Property tax can’t be equitable, Kaegi asserts

former Schulze bakery
Disused Chicago bread factory to become data center. Image credit: Emily CC BY-NC 2.0

In a new article (archived copy, also included in this pdf) for the Chicago Council on Global Affairs, Cook County Assessor Fritz Kaegi asks “In a digital economy, how can cities create a more equitable property tax system?” Of course he does not try to define “equitable,” but one infers from the article that it means “funded more by those benefiting from the digitalization of the economy, and less by those who actually perform useful work.”  A desirable result, to be sure, but how does he propose to accomplish it?  He also seems to assume that government-funded schools are a good thing, or at least that parents shouldn’t be held individually responsible for arranging their own children’s education.

He proposes to get more revenue from the big infotech companies, specifying Apple, Microsoft, Alphabet/Google, Amazon, and Facebook, but by implication the numerous other organizations who have prospered by taking advantage of the internet (as well as their lobbying capabilities to stifle competitors). He doesn’t think that local or state government is equipped to collect much of this revenue.  Further, he assumes that a real estate tax to fund “education” can only be implemented at the school district level, and couldn’t be countywide, regionwide, statewide, or in any respect subnational.  He concludes that the U S government needs to send large quantities of money to America’s cities, particularly including Chicago and the rest of Cook County.

“The federal government … is best situated to tax incomes generated by activity like digital commerce, virtual meetings, and footloose service providers [and]…will need to build fiscal mechanisms for a digital world that separates economic activity from physical space. ”  (Presumably these wealthy and influential companies won’t use their influence to deflect the tax burden to others. )

OK, so Cook County local governments don’t get revenue from this digital economy?  What about the 11 (soon to be 12) data centers in Elk Grove Village (archived copy), paying real estate taxes and utility taxes, as well as taxes imposed on persons working to construct and operate them. This report (archived copy) counts 52 data centers regionwide as of February 2021.  Both reports note that several kinds of tax favors are provided, without indicating that they’re necessary since the digital economy requires facilities in appropriate locations.

And Amazon and other on-line retailers don’t generate taxes?  Those of us who’ve bought something on line in the past couple years have noticed that the e-commerce giants collect and remit state and local sales taxes, typically in excess of 10% here.  Last year the BGA counted (archived copy) 36 warehouses in the Chicago area built for Amazon since 2015 (and noted “at least $741 million in taxpayer-funded incentives”).  This of course doesn’t count warehouses used by non-Amazon sellers such as Walmart and Target.  Again, it’s likely that most or all of these facilities would have been built without subsidies, since warehouses have to be located appropriately with respect to markets, labor supply, transportation, etc.

Kaegi is legitimately concerned about the fragmentation of Cook County’s tax base, noting that “The lower the value of real estate in a community, the higher the effective rate to provide a comparable level of school services. This results in
great disparities.”  But that problem isn’t inherent in the real estate tax; it’s inherent in the fragmentary structure of finance, funded largely by local real estate tax. A statewide real estate tax, such as Illinois had until it was replaced by a sales tax in 1933, could reduce or eliminate the disparities.  A number of states retain statewide real estate taxes, but the problem of disparities can also be addressed by a tax-base sharing arrangement, as has operated for half a century in Minnesota.

“[W]e must continue to push for local-school funding that is not rooted in local land values,” writes Kaegi.  Actually, if an effective disparity-reduction arrangement is in place, the opposite might be true.  I have previously posted a table and map illustrating that, if taxes were based on land value rather than land+improvement value, the burden on homeowners in communities of low income and color would be lessened.  And of course if the burden of sales taxes could be replaced by a tax on land value, the benefit to moderate-income households would be enhanced.

So we have an Assessor, running for re-election, who doesn’t believe the taxes he helps calculate are a good way to fund local services.  I had hoped for better (but didn’t really expect it), as the quality of assessment seems to have improved during his tenure. He does have one announced primary opponent.

Fictitious people and their imaginary taxes

Credit: Mike Licht (CC BY 2.0)

Matt Levine has an illuminating post about why the recent reduction in corporate tax rates results in a reduction in some corporations’ reported profits.  It seems that past losses can be saved as a “deferred tax asset,” permitting a reduction in taxes to be paid in future years.  But the ratio of losses to tax reduction declines when the tax rate declines, so the deferred tax asset is reduced.   Levine notes that such tax rate reduction can cause a corporation to appear less well capitalized, since it reduces assets, even tho it increases expected after-tax income.

Just another illustration of the absurdity of a corporate income tax (or perhaps of corporations in general).  Of course corporations should pay taxes – based on the land (including spectrum and other natural resources) that they claim.  And they should pay additional taxes reflecting the limited liability granted by the state.  But the accounting concept of corporate income has little to do with this.

Suppose Northern Illinois University, all its students, staff, and buildings disappeared

NIU campus scene. Credit: EarlRShumaker via flickr (cc)
NIU campus scene. Credit: EarlRShumaker via flickr (cc)

Well, then, that would reduce economic activity in the region.  On that basis, the University estimates the impact would be $900 million annually.  That’s figured by counting staff salaries, student expenditures, capital improvements, and the multiplier effect of each.

