Yves here. The use of Donald Trump by The Real News Network as the frame for this interview is a bit of a stretch, since the discussion is only peripherally about Trump. In addition, Hudson gives the impression, perhaps unintentionally, that Trump’s tax plan is in flux. In fact, it’s been set forth in detail, which does not mean it won’t change as it goes through Congress.
Lee Sheppard of Tax Notes provided a detailed analysis at Forbes. The changes in tax law are more on the corporate side, although Trump also has a big gimmie to Clinton voters in the form of ending the alternative minimum tax. The AMT hits high earners who itemize deductions. Those are typically households with high state income taxes and high mortgage interest payments, such as professionals who live in blue cities like New York and San Francisco.
SHARMINI PERIES, TRNN: It’s the Real News Network. I’m Sharmini Peries coming to you from Baltimore.
And we’re unpacking some economic mythologies here with Michael Hudson who joins us in our Baltimore studio. Thank you so much for joining us Michael.
MICHAEL HUDSON: Good to be here.
PERIES: Michael has a new book out, J Is for Junk Economics: A Survivor’s Guide to Economic Vocabulary in an Age of Deception. Michael, so let’s continue our discussion about the various myths that are out there that we need to be aware of in order to understand the economy. Part of the problem is ordinary people, partly some because of this terminologies that you described so well in your book is led to feel that the economy is so abstract, its removed from them. They’re not engaged in it. It’s all about the stock market or the housing market or what the big banks are doing. But we are very active agents in the economy everyday. So in that sense, the real estate market is the only thing that seems to be somewhat real for people because people do buy and sell their house and sometimes its foreclosed on them and they have to move out. They have to then rent somebody else’s house that’s owned by somebody else. So, let’s talk about the real estate market and how it’s mythologies for us.
HUDSON: People have the idea that when house prices go up, somehow everybody’s getting richer. And it’s true that the entry to the middle class for the last hundred years has been to be able to own your own home. From about 1945 to mid-1980, families were able to ride a wave of rising house prices. They thought they were all getting richer. Then prices went even higher up between about 2001 to 2008 as Allan Greenspan flooded the economy with money – that is, credit (peoples’ debt to the banks). People still had the idea that just like their parents got rich off of rising housing prices and were able to put them through school and give they a better life, now they’re getting richer.
What they don’t realize is that the reason house prices go up isn’t simply because population grows or nature makes them go up. There are two factors. One, the public sector pays a lot of money on infrastructure. It builds new schools and parks and roads and sewer systems. Every time it builds a new transportation system, property goes up. When New York City built a subway in on 2nd Avenue, property prices are going up there. So, you have the public sector spending money on transportation. Taxpayers have to pay but the landlords all benefit and their taxes don’t go up.
But most of all, think what a house is worth. It is worth whatever a bank is going to lend against it. The fact is that none of us have enough money to pay down cash for a house. All of us have to take out a mortgage and how much we can pay and whether we can outbid the next guy who’d like that house would be, who’s going to borrow the most money?
When I became an adult in the 1960’s there was a rule of thumb. Families could borrow up to where the mortgage would absorb 25% of their income. They would get a 30-year mortgage that, at the end of 30 years, would pay itself off and they would owe nothing. Then, when they left the job market after having worked for 30 years, they would own their home outright, free and clear.
By 2008 matters had changed drastically. Banks were lending 99% and even 100% mortgage. So you could get a house for nothing. Just sign the 100% mortgage, and in many cases you didn’t even have to pay any interest, or take any of your income for 3 years. That is why housing prices rose. It wasn’t because property was worth more. It wasn’t because people were earning more and population was rising. Housing prices were going up because banks were making junk mortgages. It was all on credit.
Was this really making home buyers richer? Was it helping create a middle class? The proportion of the population owning their homes did rise – but after 2008 it plunged back down when foreclosure time arrived and the Obama Administration re-negged on its promises to write down junk-mortgage debts to realistic prices and carrying charges that reflected actual rental values.
The result was that instead while house prices were going up, they didn’t think about the fact that their debt was going up proportionally. All their increased house price was matched by the increased debt that people were taking on. Instead of paying 25% of their income on the mortgage, which was the rule in 1960’s, the government today, in 2016, will provide a Federal Housing Authority guarantee for mortgages that absorb up to 43% of the borrower’s income. That’s a huge, historically unprecedented ratio, 43%. It’s made the bank rich, not homeowners.
