Accurate assessments are said to be important because assessing a property too high can “destroy wealth by diminishing the market value of the property.” Which is true, but do not taxes based on accurate assessments also destroy wealth? What the Assessor seems to mean by a “fair” assessment is an assessment that is calculated in accordance with applicable laws and ordinances. This definition of “fair” comes mainly from our friends in the Legislature and County Board, with some role for other government officials. “Fair” in Cook County means that owners of houses or vacant land should pay taxes at 40% of the rate applied to ordinary industrial or commercial property, unless special favors have been bestowed. In the rest of the State, “fairness” requires rates in the absence of special favors to be uniform. In all areas, “fairness” requires that religious and most nonprofit educational facilities are entirely exempt from tax. Continue reading Clobbering fairness more accurately
The title is appropriate, so good that over a dozen older books already carry it, but the subtitle may be unique. Frisby asserts quite a few facts new to me, and for the most part provides references (altho some are a bit summary, showing only the domain name such as cbs.com, or time.com, where one might need to search around a bit).
The book starts with the story of Hong Kong, a British colony which prospered thru free markets and lower taxes (The point stands, even tho in recent years external demand pushed housing costs to obscene levels, and in recent months political and governmental interference made conditions even more difficult.) Going thru tax history, Frisby of course discusses the effects of the window tax (“daylight robbery”), and explains why it was considered to be fairer and easier to administer than its predecessor. He tells us about tax revolts and England’s first income tax, all records of which were apparently destroyed (source citation is a two-volume history that I can find only in Latin). He explains the cause of the U S War between the States (which Lincoln waged more for revenue purposes than in any opposition to slavery.) He notes that Hitler was tax-exempt, and the Guardian used a Cayman Islands entity to (apparently legally) avoid taxes.
After lots more stories about taxation and its role in history, moving to modern times, Frisby explains (as if any of us need to know) the burden that taxation of productive activity places on people trying to, well, be productive. He talks about the digital nomads and crypto currencies which make collection of production tax more difficult, and about digital transactions which make the collection easier.
Finally he proposes a Utopian tax system. Is it collection of all economic rent as the sole source of public revenue? Not really. He wants VAT (not to exceed 15%, and including narcotics) and income tax (also not to exceed 15%). So the record-keeping burdens and complexities of those will remain, tho perhaps a bit reduced because the impact of error is less. To these he wants to add L U T (Location Usage Tax), which is basically LVT but with perhaps a clearer name, and which would be set at some percentage of the land rental value. He wants voters to choose the percentage, apparently a single rate nationwide. And since he aims to keep governmental expenditures below 15% of GDP, it’s unclear that there would be any L U T at all.
“The location usage tax does not apply just to land, but to any asset granted by nature — the airspace the mineral wealth, and even the broadcast spectrums.” He doesn’t seem to have any problem with private collection of rent for “intellectual property,” even tho I P is a privilege granted and protected by the government, thus straightforward to track and assess– if there’s anyjustification for I P at all.
It seems that much of the land in Britain is “unregistered,” in that the owner isn’t known, and in Utopia this will be remedied by identifying every owner. I’m not sure why that’s necessary. A tax bill could be posted for each parcel, and a copy mailed to the owner should s/he request it. After due and repeated notice, If the bill isn’t paid, the land could be taken over by the Crown (or whatever they call it over there), and auctioned to somebody willing to pay the tax. (If nobody’s willing to pay the tax, it needs to be reduced.)
Would I like to live in Frisby’s Utopia? Well, of course here in the U S we have no VAT, and the retail sales tax is generally less than 15%. But income tax can be higher, and we have various other taxes which Frisby proposes to eliminate. And LVT has other benefits in addition to the revenue it generates. So on the whole, it’s a better deal, a step in the right direction. But Utopia? Go back and watch the video.
(Note: This review is of the 2019 edition of the book. The Publisher’s web site indicates that a new edition will be released later in 2020.)
Here’s an (audio) interview with economist Richard Werner, who remarks on the problems high land prices have posed for the Japanese economy in recent decades, and the relevance for the U S and other nations. Dropping interest rates supports higher land prices, as well as facilitating financial engineering, but does little for actual investment in the real economy. Small businesses, who actually provide useful goods or services, still have trouble borrowing because big banks don’t want to deal with them. The number of small “community” banks, more likely to actually meet the needs of small businesses, in the U S has been declining. He suggests that having more local banks, especially co-operative banks, would be an effective way to make loans available. This seems plausible, as ILSR says that “In 2018, community-based financial institutions made 52 percent of all small business loans, even though they controlled only 16 percent of banking assets.” Yet it seems there’s no shortage of local banks, as least in medium and larger cities.