But of course this is a phony argument, intended to maintain the flows of tax dollars to the state’s “higher education” system. Let’s just suppose that all government funding of the University stopped. Quite possibly it could remain in operation, as lots of nongovernment schools do. But suppose otherwise.  Tomorrow morning we wake up and find that Northern Illinois University is going out of business.  And, just to keep the exercise meaningful, suppose none of the other Illinois government schools are able to pick up the slack; maybe they went out of business too, or maybe they just won’t expand.

So now there’s a big campus for sale. Would a nongovernment school want to buy it?  Or maybe one or more other organizations, such as a mental hospital, retirement community, corporate think-tank, drug rehabilitation center, penal facility, religious group, will want to buy the space?  The campus won’t remain empty.  It will be re-used or redeveloped, and that will involve an unknown (but positive) number of jobs and investments.

What about the students? It seems the economic return on college credentials is decreasing,  but surely it has some value for some people.  There are lots of colleges, public and private, looking for students.  Some students will decide to put full-time formal education aside for a time, look for jobs or start businesses.  And starting a business might be a good idea, with a labor force suddenly available.

And the faculty? Surely they’re employable, as consultants or teachers elsewhere, or doing something else.  If they really can’t do anything but teach at a government school, what necessary skills do they lack?

Meanwhile, we also need to consider the benefit to taxpayers of no longer funding the University.  How much would they save?  Or, more  likely, taxpayers would “save” nothing, but more funds would be available to cover other existing obligations, which does seem to result in some public benefit.

One more thing.  This topic was raised by a link in an email I received, labeled “What’s a state university worth to the region in which it’s located?”  That’s kind of meaningless; do we mean “to the people living in the region,” or “to the taxpayers of the region,” or “to the owners of land in the region,” or something else? And necessarily, the analysis needs to imagine what would happen in the absence of the university.  Do there exist any examples of a significant state university shutting down?  I know of none.  Perhaps a test is needed. Maybe I shouldn’t be surprised that Cold Spring Shops hasn’t commented on this.

 

Storytelling can be patented

typewriter
credit: mpclemens via flickr(cc)

We already knew that computers, equipped with proper algorithms, could write stories pretty much indistinguishable from the work of professional journalists working under deadline pressure. And had I been paying attention, I’d know that the company behind this, a “spinout” from Northwestern University, is also moving into other “turn data into a story” tasks, which from the examples here seem to mainly focus on financial reporting, tho it also appears that buyers of used cars can be exposed to “automated and individualized vehicle stories” (pdf) about their cars, which presumably helps sales. And it’s no secret that In Q Tel, an affiliate of your Central Intelligence Agency, is one of several investors behind the company.

So, it’s technology, it’s government, it’s marketing– why am I surprised that it’s protected by a bunch of patents on different variations on “automatic generation of a story?” Here I am, using a computer with many automatic functions to generate a sort of story about this company, and I really haven’t time to read and try to understand all their patents. I guess I better stop before I get in more trouble.

h/t Crain’s.

Words, including a new one, about money

bitcoin
Image of a tangible bitcoin by Steve Jurvetson (cc) via flickr

Having heard two tremendously amusing interviews with John Lanchester (I think one was on Bloomberg and one on the BBC, tho maybe it was ABC and somebody else; in any case there seem to be lots of interviews with him floating around.) I was looking forward to reading his new How to Speak Money. I’ve long agreed with his basic point, that people talking about financial issues use a shorthand which can confuse civilians, and it would be helpful to have a glossary handy.  What he has written gets part of the way there.

The first part of the book is an introductory, making the important point that economics isn’t a science, really can’t be in the way that physical or biological sciences are.  For one thing, chemists don’t have to worry that the molecules they’re studying will read the results of prior research and decide that behaving differently would be to their advantage.  He also notes that most of the main questions of economics remain open, but at least if we are going to discuss them we need to understand what we’re talking about.  He brings up the concept of “reversification,” whereby things come to mean the opposite of the word used to describe them.”Securitization” doesn’t mean making things more secure, but more likely less so. The “Chinese wall,” which is supposed to divide functions within financial firms to prevent conflicts of interest, is in fact neither a physical wall nor an impenetrable barrier.  And it’s reversification when the “credit” is defined as the amount of debt. Continue reading Words, including a new one, about money

Transaction taxes

photo credit: AutisticPsycho2 via Wikimedia (cc)

Proposals for a small tax on investment transactions seem to make some sense.  Ordinary investors, small or large, are likely to buy or sell a small percentage of their holdings each month or year, while high-frequency traders could turn over theirs dozens of times per day.  A tax of, say, 0.1% would hardly be noticed by investors, but could make high-frequency trading (HFT) unworkable.  If HFT helps destabilize financial markets, then taxing trades this way would raise some revenue while improving economic stability.

Though I don’t see such a tax as consistent with geoist principles, it seems a lot less damaging than many of the taxes we already face.  The problem is that it cannot be enforced.  Trades can always be done in some way “off the books,” probably legally but otherwise if necessary.  Since those who benefit from HFT also have resources to control relevant regulatory decisions, any such tax will have loopholes or other means to prevent effective enforcement.

