Cuts to the core of political economy. Rent is another form of tax and it alone should be taxed rather than income from productive contribution. (As Michael Hudson has been arguing from a different angle.)
Instead, rent extractors, which includes most of the plutonomy, wishes worker income alone taxed and rent exempted from taxation because "confiscation."
EconoSpeak
Evil Effect of Robot, Rent and Taxation
Sandwichman
34 comments:
Normally I think well of Sandwichman but he loses me with the Georgist cultist stuff. No, the industrial economy does not revolve around land. Can we please move beyond that?
NOBODY "earns" high income or high wealth. Progressive taxation of income and/or wealth plus spending on social programs is all that is needed, no Georgist cult required.
But so much rentier income and banker wealth is generated through inflating land prices. Your home is your most significant purchase. The mortgage is your biggest expense and greatest worry, keeping your nose to the grindstone for 25-35 years.
Land value tax is a simple single tax reform that would do more than other tax reforms to correct imbalances in society and improve the lot of the common man. It addresses the fundamental issue of property ownership, in essence putting all land under public ownership and sweeping the rug from under the banks.
Not to be ridiculed as a cult mon amigo.
And the mega rich can't offshore their land into tax havens. But MMT shows that we don't need lots of tax on rich people for the government to provide high quality public services. Once the tax issue has been solved the Conservatives won't have anything left in the hat to get ordinary people to vote for them.
Tom when a tenant notices a roof leak and calls their "rentier" landlord and that landlord has to call all around to find a roofing contractor or else has an in-house maintenance dept that they dispatch to fix the roof how is that not a "productive contribution"?
I can see Carlos' point about the value going up over time but how is the rentier's at least administrative activities in support of maintenance of the property not considered "productive"?
I know people who work in property management and they bust their asses every day... they dont "produce" wigets but they work very hard in maintenance I can assure you...
Hudson doesnt even know what the heck is even going on in the real world out there with his 24/7/365 "rent" schtick.... he is misguided at best....
Matt the problem comes with bubbles (aka the dislocation between wages and prices), it wouldn't be so much of a problem if those bubbles didn't happen, because income and wages could keep up with prices. But when they don't it hurts everyone else at the expense of property owners, some of whom quit their real jobs as they see it's just much better and profitable to play capitalist-lite games.
The only reason this happens is because, as pointed out, this is by far the heaviest expense of a normal household and from where most of the banks make the bulk of their money (issuing credit for mortgages against real estate). I'm not sure, been a while since I looked at, but an outrageous proportion of Z1, probably above 80%, and the broader money-base comes from this activate (specially when you add up all the leveraging and collaterization that happens based on real-estate assets at the base of the "money-things" pyramid, including all forms of shadow money and credit).
This happens cyclically so it's a real rent-extraction problem time to time that affects a big chunk of humanity at some point in their life (universal phenomenon).
Anyway most forms of modern rent derive from stupid "intellectual property" laws nowadays, this should be even higher priority... Big pharma is specially outrageous, but as it's high tech etc. That's why we benefit so much from open source , too bad that the ones ripping the most benefits of it are high tech companies outsourcing and externalizing trillions a year in development costs (but at least this is something the consumer ultimately benefits from to). This is a permanent income channel unlike real estate bubbles and corporations extract trillions yearly in rents thanks to this.
If both of those channels were removed we would see prices crashing getting rid of almost all inflation (var commodity fluctuations), an increase in purchasing power and disposable income and reduced inequality (all without any extra single tax), but the privilege of a some people (including many politicians) would be removed.
Ignacio but that gets right back to Warren's "all prices are a function of what govt pays for things and what they allow their fiscal agents to lend against things...."
iow if the govt didnt directly pay the higher prices or allow lending at those higher collateral prices then those high prices would never manifest in the first place...
So I dont see what "rent" has to do with it at core... it doesnt have anything to do with "rent"....
It gets right back to "borrow > default > forgive" all over again...
If the people in the govt institution saw it as "issue > redeem" then they would never so readily accept a price increase in the first place... they are moron vermin we have now infesting the govt institution....
Ignacio remember Bush II after 9/11: "go shopping!" .... WRONGO! We were f-ed right there....
iow he was saying "go shopping so there is munnie to tax to pay for the war!"