In this interview he never mentions the possibility of a substantial land value tax as a way to curb land speculation. As Keizo Takagi wrote in 1989, Japan’s land value tax “has been so low that [it] has not functioned properly as a holding cost,” [p. 129] thus failing to control speculative prices.
Perhaps deliberately or perhaps ignorantly, the Bloomberg interviewers didn’t bother to bring this up in the interview. Werner’s conclusion seems to be that, rather than ZIRP, interest rates should be allowed to rise to a level where local banks could more easily find loans profitable. I suppose that might be better than nothing.
Reportedly, taxes of 163,036 parcels in Cook County were not paid on time. This comprises 2018 taxes which should have been paid in 2019. and amounts to 8.7% of all parcels in the County. For a dozen south Cook County municipalities, this amounts to 20% or more of total parcels. Counts by municipality are posted separately for south, west, and north Cook. All sources show the percentage of parcels with unpaid taxes within the City of Chicago as 9.9%.
Separately, the reports show that only 7.8% of the delinquent taxes offered for auction in 2018 were bought by investors, which might imply that the remaining parcels are considered worth less than the taxes owed.
Unfortunately the source doesn’t tell us how many of the parcels are vacant, residential, commercial, or other uses, and gives no historical context, so we don’t really know how any of these figures compare to prior years. But regardless, the current numbers are alarming.
Suppose that the real estate tax system was changed, so that improvements would be tax-free while the value of land as vacant would be heavily taxed to make up the difference. For vacant parcels, construction of houses or other structures would not increase the tax. For parcels which contain improvements, taxes likely would be lower than now, and improvements would again be tax free. Just a thought.
Maybe expanding tax-exempt institutions raise land prices?
Crains tells us that a strikingly-designed two flat, less than 30 years old, is worthless. Well, they didn’t say it quite that way, but it was sold for $1.9 million to a buyer who will demolish it. So the $1.9 million was for the land. I don’t know whether any developer of housing or anything else taxable would have paid nearly that much for the site, but the buyer was tax-exempt Illinois Masonic Medical Center. Their exempt status of course made the land more valuable to them. Which raises the interesting question of whether buying land in the path of such an institution’s expansion might be a profitable strategy. Of course, a fair-minded community might decide to tax land used for hospitals at the same rate as land used for housing and other useful things. But we’re not there yet.
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.
Assessor Fritz Kaegi appears to seek assessments that are more consistent with applicable laws and ordinances, and easier for taxpayers to understand. This might be a good thing, tho one hopes that, once taxpayers understand how assessments are done, they’ll demand a more helpful system, one which doesn’t punish homeowners and businesses for building or improving.
Total value of land and buildings for the 72,651 farms in the state was $196,542,978,000. This amounts to $2.7 million per farm, and $7,278 per acre. Real estate taxes paid were $431,625,000, implying an effective tax rate of 0.22%.
58% of the acreage is tenant-farmed. However most (44,378) of the farms are owned by the operator, whereas 6,021 are farmed by tenants. The remainder (22,252) combine owned and rented acreage. The rent may be cash, or a share of crop, or other arrangement. Cash rent was reported to total $1,956,402,000.
Remember that whereas Georgists are concerned about who receives land rent:
The above figures may be mostly land, but do include buildings
Even farmland may have some improvements, for example drainage tiles, and the value added by these is not “land” for purposes of political economy.
Illinois contains 7,992 very small farms of 1-9 acres (Anything smaller than 1 acre isn’t counted in this census,) Most have less than $2500 revenue, but 64 of them report $1,000,000 or more. 3122 are operated by people who say farming is their primary occupation.
The report contains a huge amount of detailed information gathered from farm operators. That may help explain why the actual response rate (nationally) was just 71.8%, with systematic estimates covering the remainder. This rate is down from 74.6% in 2012, and 78.2% in 2007. Much of the data is reported at the county level as well as statewide.
Here’s a brief paper (pdf) by two Berkeley economists suggesting how a “progressive wealth tax” could work. They assume a 2% rate would be applied to wealth in excess of $50 million per household, or maybe $25 million per individual. Most of us, then wouldn’t need to pay anything. The only question for the authors is the practicality of such a tax.
I was surprised to discover that, according to the paper, wealth taxes already exist in Switzerland, Spain, Denmark, and Sweden. References are cited indicating pretty good compliance, the lowest being in Switzerland (where the authors find the estimated 23%-34% evasion rate “not as compellingly identified as the other estimates.”) I didn’t review the cited papers to learn the details of how the compliance was estimated.