Sure enough,

most investment banks offer significant UK traders “contracts-for-difference” which are contracts that precisely simulate equity ownership while circumventing UK taxes on transactions (“Stamp Duty”).

— J Doyne Farmer and Spyros Skouras
“An ecological perspective on the future of computer trading” (pdf)

 So what to do about HFT? If we consider what HFT deals in, which is largely securities issued by corporations, it may be appropriate to modify the privileges that government grants to corporations, in ways that would make HFT less damaging.

Why do cab medallions go up?

image:Mister-E via flickr (cc)
image credit:Mister-E via flickr (cc)

Last time we looked, Chicago taxi medallions were going for slightly over $250,000, far higher than a few years earlier.  In the subsequent 17 months, they’ve continued their rise, and here are the most recent transactions reported on the City’s web site:

4/27/12    6601    $325,000
4/27/12    5594    $345,000
4/30/12    6182    $348,000
5/3/12      1839     $360,000
5/4/12      2297     $370,000

Now, I do not follow taxi matters in great detail, as I am not of the economic class which can regularly use cabs.  But it’s hard to believe that, in less than two years, the economic value of the privilege of operating a taxi has increased by anything like 50%.

The best explanation, I think, came from a driver who styles himself Samuel Langhorne Insull.  He explained that medallions aren’t used by taxi passengers, but by taxi drivers.  And who are the taxi drivers?  For the most part, they’re people unable to get work in their chosen or more lucrative professions, who drive a cab for survival.  And are there more of those people nowadays, or fewer?

That makes sense as the main cause.  Of course, additional pressures are the general levitation of financial asset prices due to the FRB’s zero-interest-rate policy, and perhaps anticipation of future increases in value.

2014 Business Report

image credit: Ged Carroll via Flickr (cc)

I used to be in the forecasting business; still am in a way.  So here’s a forecast:  Look for financial difficulties in the next few years at Sandisk, Yankees Entertainment and Sports (YES) Network, Louisville Arena Authority, and Harmony Oaks housing development in New Orleans. What kind of difficulties and when?

I don’t exactly know.  Sandisk has apparently survived sixteen years of Goldman Sachs help, and the smart parasite does not kill its host too quickly. Maybe not all four; in fact maybe these four have been selected for survival.

Cuba gets it half-wrong

What kind of financial crisis could America have had without private collection of land rent?  If homebuyers were able to purchase a house, but the land came practically free with an obligation to pay a land value tax, how bad could the mortgage mess have been?  Not very bad, evidently, since mortgages would have been much smaller and quite unlikely to go under water (because the price of houses can’t decline nearly as much as that of the land under them).

Veranda in CubaWhich 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.

 

With enough assumptions, you don’t have to be correct

Does anyone pay any attention to the “retirement” investment advice that financial institutions provide? I do, once in a great while. Of necessity, these comparisons assume stable tax laws and regulations, and ignore state income taxes. That’s two unrealistic assumptions right there. So why should we worry if the rest of the example is wrong, too?

What brings this to mind is an article in the Fall, 2011 issue of a publication from a major  stockbroker. The story centers on Jane, the daughter of William Smith, who died in 2010. William left her a $900,000 IRA. What should she do? Three options are presented:

  1.  Transfer the IRA into her own name immediately. According to the article, this would yield $620,100, after taxes, all received in 2011.
  2.  Inherit the IRA thru the estate. Apparently IRS regulations provide that you can sit on it for five years, then must withdraw the entire thing. Assuming 6% annual returns (another assumption that we know cannot be correct), Jane would in 2015 then inherit $782,862, after taxes.
  3.  Be the IRA’s designated beneficiary. (This would require that William had made the designation, which seems to be the point of the article.) Under this scenario, Jane withdraws minimum annual distributions, with the result that, in 2036 when she is 65 years old, she will have withdrawn $1,221,117 plus she will have an IRA worth $1,652,117.

But, if Jane took options (1) or (2), what would she have done with the money? We have assumed she is in the 35% tax bracket, so plausibly she doesn’t need the money right away, but would prefer to pile up more. So she would invest it. And we can assume she’ll get the same 6% annual return that we assumed for everything else. Further, we will assume that she pays 35% tax on this income (whereas in reality she will probably pay a lower rate on at least some dividends and capital gains, and might be able to hide some). So, netting 3.9% what is her pile worth in 2036? For option (1), I calculate $1,613,803. And she had complete control of this money, she could invest it in things prohibited to IRA’s, she could use it to flee the country, anything she wanted not effectively criminalized. That’s over twice as much as our friendly discount brokerage firm asserted.

So did the broker make a mistake here? No, because at the bottom of the chart it says:

Source: Ed Slott & Co, LLC. [the broker] is not responsible for information, opinions or services provided by third parties.

Just remember this if you are tempted to spend time reading,  or worse yet taking, “investment” advice provided without charge by financial firms. It’s worth every penny, almost.

I really shouldn’t be spending time on this, I have serious responsibilities in the world, but one does what one is compelled to do.