Moron-fest...
Matt, right, that's why you rarely will see real estate bubbles in places like Germany or Switzerland, because the legislation and enforcement is good there and is against the social norm. Is about disciplining the asset side of the balance sheet, instead of letting the liability side grow uncontrollably and then discipline it when it can't any more.
Also why there is such cultural shock between Northern-Central Europe countries and the rest of Europe/world. Two completely (and incompatible) ways at looking at things, both with their own shortsightedness, too bad we can't mix up best of both and instead end up getting worse of both!
Yes rents exist because the government doesn't make the proper policies and enact the proper laws, many times because lack of understanding, or vested interests, or whatever.
Tom when a tenant notices a roof leak and calls their "rentier" landlord and that landlord has to call all around to find a roofing contractor or else has an in-house maintenance dept that they dispatch to fix the roof how is that not a "productive contribution"?
There is a huge confusion around the technical meaning of "rent" in economics and the ordinary language meaning of "rent." Same sign, different symbols.
As Michael Hudson points out, improving one's RE property is a productive contribution and that should not be taxed as rent, even though "rent" is collected on use. Land rent is an increase in the value of the land less improvements to it that occurs owing to factors other than improvement by the property owner, e.g, appreciation owing to location.
There are Canadians who have played the property bubble and were able to retire early.
There are Canadians who have played the property bubble and were able to retire early.
It's pretty well known that the surest and least risky way for most people desiring early retirement is through RE using OPM (leverage). Bubbles are not necessary owing to the leverage available but they can accelerate the process.
Matt think about it this way - you have two parts the location and the buildings/improvements. Nobody should tax buildings/improvements but the location is entirely due to the community - infrastructure spending, law and order, better schools/hospitals, natural view, etc.
You combine tax on location with building to Passivhaus standards, competition from landlords in quality of buildings not rent seeking happens.
Dan,
The scientific approach to experiments is to keep all variables constant apart from one, which you change, and that gives you a meaningful comparison and hopefully a meaningful result.
So for example, it is reasonable to ask "Is it fair that a single-earner couple with a modest income and two kids pays the same for their house as a two-earner couple on high salaries with two kids in an identical house next door?"
All variables are kept constant apart from their earnings. And the answer is "Yes of course; each household is using the same amount and value of land so they'd have the same mortgage repayments and pay the same in LVT." By the standards of their peers, two-earner couple has a modest house and/or the single earner couple has a nice house.
So it's the same as asking "Is it fair that a single earner couple with a modest income and two kids pays the same for a two-week holiday in Chalet XYZ as a two-earner couple on high salaries with two kids who book the identical Chalet next door?", to which the answer is also "Yes."
http://kaalvtn.blogspot.co.uk/2013/01/b-diagonal-comparison_17.html
Dan Lynch: "...he loses me with the Georgist cultist stuff. No, the industrial economy does not revolve around land. Can we please move beyond that?"
Actually, Dan, my argument doesn't come from Henry George but from my critique (in discussion with John Quiggin and the folks at Crooked Timber) of John Locke's "Of Property". It just so happens that a follower of George stated the point well long ago and rather than take credit myself for the argument, I cited his.
The industrial economy does indeed "revolve around land" if we define "land" broadly enough to refer to both renewable and non-renewable natural resources and processes of nature including the capacity of the ambient atmosphere, waters and land to absorb the waste products resulting from industrial activity.
You might like to have a look at Elinor Ostrom's work on common pool resources (CPRs). There's a good argument to be made for scientific knowledge as a common pool resource which throws into question the current practice of fencing off technological development with intellectual property patents.
There are natural factors, including human beings as products of evolution on earth, what humans add through artifice (Greek τέχνη transliterated as tekne or techne). τέχνη is the etymological root of technology.
The classical factors of production — land, labor and capital — translated into the natural environment, humans and the social environment including culture and institutions and their products and consequences, and technology.
It's clear that the foundation and necessary condition for humanity let alone progress is "land" in the sense of the natural environment. It is the common endowment of humanity. Humanity as an intelligent species is also coming to realize it acts as steward rather than as master (pace Genesis).