In Germany where I was last month, the average rent is between 10 and 15% of family income. There are very low prices there, for historical reasons. So ask yourself how can you expect American factory workers to compete with German factory workers, when you have to pay 43% of your income for a mortgage and they have to pay only 15% of their income. There’s no way you can compete. So instead of making the U.S. economy richer by housing prices going up, it’s actually made the economy less competitive, leading to more unemployment.
Of course there’s one other facto that makes housing prices go up. That’s property tax cuts.
This is a radical change, and it has helped banks much more than homeowners. Every economy in the world before about 1800 used to depend primarily on the land tax. Ever since the Stone Age, Bronze Age and classical antiquity, the land tax was what was the basis of taxation. That was the criterion for citizenship in Greece and Rome. Governments financed themselves by taxing the land. After William the Conqueror conquered England in 1066, a few years later he had the Domesday Book written up to calculate how much rent tax everyone had to pay on their land.
Water, all of this tax was privatized. The Revolt of the Barons sought to privatize the rent tax instead of making land a public utility.
Fast forward to today. In the United States since the Reagan administration, there’s been a steady cut in the real estate tax. At first glance, many homeowners think that this saves them money and helps the middle class get richer. What they don’t realize is that when the real estate taxes are cut, that leaves more rental value of the land available for new buyers to pledge to pay the banks in interest. The basic principle is that rent is for paying interest. This is true in commercial real estate as well as residential real estate.
Bankers know that every time there’s a property tax cut, they can make a larger mortgage loan against that property. The result is that instead of paying taxes, new homeowners pay interest to the bank. The higher interest payment absorbs the tax cut.
Meanwhile since they’re not paying taxes on real estate, the government – local governments especially – find themselves in a budget squeeze. They’re not getting the real estate tax revenue as before, especially California with its Proposition 13. So, they have to find the tax revenue elsewhere – for instance, by sales taxes on what con summers buy. Some cities and states impose an income tax on labor. But they don’t tax dividends or Wall Street.
The result is that if you are a wage earner, they tax your wage withholding, impose excise taxes and sales taxes on the things people buy. Not houses, not stocks and bonds, not the things that rich people buy, but the things that the middle class and the working class buy. They end up with the tax burden. And landlords get richer, especially commercial property owners.
What this tax shift means is that housing prices have been pushed up by shifting taxes off real estate, off the Donald Trumps of the world, onto homeowners, renters and consumers – the people who are not millionaires. But most people don’t realize why prices for real estate are going up. Most of all, they don’t realize that they’re not really better off if the price housing goes up, if their debt goes up even more. They didn’t anticipate that in 2008, housing prices would plunge and the debts would remain in place. Suddenly many families found themselves in what economists call negative equity. That’s the position that 10 million American families were in when they were foreclosed upon after 2008.
And just now, as soon as the election was over in November, foreclosure rates have gone up sharply. It’s as if Wall Street has said, “Okay, we got the suckers to vote, now we’re going to slam and begin foreclosing on them like anything. That’s exactly what’s happening in New York where I live. Foreclosure rates way up. You’re seeing a transfer of property from debtors to creditors.
PERIES: And Donald Trump in his interview on 60 Minutes on Sunday with Lesley Stahl said the first thing he’s going to do, he has a bill waiting which is going to cut taxes. So what does he mean by this, and what will it mean for us?
HUDSON: Nobody knows what it means because we don’t know whether he’s just going to turn the presidency over to the Republican Party’s lobbyists to write the bill. The implication is that when he talks about cutting taxes, being a narcissist he means cutting taxes for himself. He doesn’t mean cutting taxes on most people. There may be a small token tax cut for other people, but a big cut in the taxes on the highest wealth brackets. So, you can be sure that his constituency is going to get the biggest tax cuts. Not your constituency that watches this show.
PERIES: Here you’re talking about Wall Street getting more tax cuts?
HUDSON: Right.
PERIES: All right Michael, thank you so much for joining us.
HUDSON: Good to be here.
PERIES: And thank you for joining us on the Real News Network
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I’m here because I beat the crazy guy. Being in Australia (that far east) I can do it every time.
But no more.
Fiat money fuels debt. Tax policy favorable to real estate, inflates supply. This is a choice, not an inevitability, but long term policy has consequences, many of them unintentional. These issues are more relevant than the minutiae. Government policy inertia is a Gordian Knot of “one the one hand, on the other hand” that can’t be cut other than by revolution, peaceful or otherwise. Status quo and tweaking won’t get us there.
