A “not so concise explanation of Land Value Tax and some brief responses to some of its most common objections” at Jock’s Place
A good balance between failing to adequately describe it and going beyond the readers’ attention span. British, but comprehensible.
This one comes from U of Chicago Prof Luigi Zingales. He wants homeowners to be able to swap part of their mortgage– equal to the percentage by which “house” prices declined in their zip code since the mortgage was issued– for a share of equity. Debt declines but equity increases. Homeowners would have the option to do this, or not, but if they do it then, when they sell, the bank (or whoever holds the mortgage) would get “50% of the difference between the selling price and the new value of the mortgage.” Zingales would limit this option to properties in zip codes where the Case-Shiller index shows a decline of at least 20%.
He proposes a sort of similar solution for banks. Holders of bank debt would be able to force the bank into bankruptcy, wiping out the existing stockholders but giving ownership of the bank to the debt holders. To avoid this happening to solvent banks, stockholders would have the option of paying their share of the debt and keeping their stock.
Zingales notes that both of his proposals are simple standard ways of doing what more often involves hordes of lawyers and complex negotiations. Foreclosure is a very expensive process, for both sides, and corporate bankruptcy is hardly simple.
It seems to me there’s another advantage, which is that this plan gets the incentives right. Those who wrote inappropriate mortgages will suffer a cost, but, if they were correct that “house” values are increasing they’ll eventually come out well. If they weren’t, they won’t. And stockholders who failed to keep control of bank management will also suffer.
The net result would be people staying in their homes, with manageable mortgages, and banks with enough equity capital to make loans. At virtually no cost to the general taxpayer, by the way. It’s not especially Georgist, and it does little to prevent a future repeat, but it’s a lot better than what is actually going to happen.
That’s the title of an article by David Burns in the September Railway Gazette International. A long list of benefits which accrue to the community, such as reduced energy consumption, land use advantages, easier commutes, and cheaper freight rates, are noted. “Increased land values” are noted as a benefit but unfortunately there is no mention that these land values incorporate all the other benefits. A “property tax” and transfer taxes are among the methods proposed to collect these community benefits. Railways generally cannot cover their full capital and operating costs from revenues they receive for carrying freight and passengers.
Last week I said that the bailout, by easing the fall of land prices, would delay the recovery. Now Vernon L. Smith agrees with me.
To the extent that the bailout shores up existing home prices and its paper, it delays the inevitable.
— WSJ 10/9/08 “There’s No Easy Way Out of the Bubble”
A couple of loose ends here. One is that Vernon says “home prices” whereas (as I assume he knows) the bubble was more in land prices than structure prices.
The other is that the article was sloppily copyedited, “its paper” probably should be “related paper” or something like that. And earlier, it says “[T]he crash has been exasperated by the increase in oil prices.” I guess Rupert has outsourced the copyediting to…somewhere not so sharp on English. It’s exacerbating.
Bob Drake’s abridged and modernized version of Progress & Poverty is now available in an audio version. Free downloads of the mp3’s, with financial contributions very much appreciated.
Everyone who gets to privately collect some of the rent wants to protect his take. So we read, in the Sept-Oct issue of Progress, that among the Exxon Valdez plaintiffs were “[f]ishermen who held $300,000 commercial fishing permits for salmon and/or herring fisheries at the time of the spill [who] now own pieces of paper worth around 10% of their former value.”
Henry George had a lot to say about economic meltdowns, and it’s time to review.
What causes a meltdown?
Bob Matter’s thoughtful comments need a response, and I can’t figure out how to properly format one without doing a new post, so here it is.
1. Not enough to time to implement a plan of such scope.
There’s enough time to price and purchase opaque derivative securities but not to open 700 straightforward banks? There are so many out-of-work bank staff– and more to come. I agree that this is a considerable task, but there are lots of people who know how to do it, and would have started their own banks already if they could raise the capital.
2. Too much added expense. 700 more buildings to rent, heat, light, and maintain, 700 sets of phone lines to pay for, computers, personnel, etc. etc.
We have a banking infrastructure in place now. There is plenty of vacant commercial space pretty much throughout the country. Of course there will be a cost, but each bank is a billion-dollar institution before they even take a deposit; they could spend 1/10th of 1% for physical facilities and startup staff.
3. Even this plan would ultimately lead to failure. The core problem of allowing private ownership of real property needs to be addressed. Until that time we will just keep repeating the boom-bust cycle. Interested parties can read the solution to today’s financial “crisis” in _Progress and Poverty_ by Henry George.
Henry George explains the root cause of economic meltdowns, and they will not be avoided until something like his proposal is put into effect. If he were here today, what would he propose as a way out of this depression?
I claim only that my proposal is far better than what the authorities propose. I don’t claim that it is better than doing nothing, which would result in considerable inconvenience but probably a quicker recovery than what we’ll get.
What’s really encouraging now is how much opposition is appearing to the whole idea of any bailout. I wish that meant it was unlikely to happen.
Georgists know why the economic meltdown was unavoidable. It could be postponed and, to some extent, redirected, but it was inevitable as long as big profits could be anticipated from speculation in privilege including landownership.
And furthermore, we know what needs to be done to avoid the next meltdown.
But what do Georgists say should be done to facilitate the recovery from the present economic distress? I will offer my suggestion, a pragmatic approach to what’s already underway. Continue reading The 700-bank solution
…and undertaxing those who just sit on land, waiting for its value to rise.
The 2006 data are now published, and once again the Cook County Assessor has overassessed houses (and the lots they occupy) in Chicago relative to vacant land. As in the previous year, data from actual sales show that, as a percentage of sales price, assessments on houses (including land) average 50% higher than assessments on vacant land. This is the reverse of the legal requirement, under which real estate which includes houses is supposed to be assessed at a 1/3 lower percentage of value than vacant land.
This amounts to is a further penalty on homeowners (and owners of condo’s, and 2-4 flats, too), as owners of vacant land aren’t carrying their legal (let alone fair) share of the tax burden.
Is Cook County uniquely corrupt or incompetent in this regard? Other Illinois counties do not even pretend to assess residential parcels at a lower percentage of value than vacant parcels. Rather, they are obligated to assess everything at the same percentage of value. In most cases where data are reported, however, the assessment as a percentage of sales price is considerably lower for vacant parcels than for improved real estate.
Source: Data compiled by the Illinois Department of Revenue, which can be seen here (look at the “ratio” links under “property tax.”