Humans are part of the natural environment, a product of it, and dependent upon it. By application of knowledge and skill through "labor," that is, work, humans can be proactive rather than passive hunters-gathers like the rest of the animals who are our "cousins."
Anything that humans add by way of work that is in addition to hunting and gathering with bare hands is by "artifice" or τέχνη. Even the most primitive tools are technology. One of the greatest technological achievements of humanity in its entire history was the harnessing of fire to do work — to produce light at night and cook food at first, as well as to protect from incursion by animals. The rest is history. Iron and steel, the basis for modern industrial technology, came from smelting ore, for example.
If the application of knowledge is technology, then money, which is an idea rather than natural product of nature, is also a type of technology.
There are basically two types of technology with which economics deals — real technology or capital goods and financial technology based on money and financial instruments denominated in money.
The historical result is a complex adaptive system that is evolving all time through emergence based on reflexivity (feedback, learning), for example. The elements that make up the system, as well as the nested subsystems, are interdependent, related in myriad patterns in a web or network of relationships. The system itself is the natural environment.
There are various POVs that can be taken toward these fundamental facts. Some of those POVs are social, political and economic theories. Theories are models and models rest on assumptions that function as criteria in the intellectual apparatus, e.g., as axioms or postulates.
I'll leave it there, but it should be clear "land" is, as Sandwichman says, much more than the plot to which an owner has title in the model based on the dominant legal and economic POV today. A title search leads back to the point at which the plot was artificially enclosed from the commons through a type of technology that brings ownership into being and creates rules for it institutionally.
What does that enclosure rest on as foundation? For the most part force rather than consensus — a confiscation of a part of the commons that is the natural endowment of humanity.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/11/robots-and-the-core.html
More mention of land.
Matt,
I have being paying rent for for 13 months in my current apartment and the Landlord has fixed and spent .... Nothing.
Thats 100% renter income, money for nothing if he has already been remunerated for building the apartment.
My beef is with unproductive income, in my experience the landlord generally spends less than 10% on repairs. It get's worse when you consider the almost pure rentier overheads at shops, restaurants, factories and farmland.
You will likely find the unproductive land component of most products is huge, I hesitate to put a number on it. I spoke to a business owner recently paying $30,000 a month for rental for his restaurant, I roughly estimated 50% of his revenue. Tenant farmers in some countries (on prime land) can also account more than 50% of production costs on rental.
The landlords are sitting at their investment terminals with zero value add. Just consider if 10% to 50% of everything you purchase goes to some lard asses doing absolutely nothing in return.
Theoretically a full land value tax could overmatch current tax revenue, think what percentage of that is non productive, it's mind boggling just how much economic activity is non productive. I laugh when small Government clowns talk about wasteful Government. The real estate, finance and insurance sectors add far less value to the sum of human achievement.
Carlos, you may find this blog interesting. How to introduce LVT incl banding, http://kaalvtn.blogspot.co.uk/p/valuations-and-potential-lvt-receipts.html
One idea is LVT/Basic Income. The average household in the average location would pay nothing. The quid pro quo is that you exclude others from a location you pay for the privilege. But I say this ignores that there is no one to one relationship between stuff and money and you can't just "hand out" Basic Income. I would have BI about 70% of LVT.
Come to think of it,
If the tax system was 100% focussed on eliminating unproductive economic activity, taxation would be far more worthwhile.
Put your minds to work on that thought, if you dare.
Ironically Mike would be taxed out of a job :)
Thanks Random, I had arrived at a similar conclusion myself. LVT is hugely unpopular in the mainstream because retirees and underemployed folks fear being taxed out of their homes. The Bob Roddicks of the world would claim they are being robbed.
If there was a guaranteed basic income accounting for the tax on a median house. Low income retirees in expensive areas would have to downsize (if they haven't made provision for taxes).
LVT doesn't mesh with the capitalist dream to get ahead, retire and stay ahead for ever. To stay ahead people will actually have to work... irony max.
Trading is a job as market maker providing liquidity. Trading gets taxed as ordinary income, unlike capital gains.
already
Capital gains would be taxed as ordinary income, although there probably should be an adjustment for inflation since gains over time may not be real gains at all.