Rising prices, in houses, equities, oil, food or Beanie Babies are a zero sum game. They’re good if you’re selling and bad if you’re buying. It really is that simple. Sometimes they are because of a scarcity of supply, like when a harvest fails and food prices go up. Sometimes they represent an improved product, like when a nearby transit line improves the value of the houses near it. And sometimes they simply represent more money available to buy them, like when house prices went up during the RE bubble or when stock prices go up because the fed is easing the lending of money, and so purchasers are simply paying more for the same housing or the same future dividends.
Except they are not a zero sum game for buyers and sellers, when a bank stands in the middle and is loaning you more than you can afford to pay.
It’s still good for the seller. and bad for the buyer. THAT is what a zero sum game is. For every extra dollar that the seller gets, the buyer has to pay an extra dollar to secure the (housing/nutrition/future dividends) that they are purchasing.
You mention “food prices” and “harvest fails”, but fail to mention the role of subsidies;
https://commons.wikimedia.org/wiki/File:United_States_farm_subsidies_(source_Congressional_Budget_Office).svg
You mention ” improves the value of the houses”, but fail to mention how the ” improved product, like… a nearby transit line” came to be. Is the “improve[d] value” a result of the individual efforts of these individual homeowners? Are you suggesting that infrastructure can be developed privately? Are you conflating “price” and “value”?
“It really is [NOT] that simple”, if you lost your job, livelihood, home, business, health{insurance}…It’s not a {“game”} nor “zero sum” for those discarded, outcast and forced to enervate at the margins of society–it’s a net negative… It’s not a {“game”} nor “zero sum” for those abandoned and left to rust, when {corporate persons} decide “they” no longer have any use for the people “they” conned into depending on them—it’s a net negative…
Shorter Objectivist Individualist: “A strong Nanny state for Me, but not for Ye”
http://deanbaker.net/images/stories/documents/cnswebbook.pdf
I picked the transit line BECAUSE that doesn’t represent any investment that the seller made into the house, just a exogenous reason that the value of that house as a place to live went up. The seller DIDN’T add the transit line (except passively, by paying taxes) and yet the house is worth more because of it. A zero sum game doesn’t mean that there are no losers. It means that the winners are perfectly balanced by the losers.
On balance, the RE bubble led to a huge miss-allocation of resources, and in the end, it crashed the economy. But there were winners: people who sold their houses at peak prices, mortgage brokers who made crazy stupid loans and then sold them, Wall Street brokers who packed those loans into bonds that they convinced suckers to buy.
How is a transit line “exogenous” to “location, location, location”?
You seem not to recognize the role of the nanny state, in who “won” and who “lost”, and who continues to “win” and who continues to lose. You further seem to imply that “winning” is somehow a result of “skill” in timing {peak prices}, unloading “crazy stupid loans” and “convinc[ing] suckers to buy” {junk bonds}, yet fail to mention the FRAUD that made that “winning” possible…seems like recycled “blame the victim” red-herrings, IOW, “A strong Nanny state for Me, but not for Ye”…
You seem to ascribe to me views that I don’t hold and have not stated. I did not say anything about the “skill” of people who sold at peak. Or that the bankers and mortgage brokers were not committing fraud. If a man points a gun at me and takes $100 from me, he is the winner and I am the loser in that transaction. I am not ascribing any special skill much less morality in his ability to rob me. I am simply saying that the $100 that he “won” came from my pocket. “Winner” in no way implies that somebody won through skill and not by cheating. I am, however saying that the idea that the real estate bubble had no winners is just as silly as the idea that rising prices have no losers. That is not to excuse those who were winners because of fraud anymore than it would excuse a man who steals $100 at me at gunpoint. But he DID come out $100 ahead on that transaction.
Caveat: First, I don’t think there is anybody who has ranted and raved more about the lack of prosecution of bankers than me on this site. The forbearance with regard to forgery by states and the federal government is simply shocking, and not just the first step, but the first 60 stories, into a lawless society.
Hudson: “But most of all, think what a house is worth. It is worth whatever a bank is going to lend against it. The fact is that none of us have enough money to pay down cash for a house. All of us have to take out a mortgage and how much we can pay and whether we can outbid the next guy who’d like that house would be, who’s going to borrow the most money?”
I remember when I bought my first house, and how I was advised by people I consider intelligent, as well as the common wisdom, to borrow as much as possible. Your house price would go up, and it was for those people who write financial columns one of the things where one could talk about how “smart” people get rich using other people’s money, and you got to use a high falutin word for it – “leverage” that just made one seem sooooo, so smart.
