Art Auble plan was the reason, but the draft was eliminated.  There are those who miss it and want to bring it back, in one form or another, but I’m not among them.

Applying the Art Auble Plan to the Federal Deficit

So why couldn’t we apply a version of the Art Auble Plan to our free-spending Congress?  Of course we’d have to find some honest auditors, not a simple task but it probably could be done. They would also have to be very smart, hardworking, and expert in governmental games.  At the close of each fiscal year, these auditors would look at actual federal receipts and expenditures, depreciation schedules, assets and liabilities, all the places where dollars might be hidden, and determine whether operations were reasonably in fiscal balance.

If there was a deficit, more than, say .01% of GDP, Congress would be liquidated.  Maybe that’s the wrong word; I don’t favor capital punishment, but all seats would be declared vacant and new elections held.  We’d need a rule prohibiting members of liquidated congresses from running again, at least for a decade or so.

To prevent lobbyists from controlling the government,  we might need some provision to de-register all lobbyists who had any contact with a liquidated Congress.  Sort of like the way we might deal with a communicable disease.

There might be a few other details to iron out, and I’m a bit concerned about finding those auditors, but I think something like this plan could get us pretty close to a balanced budget.

Now, it would be too much to expect the President’s Commission to suggest anything that would seriously change the way the powers-that-be conduct their business.  So I’m unsurprised that they pretty much endorse the existing income tax system, calling for some “simplification” and removal of “loopholes.”  What they really should have said, on the revenue side, is something like:

Remove all taxes on earned income, including return for investment in capital goods.  Instead, tax things which are not products of labor, including the ownership of land and other natural resources, including exclusive access to portions of the electromagnetic spectrum.

This would have so aided the economy that nothing more might be needed, tho liquidation of many other rentier aids outside of the tax code would still be beneficial.

As for expenditures, it’s even worse than I expected.  Most of the savings seem to be versions of “reduce waste.”  Page 20 shows (sorry, for some reason WordPress doesn’t want me to put the page image here)  their “illustrative” cuts for “domestic” spending (which happens to include foreign aid):

The biggest item on the page is “Eliminate 250,000 non-defense service and staff augmentee contractors,” which apparently is expected to save $18.4 billion in 2015.  So, uh, what are these people doing? What programs will have to be eliminated, or cut to what extent, when they’re gone?  Perhaps they’re doing nothing useful, just writing memos to one another, so there’s no question they must be laid off. More likely they’re actually responsible for something, useful or useless, harmless or harmful, and until we know what it is we can only assume that, if they’re actually cut, it will be because they aren’t good enough at making themselves seem important.

Most of the rest on the page are equally inexplicable.  Pages 19 and 35 give similar pretend savings, for “defense” and “health” care, respectively. Who could object to “Cut Medicare Payments for Bad Debt,” whatever that really means?

“Pay doctors, other health providers, and drug companies less and improve efficiency and quality”  (page 32). Yeah, I’m sure the medical providers’ lobbyists will let that one go without comment. Even scarier, on the same page “Pay lawyers less and reduce the cost of defensive medicine. Enact comprehensive medical malpractice liability reform to cap non-economic and punitive damages and make other changes in tort law.”  Which means, basically, if an underpaid operating room staff accidentally cut off the wrong appendage, you the victim are entitled to an artificial leg, arm, or whatever, plus some portion of your expected earnings.  (If you’re unemployable, you’re uncompensable.)

Another part of the Committee’s draft solution is to transfer some of the burden to state and local governments.  “Reduce Taxes that States May Levy on Medicaid Providers” (page 35). “Include newly hired state and local workers in Social Security after 2020″ (page 45).  Few states are in any shape to absorb these costs, of course.

The very few realistic good ideas in the draft are hardly new, but let’s give credit where due.  Regarding the social security payroll tax: “Gradually increase the taxable maximum to capture 90 percent of wages by 2050″ (page 46) would certainly be better than the current system.

There is also some procedural stuff that might be significant; I don’t understand it, things like “60-vote point of order to enforce caps in Senate; separate non-amendable vote on point of order to enforce cap in House; sequester applied if caps are exceeded” (page 17).  Probably it will just lead to more innovative ways to play budget games.  I will discuss a serious proposal in my next post.