Trading, scalping, middleman, market maker? Agreed there may be a limited utility as market maker. But mostly as market maker to other speculators not so much currency exchange end users.
I don't like biting the hand that feeds. I genuinely appreciate MIke and this blog. But let's be honest. The currency trading, speculative process has marginal social utility relative to it's cost. It is a low value add, mainly casino gambling activity, recreational amusement at best.
Professional gamblers can make a living duking it out, sure I don't deny them that, some win some lose, great. But mostly it is rentier income adding cost to imports and exports. Increasing mom and pops overseas holiday costs. At worst it is deceitful manipulation and cheating based on asymmetric information and monopoly trading positions.
I agree capital gains can and should be treated as ordinary income. No need to adjust for inflation, amortise the gains over the period of the gain and make the backdated tax payments accordingly. With accurate tax records this is easily achieved.
Ring fence the trading casino and use the price signal to regulate over the counter exchange rates with minimal exchange fees?
Banks have too big an incentive to widen the spread.
If efficient capital market with current bids and offers are desired, then traders are a necessary condition for generating this. This is a key element in the operation of free market capitalism.
I'm not sure I desire that kind of efficient capital market. An open process with symmetrical information for valuation and sale of assets will suffice. Asset owners with more skin in the game and responsibility for social outcomes might be an improvement.
Dare I say it... Governments can host trading platforms, recouping costs or even implementing re-distributive taxation through fees.
I think it was you Tom who said what the financial sector fears most is Government doing their job more efficiently.
Carlos points taken I have some first hand experience here....
What is causing the current problem there is again the govt policy not "rent"...
You have banks being allowed to operate properties and enterprises that have been foreclosed upon instead of being made to liquidate them as we did back in the S&L days...
If regulators came in and informed banks that the were not REITs and Private Equity Funds, and therefor they had to get rid of every non-loan asset in 90 days, then prices would adjust back down to reasonable levels where you wouldnt see the restaurant having to pay 50% of sales for facility lease....
One guy I know had his restaurant taken away by his bank but the bank has not closed it... it has hired a management company to keep running it as a going concern meanwhile all they have to do is break even... then another guy I know has to compete with them so that is not fair as banks have license to leverage paid in capital, my friend who has to compete with them cannot leverage capital.... so imo banks should have to get rid of foreclosed assets withing 90 days and prices would remain reasonable....
Another situation I know of is where the developer went bankrupt on a big development and now Wells Fargo has taken the development back and has hired professional real estate firm to re-structure the development and keep selling small villas .... Wells is offering financial incentives to prospective buyers that other developers who didnt go bankrupt cannot compete with....
So none of this is fair to we who didnt go bankrupt in the crash...
Banks are being allowed to compete with us with unfair advantage that is what is causing the problem NOT "rent"....
Blaming it on "rent" is a sophomoric analysis... its blaming the symptom not the disease....
Carlos when buildings are new there is less maintenance...
No doubt there is bad management out there who defer maintenance and never think they have to update... but they usually end up with slums and major headaches down the road or they have to sell it to get out of it...
Trump is currently doing the old Post Office pavilion building on Pennsylvania Ave in DC... when I was in college in the 80s I had a friend in Architecture who took a field trip there to see it it was all brand new and an award winning renovation THEN... I was there just maybe 5 years ago it was f-ing A DUMP.... so they got maybe 25 years out of it tops... Trump is in there now completely gutting it..
A lot of people who get into real estate think it is a gold mine it is ultimately not nothing is... people have lost big in real estate... I dont recommend it major headaches if you are a responsible owner and seek to maintain it properly...
And the price of real estate is determined by govt policy... so if you have a problem with the "rent" (symptom) then the problem is as usual morons in govt positions (disease)...
Hudson doenst understand this he's locked into the "borrow > default > forgive..." paradigm....
"if you are a responsible owner and seek to maintain it properly"
The problem is that it's easy to get away being a irresponsible owner and still lif a nice profit. As such you extract rent while running down real estate and then let the company go bankrupt.
Here in Sweden a company -Boultbee- bought shopping malls everywhere, hiked rents a lot at take over and spent nada on maintenance. Through out those few years the company were drained through hefty remunerations among other things. Owners walked away wealthy and losses were forced upon others.