And yet, despite how wonderful debt is suppose to be, it somehow never seems to actually benefit anyone who isn’t wealthy…..
And now, in another column, we see how the Trump stimulus package, based on infrastructure debt, is probably just a scam. Yet just as economists can see that “free trade” is a great scam for the benefit of the rich, economists can’t seem to see that public debt is not an unalloyed good – its often no more than a scam to keep the rich from paying taxes, as well as a mechanism to often funnel money to them to boot. Debt can be useful, but I certainly remember the frenzy that everyone should buy the biggest, most expensive house they could….because it would be worth so much more in the future (yeah, 2123)
And it wouldn’t be me without a bonus rant. PEOPLE, you can’t cut carrots on a granite counter top any better than on a corian counter top, and a white enamel refrigerator cools as well as a stainless steel one. Maybe less (stuff) is more (independence from a banker) – so a banker letting you borrow as much as you can isn’t really doing you any favors…
Granite counters and stainless steel as shorthand for buying more than you need, is how I take your point and agree. But those two things are not significant costs these days. Not square feet either (cf the McMansion rants). In my part of the state, cost is mainly driven by how far you are willing to commute to a job, which translates to how far inland from the coast.
Telecommuting for the professional classes en masse (5-10 yrs off, imho) will change that dynamic big time.
Once you can telecommute you can be outsourced as well. What is the point of paying a member of the professional (I really hate that term now) class a high wage when you can outsource that job to a guy in India that has taken the same courses and works for 1/4 or 1/8th of an American?
The only people who they can not outsource are people that work w/ their hands, teachers, nurses and people working in MIC and PIC. Everyone else will have to compete on global markets once they can telecommute.
My sister in law works from home. She works in HR. Her job is in Pa but she lives in Fl now. She understands the rules and minutiae but it is HR. We are not talking about high level work here. If she can work from home then someone else can work from home for less in a foreign country. The only problem is the time zone.
“The only people who they can not outsource are people that work w/ their hands, teachers, nurses and people working in MIC and PIC”
I agree…except for the teachers. We are not there yet but I can envision a time where students must do some schooling over the net…Imagine the cost savings for schools with a classes of 300…or more….The quality of the education might suffer, but…
Telecommuting doesn’t work for most jobs. And that includes the professional variety.
Even in this wired day and age, there’s a lot that can’t be done unless it’s face-to-face. This is true, even in highly wired places like Silicon Valley.
the reason why most strap hangers take the subway or the nj transit is so the boss sees them. once you see someone there is some reluctance to be mean.
if the boss figures you can telecommute from north brunswick, how long will he take to figure our he can get someone to telec from bangalore or moscow or taipei at the cost of just the FICA contribution?
20 years from now, people will regard stainless steel appliances and granite counter tops with the same derision that we now reserve for avocado green appliances. Location, location, location has always been the major factor in RE prices.
@fresno dan – “…economists can’t seem to see that public debt is not an unalloyed good – its often no more than a scam to keep the rich from paying taxes…”
Generally, the term “public debt” refers to government debt, but from your context, you apparently mean debt incurred by the public, i.e., mortgages, etc., which is generally referred to as “private debt”. Please correct me if I’m wrong and, if so, explain how government debt fits into your statement.
Otherwise, I agree completely. You give great rants, fresno dan.
John Zelnicker
November 22, 2016 at 10:14 am
Yes, I was very imprecise. I was equating public debt with government debt. Even Krugman, of spending on alien invasions fame to alleviate a recession to have some stimulus during recessions, wrote a column about how Trumps infrastructure plan was not a good use of public debt.
http://krugman.blogs.nytimes.com/?module=BlogMain&action=Click®ion=Header&pgtype=Blogs&version=Blog%20Main&contentCollection=Opinion
I suspect what your getting at Mr. Zelnicker is that government can’t go bankrupt. I would agree with that, but my argument isn’t the danger of government going bankrupt from printing (or making in a computer government credits) as it is that a great number of people who advocate increased government debt are doing it to prop up neoliberalism or simply to get themselves a funnel of money.
My argument is that just as “free trade” as theory is fine, but that too often it is supported mindlessly, naively, and IDEOLOGICALLY to support neoliberalism, and economists seem to be in an ivory tower and not realize that people who are trying to scam you will of course not say “I am trying to use these free trade agreements to in fact diminish competition and increase my profits by undermining domestic laws and regulations and make everybody else poorer, but of course I can’t say that and I have to say the country will be richer.” And yes, the country is richer….they just didn’t tell you it was just richer for about 100 people….
