Posts Tagged ‘privilege’

Putting government pension costs into perspective

Wirepoints recently issued a helpful report showing state and local government pension debt per Chicago household.  They estimate the burden at $144,000 per household.  This is a big number, but one could suppose that a prosperous household, over decades, could bear such a burden.  Some could, but probably not those below poverty level.  Take them out of the picture and the per household amount rises to $172,000.  Excluding households with incomes below $75,000, or below $200,000, and the per-household amount rises further, to $393,000 and $2,022,000 respectively.

Here’s their chart: pension debt chart

Of course this doesn’t consider land values, nor businesses.  If prime Chicago land is worth $1,000/sq ft, that’s 5.38 sq miles.  But more typical land value is much less, probably no more than $25/sq ft. (it seems that nobody has tried to estimate citywide values). That would be 112 square miles.  Once we subtract land owned by governments, churches and other exempt nonprofits, we might be approaching the total value of all land in Chicago. And that’s just for pensions, not bonded debt, nor needed capital improvements.  Real estate buyers know, or certainly should know, about these encumbrances.

Of course money can be raised from business taxes, but that’s hardly a way to grow economic opportunity for Chicagoans. I would consider any tax revenue from “gaming” as a kind of business tax.

The lesson Wirepoints draws from this is that pensions have to be downsized somehow, which required amending the state constitution.  And they go further, comparing government salaries to those of the private sector:

some local gov't salaries compared to average workers

So it looks like we’re going to have to confront a large number of people with guns and firehoses and control over our children, who have been getting a lot of money from us for years and may prefer not to moderate their demands.

Tho I don’t know how, this problem will be solved. Maybe MMT will yield a continuing stream of funds to bail us out.  Maybe inflation will accelerate such that the fixed 3% compounded pension increase isn’t a burden.  Maybe Chicagoans will decide that they just don’t want so many government “services.”  Maybe politicians will decide to remove all taxes from productive economic activity, taxing only the value of land and other privileges (such as the private monopoly over street parking fees), which will grow the economy (while reducing the need for emergency services) sufficient to make pensions a non-issue.

And when it is solved, those who own land and other privileges will benefit most.

Why does public policy favor homeowners over renters?

image credit: Stephen Dann CC BY-SA 2.0

It’s certainly true here, where owner-occupants (of houses or condos) pay less tax than renters occupying units of the same value, with additional discounts for old people, some military veterans, and some poor old people.  Some owners also still benefit from deductability of mortgage interest and/or property tax.  So why do renters put up with this discrimination?

I have always thought, and some data seems  to confirm, that it’s because homeowners vote, and renters don’t. But according to this interview, the problem is similar, perhaps worse, in Australia.  Voting in Australia is compulsory, which apparently means one is fined if one fails to at least show up at the polls (the fine is up to $79AU, less for their Federal elections).  They also vote on Saturday, and seem to make a party of it, according to various posts such as here and here.

Of course just showing up doesn’t mean that you vote, nor that you pay much attention to candidates and issues, but the problem of low-information voters isn’t unique to Australia. Maybe there’s something about the worldview of people who rent vs. that of people who own….? Dunno.

U S jurisdictions do often provide some protections for tenants, which can disadvantage landlords, but they wouldn’t affect the status of owner occupants.

About those corporate tax rates…

credit: Mike Licht (CC BY 2.0)

We hear that corporate tax rates, at 35% (federal), are too high and need to be reduced so U S companies can be competitive.  I remain confident that the best way to fund public services is thru a tax on land value and other measures of privilege, but if any kind of corporate tax is to be retained, here are a few things to consider:

  • The statutory rate is 35%, but there are all kinds of credits and deductions a corporation can take, so typically the effective rate is much less. Here’s a U S Treasury report (pdf)  claiming that effective corporate tax rates were 20% in 2011, the most recent year calculated. Major corporations have the ability to obtain special tax favors. (Just scan thru the tax code (big pdf) to find some of these special favors, available only to individual projects or corporations which reached specific milestones on specific combinations of dates.)
  • Enterprises in most countries, but not in the United States, have to pay a national value-added or sales tax.  The rate and details of course varies by country, but is typically about 19% as indicated by this OECD spreadsheet.  Scroll down to the second half of this article to get some more perspective from John Hussman.
  • Most U S states impose an additional corporate income tax, with varying rates and rules. Illinois takes 9.5%.    I have no knowledge about other states nor subnational jurisdications outside the US.  However, this table from Deloitte (pdf) provides some detail, including an assertion that the total national+local corporate tax rate in Germany is about 30-33%.
  • Some commentators complain about “double taxation” of corporate earnings, because corporate dividends are paid out of after-tax earnings.  However, incorporation, with its perpetual life and limitation of liability, is a privilege, for which it’s reasonable to expect corporations to pay.  I don’t suppose that taxable income is the best measure of the value of this privilege, perhaps a small percentage of total expenditures would be better, but certainly the appropriate fee is greater than zero. Furthermore, a considerable percentage of corporate stock is owned by various kinds of entities which do not pay tax, such as universities and other nonprofits, and Roth IRA’s.