They note that wealthy people can hide their assets abroad, but imply that they could be caught if the government had more resources. While it’s possible for the wealthy to avoid some taxes by leaving the US and renouncing citizenship, the proposal includes a 40% tax on the wealth of the departers. They praise FATCA and recommend it be more vigorously enforced, without considering the disruptions it’s already caused (pdf) for many Americans who live or work abroad.
They aren’t concerned about the wealth tax reducing the availability of capital goods for productive use in the US, because they assume any decline in investment by Americans could be made up by foreigners, by the less-wealthy, or by government expenditures funded by the wealth tax. They don’t address the issue of what percentage of “investment” is actually productive.
They also don’t worry that the wealth tax would reduce innovation, pointing out that most innovation is done by people with less than $50 million, that innovation is enhanced by providing children with exposure to it, and that the wealth tax might encourage the rich to invest in more productive ways. Again, they aren’t concerned about the extent to which “innovation” is a good thing.
They don’t believe the wealth tax would discourage talented people from immigrating, pointing out that the government imposes lots of barriers to immigration which it could adjust if needed.
As for the impact on charitable giving, they curiously suggest that “foundations used to shelter wealth (i.e., controlled by wealthy individuals and not used for charitable purposes) should be subject to the wealth tax.” They don’t explain how such foundations could be identified, and why they are currently tax exempt.
The scariest part of the paper regards “information reporting.” They point out that the IRS already requires extensive reporting of income and, to some extent, assets. These would just need to be modified to better report wealth. Of course this means that everyone’s assets and liabilities needs to be reported, if only so the rest of us can “prove” that we don’t have enough net assets to be subject to the tax. For real estate, by the way, they assume that local assessor records would be an adequate source. They don’t address the problem of offshore secret trusts. They indicate no interest in counting “intellectual property”
Many years ago, an anonymous former IRS agent wrote a book advocating a “Doomsday Machine,” which would record every financial transaction by anyone in the US (and presumably by Americans abroad, I don’t recall.) He thought this was the only way that the income tax, as it existed then, could be enforced. Of course, since that time, this kind of surveillance has been facilitated by the digitization of much of the economy. It the book were updated, he’d now have to expand his machine to include all kinds of assets and liabilities.
Just in case anybody read this far and missed the point: A tax on the value of land, other natural resources, and government-protected privileges would avoid nearly all of the above problems, while still falling mainly on the wealthy.
update February 26 2019– NPR reports more poor results from wealth taxes, tho they don’t completely write them off.
We have a new report(pdf) today from the Civic Consulting Alliance, pointing out that residential assessments (excluding condominiums and large apartment buildings) done by Joe Berrios and his crew are of poor technical quality, don’t make effective use of modern techniques, and tend to treat expensive properties more leniently than less expensive ones. The Tribune article gives pretty good context and describes the contents of the report, so I won’t try to duplicate it. Rather, I’ll focus on just a few things that caught my eye.
The study uses data that apparently has never been made public. That is, it belongs to the public as represented by Joe Berrios, but the public hasn’t been permitted to see it. And we’re still not permitted to see it. In fact, the consultants and the Assessor seem to have spent more than two months negotiating a five-page nondisclosure agreement (reproduced at the end of the report) to make sure we wouldn’t see it. But we are able to see some detailed analysis, in the study appendix, that’s more useful than the raw data for understanding how assessments actually work.
We get some useful detail on the bias in favor of expensive properties.
The above figure, which is Appendix Table 5 in the report, shows the inaccuracy (left half, shorter bar means less inaccurate) and bias in favor of expensive properties (right half, shorter bar means less bias). We can see that the bias in favor of expensive properties exists for all four categories, but is most serious for multi-family and mixed-use (residential with a storefront, for example). But for such properties, there’s no reason to expect that the expensive property contains the wealthier taxpayer.
Also as previously observed, the report notes that more appeals are filed by owners of more expensive properties:
This implies that wealthier homeowners are getting a bigger tax break, proportionally, than less wealthy homeowners. I suspect it’s true, but I really don’t see any way around it within the current assessment system. The wealthier homeowner has more to gain from a successful appeal (or, what is the same thing, more to lose by failing to appeal.) She may also be more comfortable dealing with government officials and forms (and perhaps with the tax lawyers who send mailings to homeowners).
But isn’t the same true of the income tax? The wealthier taxpayer is more likely to know, or learn, tax-avoidance tricks, and/or to use a skilled tax preparer. The difference is that parcel-level assessment data is, to some extent, public information, but income tax returns in the U S no longer are.
Of course the main remedy for problems of inequitable assessments comprises:
(1) Assess only land value, ignoring the value of any improvements on the parcel.
(2) Post the assessments, including all information used to calculate them.
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.