Likewise, I think it is a good thing for government to borrow for worthy infrastructure projects, especially during hard economic times. But just as some economists hear “free trade” and knee jerk support it, some economists hear “increasing government debt” and think that is an unalloyed good.
Is military spending good? Talk about something that is almost always just a big grift and is often just a big funnel of money to the 0.1% – I don’t want to overload this post with links, but look up Cheney and Haliburton and if not outright illegality, it certainly is stuff that doesn’t meet Adam Smith’s definition of free enterprise.
To my mind, whatever the stimulative affects of military spending are, they are offset by the corruption and incentive it gives to use all that military hardware (e.g., Albright, ‘what is the use of this great military if we can’t use it’) – it is not a net benefit to society.
And although heath care and insurance isn’t often thought of as government spending, I believe something like 50% of American health care is funded by the US government, so how much government spending, and consequently government debt there is, is related to government health care spending.
So does it matter if the ACA is actually affordable, or not? If we need to pay more for health care, lets just borrow and pay for it, right? Well, my problem with that is just like the housing crisis – house prices go up and up, Wall street, banks, mortgage companies make a fortune, and when if all goes kablooey, there is enough money to bail out wall street, but strangely and inexplicably, there just HAPPENS that there isn’t enough money to bail out the people who borrowed who have the least amount of money, are in the most desperate situation, and by any normal economic theory, would have the greatest stimulative effect on the economy if they were bailed out. STRANGE…strange that the dems didn’t do this…..or is it????
From this article:
“Was this really making home buyers richer? Was it helping create a middle class? The proportion of the population owning their homes did rise – but after 2008 it plunged back down when foreclosure time arrived and the Obama Administration re-negged on its promises to write down junk-mortgage debts to realistic prices and carrying charges that reflected actual rental values.
The result was that instead while house prices were going up, they didn’t think about the fact that their debt was going up proportionally. All their increased house price was matched by the increased debt that people were taking on. Instead of paying 25% of their income on the mortgage, which was the rule in 1960’s, the government today, in 2016, will provide a Federal Housing Authority guarantee for mortgages that absorb up to 43% of the borrower’s income. That’s a huge, historically unprecedented ratio, 43%. It’s made the bank rich, not homeowners.”
“It’s made the bank rich, not homeowners.”
Makes me wonder what percentage of their income people use to pay for health insurance, and how much they pay now (of course, taking into account all the co-pays and adjustments) And, in a REMARKABLE COINCIDENCE as well, it just so happens the EXACT SAME THING happens with medical bankruptcy – there is always money to pay health insurance companies when “reforming” health insurance and hospitals, but somehow the insurance doesn’t cover all the medial expenses and the patients pay more, gets poorer, and goes ….bankrupt. It seems to me that all “reform” nowadays in the US is to assure that the rich get more…
And no matter how much people say the government can print all the money it wants, the economy is about resources, and who has them, and WHO DOESN’T”T. I may be wrong, but again, it seems to me that it has been going on for the decades that those with resources are getting more, and those without resources are getting less….
So – the idea that we ALWAYS increase government debt to solve our problems instead of raising taxes makes me cynical about the economists who always act like government borrowing has no downside what so ever. I suspect some wolves among the sheep.
Now, I could be wrong, but the people who think that government borrowing solves everything have to explain this chart:
https://fred.stlouisfed.org/series/W270RE1A156NBEA
That has been going on for decades…..under repubs and dems. If they haven’t been printing money for the poor in the last 50 years, why does anyone think they will in the next 50?
Excellent post. Thank you.
@fresno dan – Thanks for clearing up my confusion. This is a great post.
You are absolutely correct that government borrowing doesn’t solve everything. Actually, I don’t see it as a solution to anything, but rather a tool to be used judiciously to reach a solution (even though the federal government has no need to borrow at all). It certainly is all about resources and their distribution. Not all government spending is equal or beneficial, although there are some economists who believe it is. What you seem to be inveighing against is the spending that goes to economic rent, rather than productive uses, e.g., health insurance premiums instead of single-payer, or military instead of social services.
Of course they aren’t printing money for the poor, or the working class for that matter. As you note, there is always enough money for the military and the bank bailouts, but not enough for Social Security, Medicare, or Medicaid. And, this will not change until a united movement of the working class and the poor can grab the reins of power from the neo-liberals.
