Westbound on Cermak at Wabash (Menace of Privilege photo)
BACK ON THE BUS: SPEEDING UP CHICAGO’S BUSES showed up this morning from Active Trans. Of course it says transit needs more money, and doesn’t connect the dots on cost-effective investments. From the executive summary:
Chicago needs a healthy and growing bus system. Fewer Chicagoans riding the bus means more people driving and more cars on our already congested streets, especially in and around downtown during peak periods. Our hub-and-spoke rail system continues to be a good option for people who live and work along the CTA train lines and in the Loop, but many neighborhoods lack access to it. Without more investment in bus service, Chicago risks more people abandoning transit for transportation options that are more expensive and less efficient, healthy, and green.
The report acknowledges that part of the problem has been CTA’s substantial service reductions, but seems mainly to look at “how do we move buses around faster” rather than “how do we provide service that lets people travel where they want, when they want, under civilized conditions and at a reasonable cost.” But, hey, moving buses faster is probably a good start.
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.
I think the hero in all this, and I talk about this in The Code Economy, turns out to be Henry George. I mean, I think he really, you know, the 19th century U.S. economist–and he really anticipated these phenomena more clearly than anybody.
Pleased enough to read Auerswald’s new book. And he does get a lot of what George wrote about.
Auerswald’s main point seems to be that an economy doesn’t just have inputs and outputs, but what’s more important is the methods by which the inputs are used to produce the outputs. That’s “code,” and folks have been using it for 40,000 years. In recent centuries, standardization and automation of various kinds have increased productivity — the amount of stuff which a given amount of inputs could produce.
And, as we see computers and machine-driven processes increasingly capable of replacing human labor, what will humans do? He endorses Henry George’s analysis that, as productivity increases, rents will increase. And he supports the citizens’ dividend (tho he does not use the term), to be funded by a land value tax.
But his concluding pages seem to assume that, of course everyone will have a guaranteed income from land rent, no problem there, but what will people do with their time? To George, the problem was to get a fair distribution (not redistribution, because by right the rent belongs to everybody) of wealth, which he expected would result, over time, in social progress and a more constructive community. When I look at Wikipedia, Flickr, some blogs and a bunch of other internet resources, I tend to agree with George. Auerswald assumes the wealth distribution, but doesn’t assume that people and the community will improve. If I looked at Facebook or some other sites I might agree with him.
Auerswald also makes interesting use of the concept of comparative advantage, applying it to humans exchanging work with machines. Machines can do certain kinds of work millions of times faster than humans, so logically machines should do such work. In other tasks the difference might be much less, so those tasks would remain with humans (tho I would guess at much lower wages than currently.) And then there are some “low-volume, high-price” tasks which might remain human monopolies.
*****If you’re not the editor of Auerswald’s book, stop reading here*****
This book is full of irritating errors. On page 2 is a list of ingredients for chocolate chip cookies, comprising butter, sugar, water, salt, and chocolate chips — but no flour. Page 92 says “slavery was abolished in the British Empire in 1807,” while Wikipedia provides various dates, depending on your definition, in the 1830s or 1840s. Page 120 places Ray Kroc’s first McDonalds in “Desplaines, California.” Page 175 calls Zipcar a “ridesharing” platform, corrected on page 213 to “car-sharing.” “As Henry George understood nearly a century ago” on page 232 doesn’t seem likely regarding a man who died in 1897 mentioned in a 2017 book. There are probably more, that historians or various kinds of geeks would notice.
Singapore Skyline by Bernard Spragg .NZ (public domain)
According to Bloomberg, “Malaysian Tycoon” Quek Leng Chan’s company spent S$1.62 billion (reportedly equivalent to US$1.2 billion) for a development site. Bloomberg doesn’t tell us the size of the site, but the local source Today says it includes permission for a building of up to 950,592 sq ft., thus requiring a site cost of S$1704, or about US$1262, per square foot of building. My guess is that you could produce a very nice office building for construction cost less than $1200/sq ft, in which case site cost will actually be greater than the entire construction cost of the new building. Today notes a couple other costs for the developer:
He has to replace the police station currently on the site
This isn’t a fee-simple purchase, but a 99-year lease
Which I guess indicates that land is still a nontrivial part of the cost of doing business. No surprise.
