Category Archives: taxes

Some effects of high and misconfigured real estate taxes

Delinquent taxes soaring in Cook County

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.

“Taxes – De Standaard” by Stijn Felix is licensed under CC BY-NC-ND 4.0

 

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.

Notes on Cook County Assessments

Selection from Olcott’s Land Values Blue Book, 1936 edition, Numbers represent values per front foot, to be adjusted as described in the book.

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.

Traditionally, Continue reading

Notes on farmland from the 2017 Census of Agriculture for Illinois

wind turbines in a farm field

1009 Illinois farms have leased wind rights to others. (“Farms” by jopaha is licensed under CC BY-ND 2.0 )

The 2017 Census of Agriculture Illinois report was issued earlier this month, and here are a few statistics of interest:

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.

 

 

 

Wealth tax would require even more government monitoring

Not the paper, but the book cited below

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.

Some Cook County assessments are maybe about as bad as we thought

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.

 

 

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.

Another outrage that a land value tax would eliminate

One of many sophisticated dogs named “Wrigley” Image credit: Liz CC BY-NC 2.0

Expanding on a subject covered here nearly six years ago, Tim Novak of the Sun Times writes about  assessment deals in Wrigleyville.  Actually, not just 32 properties in Wrigleyville, but apparently on 13,984 parcels countywide, each of which reportedly contains commercial use along with at least one, but no more than six, apartments.

Because Cook County taxes residential (and vacant) property at 40% of the rate applicable to commercial property, and because, 17 years ago, the Cook County Board decided to pretend that commercial property containing one to six apartments is residential, taxes on these 32 Wrigley-area properties (and, presumably, on all 13,984 parcels) are only 40% of the amount they would otherwise be.  Furthermore, Novak visited some of the properties and found evidence that they don’t contain any apartments at all. Which Assessor Berrios thanked him for reporting.

Novak also visited an auto repair shop across the street from Wrigley, whose owner owes $78,000 in back taxes and claims to fear losing his property.  Of course I don’t know the owner’s personal financial situation, but given high land prices in the neighborhood, it seems he could sell his site for a couple million dollars, take the money and buy (or buy land and build) a better facility a mile or two away.  Across from Wrigley may have been a good location for car repair in the 1970s, but not so today.

Three conclusions:

(1) Sun Times needs to sell papers (and attract web traffic) and putting “Wrigley” in the title probably doubles or quadruples the number of people who’d read an article about “tax break.” But the issue is taxes, not commercial baseball.

(2) Once again, let’s be thankful that real estate tax and assessment data is (mostly) accessible to the public.  Who knows what kinds of scandals there are on the income tax and sales tax returns filed by the politically-connected property owners, their accountants or attorneys? Unless Wikileaks takes an interest, we’ll never see them.

(3) All this would be solved with a land value tax.  Everybody pays the same rate — a big rate — based on the value of their land, exclusive of improvements, and perhaps no other taxes are needed.  If there were inequities, the Sun Times — or the Civic Federation — could publish maps making them readily visible.

 

Won’t be finishing this book

Laurel & Hardy silhouettes. Image credit: Stephen McCulloch CC BY-SA 2.0

A Fine Mess by T R Reid. The subtitle is: A Global Quest for a Simpler, Fairer, and More Efficient Tax System. A great quest, and certainly something to investigate. Grabbed it off the library shelf, started to read, and …

Any time I see what might be a thoughtful book about taxes, I pretty soon turn to the index to see what it says about Henry George, land values, or economic rent. Hey, Reid devotes about six of his 262 pages to a section about Henry George and land value tax (tho he sort of conflates this to the “property tax” which includes improvements.) He acknowledges George’s historic significance and the logic of the Georgist argument.  Then he says:

In George’s day, government– and thus the funding needed to pay for it– was vastly smaller than what we know today… [I]n 1879 there was no Social Security, no Medicaid, no NASA, no Department of Transportation or Energy or Health & Human Services.  Some economic historians argue that the Georgian Single Tax might have been adequate to maintain the relatively minimal governmental establishment of the 1880s…No country has ever been able to fund its governments with only the Single Tax on the value of land that Henry George envisioned.

He does not say “Full collection of economic rent would be insufficient to fund all the legitimate functions of government,” tho he certainly implies it.  So a response is needed.  And available.

  • If the government provides services which make the community (city, state, country, whatever unit) a more pleasant or productive place, what is the effect on the value of land? Does this not apply to the services Reid mentions?  If it does not, why should the people continue to pay taxes for such services?
  • If all the taxes which make labor expensive and real wages low, such as the tax on earned income, payroll tax, sales tax, tax on houses, utility tax, Medicare tax, were abolished, what would be the effect on the value of land?  And what would be the effect on the need for that part of government expenditures which assist the poor?
  • In fact, how has the value of land in America changed  since George’s time? It is a national embarrassment that we do not have reliable information to address this question, but surely the answer is “multiplied manyfold.” One reasonable estimate (pdf)  of today’s value is $23 trillion (as of 2009). That’s more than the national debt.  Because land value is a function of rent, and because all taxes come out of rent, imagine how much greater land value would be in the absence of all the anti-productivity taxes as noted above.

Of course, George’s proposed tax does not apply only to land as conventionally defined.  It also includes taxes on mineral rights and extraction, electromagnetic spectrum, water rights, and more. (Mason Gaffney compiled a pretty complete outline (pdf)) It also applies to the moon and planets, should NASA or some billionaire claim rights.

So since Reid neglects to properly evaluate the potential of the single tax, I’m not inclined to read his book because I wouldn’t know what other oversights it might contain. But I did browse thru it.  Reid really likes the value-added tax: “We should…implement this tax and use the money it raises to cut taxes on work and savings. (page 255)”

Uh, what are the economic purposes of work and savings? Yeah, to buy goods and services, now or in the future.  Substituting a VAT for taxes on earned income would permit people to get earn or save more dollars — and would make more expensive the things people want to spend those dollars on.

Gaffney has provided a further case against VAT (pdf).

 

The only honest way to do income tax

“ All of Nature Flows Through Us” by Marc Quinn

photo credit: Randi Hausken CC BY-SA 2.0

In Norway, it turns out, income tax returns are public, sort of. Apparently you need to be Norwegian, or know somebody who’ll let you use their government registration number. And the taxpayer will know who has looked at her information. Authorities say “We like people to do searches which could help us in investigating tax evasion…” Logically, if taxes on income are a major source of public revenue, it makes sense that the public should be able to see the details of how these amounts are determined.

And in Norway, like most places, big landowners are able to minimize their tax:

The tax lists only tell you people’s net income, net assets and tax paid. Someone with a vast property portfolio, for instance, would probably be worth far more than the figure found in the lists, because the taxable property value is often far less than the current market value.

Just to be perfectly clear, I am not suggesting that U S and Illinois income tax returns should be open to public inspection. That would be a second-best solution. The best solution is to abolish the income tax, as well as most other taxes, and obtain revenue for legitimate government costs thru public collection of land rent.

h/t Slashdot which was my original link to the BBC article.