Getting back to blogging — just in time for football

Football Cake by Sweet Pea 0613 via flickr(cc)

Football Cake by Sweet Pea 0613 via flickr(cc)

After a couple of months’ diversions, I hope I am getting back to something like regular blogging, starting with a nice article — as far as it goes, at least– by Gregg Easterbrook about the subsidies and political favors governments provide for professional football. A lot of this, on stadium subsidies (not just for football), has been covered in the past by Heartland, most recently here (pdf). But Easterbrook covers some additional ground, noting the federal favors done for the football business. I hadn’t been aware that NFL has a special anti-trust exemption (I thought it was just one of the many many cases where feds choose not to enforce laws.) And I’d never made the connection between stadiums paid for by the public, and the “intellectual” “property” of football game images, which of course are government-created privilege.

Easterbrook does seem to be a football fan, which is a skill (affliction?) far beyond my capabilities.  My preferred remedy for “sports” subsidies has always been for the audience to go away and do something else.  But even tho I’m just as happy watching an amateur softball game, many people evidently get pleasure from seeing the professionals in action.  Easterbrook suggests that it’s necessary that “public attitudes change.”  Great idea, but as long as the public feel compelled to watch these games, it’s difficult to imagine any politician willing to risk the wrath of those who control them.

The Secret Life of Real Estate

is subtitled “How it Moves and Why,” but this isn’t about the Kinetic Condos. It’s a response to a questions Georgists often hear: “If you’re so smart, why aren’t you rich?”  Different Georgists give different answers, including “I am rich.”

We know that the major cause of the business cycle is the capitalization and trading of government-protected privilege.  This privilege can be any kind of income obtained without producing, and may flow from spectrum licenses, drilling rights, patents, copyrights, or a hundred other sources.  But the main one is land ownership, since land is not a product of human labour.

When demand increases for a product or service, production can increase, but that isn’t true of privilege. The only limit on the price of privilege is what the market will bear without breaking.   So can’t we measure that price, use the information to forecast economic meltdowns, and thus become wealthy?

Our massive government statistics operations, which know how much more Asian-American households spend on rice than the rest of us do (4 times as much, as of 2003), and that people spend an average of 2.43 hours each weekday watching television, know just about nothing about the price of land.  Only a few countries maintain any such information (Korea, Japan, Denmark, and Australia come to mind).  Many local authorities compile land assessments, but the relationship to actual market prices is, at best, elastic, and the information is not systematically reported.  So indirect and ephemeral indicators must be relied upon.

Moreover, they land price cycle tends to run about 18 years, and may be disrupted by war (not by much else, it appears). This means that taking advantage of it requires a great deal of patience and, one can only say, a certain amount of faith.  And starting at a young enough age, by the way. Of course the cycle might be entirely abolished, but that would require the elites, and some of the non-elites, to surrender significant privilege.

The book is well-written, well-edited, and well-documented. (A subject index would be nice.) Economist Mason Gaffney’s  review is far more informed than anything I could have produced.  He points out a number of imperfections, but on the whole this is a very useful book for anybody who wants to know why many of us aren’t rich, or who would like to be.

Vacant Land is still undertaxed

Many years ago, I wrote a memo called “Vacant Land is Undertaxed.” The title says it all, but it’s still true today.

A new Civic Federation report shows vacant land in Chicago assessed at just 4.81% of market value– it’s supposed to be assessed at 22%. On this basis, vacant land in Chicago is worth $5.3 billion, and to assess (and tax) it properly would bring in over $50 million/year. If the County Board were to revise its classification ordinance to assess vacant land at 40% of value (to go any higher would have other repercussions), another $40 million or more would be recovered.

In the suburbs, the underassessment is less severe, but vacant land there is estimated to be worth over $4.6 billion, so some additional revenue could be realized.

And or course, no matter how high the taxes on vacant land are raised, nobody’s going to move it away or decide not to use it because of the tax on it.

A letter to this effect was sent to the Tribune this afternoon. I am sure they will instantly recognize it as a perceptive and cogent statement, and will publish it under a prominent headline. Uh, right?

UPDATE Nov 6: The Tribune did publish the letter,  though not formatted quite as I wished.  Two days later they also included on their web page (but not in print) my suggestion (about halfway down here)  for transit funding from land value.