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.
August 2017 view south from Jackson Blvd bridge. It turns out this structure is the remnant of an underground bypass to handle river flow. Click image to enlarge. (photo by Menace of Privilege)
Building The Canal to Save Chicago by Richard Lanyon is a great book about a critical infrastructure project. It’s the story of what we now call the Chicago Sanitary and Ship Canal, built at the close of the 19th century to protect Chicago’s water supply. Of course there’s more to it than that, including effects on flooding, navigation, and downstate.
The book is full of photographs of the work, and one cannot ignore how dirty, strenuous, dangerous (and noisy) it must have been. Power shovels, dredges, locomotives, various devices for moving soil out of the channel– all powered by coal, burned without emission controls of course. Over 5,000 people were employed, and there were deaths — unfortunately no count is provided.
We get some useful details about the costs and funding. Substantially all of the construction (which began in 1892 and was substantially complete in 1900) was done by contractors under competitive bidding. The work day was set at 8 hours, with extra pay for work beyond that time. Minimum wage was to be 15¢/hour.
Adjusted to today’s (2015) GDP/capita, that 15¢ equates to about $37.50, but other approaches would yield vastly different numbers. Of course, due to the primitive equipment available, the workers could not have been nearly as productive as equivalent workers would be today.
Total cost of the project was reported as $33,530,000 (page 355 — excluding work east of Damen). This could equate to $8.38 billion today. It was paid entirely (page 338) from property taxes imposed on the approximate area benefited (including bonded debt paid from these taxes), without federal or state financial assistance. Initially the tax rate was 0.5% of assessed valuation, later raised for a five-year period to 1.5%. If based on actual property value, this would be a very hefty tax, but traditionally property in Cook County has been assessed at a modest fraction of market value.
I say “property tax” rather than “real estate tax” because, up until the 1970s, Illinois taxed personal property as well as real estate. The tax was poorly-enforced and hard to administer, and was replaced by a corporate income tax surcharge. I suspect that personal property never amounted to more than a small fraction of the tax base.
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.
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.
The Chicago Tribune, or what’s left of it, has issued a pretty good report on inequities and corruption at the Cook County Assessor’s office. Of particular note, they’ve included a lot of detailed statistics looking at assessment/sales price ratios, as well as a lot of details of recent history. I think it’s fair to describe their main points as:
Less expensive homes typically are assessed at a higher percentage of market value than more expensive homes, and therefore pay more taxes than they would if assessments more accurately reflected market prices.
Sophisticated homeowners are more likely than unsophisticated ones to appeal their assessments, and a large percentage of appeals are successful. This is one cause of the problem in (1).
The quality of assessments in Cook County doesn’t meet professional standards of accuracy. The MacArthur Foundation funded development of new mass appraisal methods which may provide more accurate results, but the Assessor has made little or no use of them.
The Cook County Assessor’s office suffers from some combination of corruption and incompetence.
Don’t know if fair use permits me to use Bloomberg’s picture, so here’s a goose in Aurora, maybe somewhere near the site of interest. Image credit: Kenneth Cole Schneider (CC BY-NC-SA 2.0)
Just in case anybody doubts that location has value in the 21st century, here’s a report from Bloomberg about a 31-acre Aurora parcel that became valuable because it’s adjacent to the CME Group‘s data center, enabling one to trade a millionth of a second faster. The site sold for $14 million, “probably twice as much as it’s worth” according to a local real estate exec. I would argue that it must be worth $14 million, else the buyer would not have paid it.
The article reports a couple other nearby deals, but provides no parcel numbers nor even a map, so we can’t see what the assessment of this parcel is. There’s also no indication who the seller was.