I think it was you Tom who said what the financial sector fears most is Government doing their job more efficiently.
Right. I didn't say that I thought that the system in place is optimal, only that with this system efficiency requires trading volume for efficient pricing.
And it's true that one of the biggest fears of capitalists in addition to labor bargaining power is the discovery that government can be efficient and effective. So there is running propaganda in the media that government is necessarily inefficient and ineffective and needs to be kept "small." that is, out of the way of business interests.
Sim,
Largest Mall operator in US:
https://en.wikipedia.org/wiki/General_Growth_Properties
Bankrupted.... they all got wiped out... this is not good...
Bill weighs in here today with "value capture" concept over at his place...
I dont see this obsession with 'rent' and 'value capture' being well advised it is a slippery slope into out of paradigm city...
A lot of what you read are the short term 'success stories' in the media and when the thing doesnt work out you never hear about it...
Bill cites the guy and his wife from Boston who got the LA Dodgers somehow but they ran the thing into the ground and the Dodgers eventually became the first modern MLB team to go bankrupt (couldnt make payroll!) under those two idiots... they lost everything...
You guys want to hitch us up to these wealthy/elite people's pump and dump wagons its not going to work when they eventually lose it all (and they ALWAYS DO....) you will be right back to where you began in the first place...
A lot of people screws up because they expect the prices to go always up, as fast as they go in, they get destroyed on the price crunch when the market crashes.
This is familiar for us but that people doesn't understand that markets can go down as well as they go up. So on the way up they build up big time because accessing credit against inflated collateral is easy, then when they things start to go south they get into negative equity and it gets worse and worse as real estate market is not a liquid market.
So they end up losing everything they got PLUS loaded with liabilities that were issued against collateral which mark-to-market has crashed big time.
Is always the same thing, but the fools never learn. However in the mean time some people has made fortunes out of it and if they were smart retained their gains (to what they will answer "no risk no gain"), but the costs of it have been externalized to the end consumer.
The problem is that housing is an universal expenditure to which families devote an outrageous part of their income for decades, it gets personal and most people who does not benefit (important) or is left hanging it feels betrayed, and a lot of people believes that speculation shouldn't be allowed at such markets and bubbles should not be let to develop. You don't see this outcrying with financial markets because the majority are not involved with them in a meaningful way, directly. But the principle and behavior is the same for every market.
In any case all can be tracked back to the lack of enforcement and asset side discipline by the authorities, which many times are even pro-cyclical making it worse: http://wolfstreet.com/2015/11/10/fed-trips-over-commercial-real-estate-bubble-early-signs-of-search-for-yield/
you can't make stuff like this up, they are completely useless.
I,
Mike has been pointing out that Paulson guy who made a lot in the crash but since has been buying gold on the basis of "munnie printing causes inflation!" meme and has been giving it all back...
We cant hitch up our future to being able to tax these idiots who are legends in their own minds...
Trump had a lot on paper at one time in Atlantic City but then all of that went sour on him too... he says he got out unscathed but I would bet he overall didnt make much munnie there at all....
We cant propose to tax such fictitious/fleeting "wealth" or "rent" as a long term solution to our alleged "revenue problems"...
The biggest rent out there is the monopoly rent from OPEC and they operate outside of US tax jurisdiction to begin with....
" lack of enforcement and asset side discipline"
Right... if we are FOR 'asset side discipline' then we should NOT be for 'taxing rent'...
The two concepts are not logically congruent...
If you manage the asset side correctly, then the "rents" will never manifest in the first place...
Abandoning strict/informed/competent authority over the asset side IS WHAT ALLOWS the 'rents' to THEN manifest...
"Bankrupted.... they all got wiped out"
Bucksbaums do not seem to live in tents, but rather being wealthy enough to still being in the business together with banks. If you're big enough you don't get wiped out, your company maybe but not you personally. Small people, small companies get wiped out, some shareholder too perhaps.
I don't know about GGP but Boultbee was a disaster from start to finish, where they trashed small businesses with their huge rent hiking together with lack of maintenance. People dislike going to malls with leaking roofs and where stores are closing down leaving gaping holes.
BTW Boultbees' owners don't live in tents either…
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