I have come to my own conclusions on the following:
The foundation of wealth is to not feed any rent seekers.
The definition of wealth is your capital making more money for you.
Notice the absence of debt in both of those scenarios. That is how the real, old money was made.
It will take about half my working life to achieve the former, and I will just have to see in time how much I achieve of the latter.
I agree with the substance, but if we are talking broad groups, the headline is rather misleading. The primary broad group harmed by the past couple decades of housing inflation is renters. Homeowners have done quite well. Both the median and mean net worth of households that own a home (including those with enormous mortgage balances) are much, much larger than the corresponding values for households that rent their primary residence (or don’t have one at all).
+1000
Only if they cash out and move to a cheaper city. For example, a homeowner sells in NY/SF/LA and moves to Kansas City.
So what if a homeowners house went from $600K to $800K? What’s the use? They can’t upgrade because the better house has gone way up too. And if they upgrade and there’s a correction, now they’re really stuck. Many homeowners are essentially renters, but without the ease to move if necessary.
Ah, of course there is spread around averages and medians (this gets at why the headline category is misleading), but that doesn’t dispute the basic summary that, overall, homeowners are much wealthier than renters.
On specifics, no, it’s not dependent upon cashing out. Nor is it dependent upon local cost of living (which is actually pretty tricky itself – what is the cost for somebody living in Kansas City of seeing Hamilton in NY or dipping their toes in the Pacific Ocean in San Francisco…).
Some subset of homeowners are poor, absolutely. It’s a much smaller percentage, though, than the corresponding subset of renters. What you call being stuck a lot of renters would call stable housing, a savings account, a stock portfolio, and all the other specific components that go into calculating household net worth.
: That’s the position that 10 million American families were in when they were foreclosed upon after 2008.
Ima shoot some approximations from the hip here. 10 mill fam households, 4 people per household = about 1/10 the U.S. population. Middle class = home’own’ers.= 10% population runway foamed out of middle class. Middle class something like half population = 20% of middle class wiped out to save the banks that started the mess in the first place.
Thanks, Obama.
Just a bit of trivia. My mother came from a farm in Norway that is still owned by cousins. In the 1664 Priest’s Census it listed the amount of property taxes: 2 hides.
The property taxes today are much the same. In 1664 the hides were from cattle. Today the hides come from the human couple who own the property.
For regions with punitive property taxes, if you don’t expect to either refinance the house or to sell it, it’s in your interest for property values to go down.
Not sure that really makes a difference.
Where I live, after the last real estate crash the town lowered everyone’s property value by 10% across the board to avoid having everyone take them to abatement court. Smart move on the town’s part but it didn’t result in lower taxes – the town just raised the mil rate to keep the overall amount of tax collected roughly the same.
If you want lower taxes, you need to have less infrastructure, ie fewer buildings and businesses. There’s one town in the area with some of the highest priced waterfront real estate around and the residents pay next to nothing in taxes (which is probably also in part why prices are so high there). The town is on a thin spit of land that juts out into the ocean so there’s only one road that needs to be maintained. It’s mostly residential and any small businesses are located inside someone’s house. They have a small firehouse and school and that’s about it.
Next time someone tells you that more construction and more business is needed to increase the tax base, call bull**it. All that does is create the need for more infrastructure and more taxes to maintain it.
Property taxes should not be the sole support for infrastructure. As infrastructure improves the value of a property that increase in value should be taxed and used to improve the infrastructure of other areas. Our present system helps keep the schools and roads in poor areas … poor.
That’s a matter of redistribution, not tax base. Hong Kong runs pretty much on Henry-ist economic model, (and no one owns land, but only gets it for a 50/70/90 year lease (length of lease depending on restrictions on use)) but funds are considered to belong to all of Hong Kong, not just the expensive areas.
Hudson is a great macro economic thinker and I love his work. However, a the micro economic level, without California’s Proposition 13, millions of elders would be forced to sell their homes that they can now live in until the day they die. Getting rid of Proposition 13 would be a negative.
The FIRE sector hates Prop 13, it means no real estate commissions for the BMW driving agents, assessments on homes remains low, home owners insurance premiums remain low, and that means less property tax money for politicians to blow on their favorite non-profits and wasteful spending, or more money to pay interest on bonds.
Stable, long lived, communities of of involved older people with an interest and commitment to where they live, are a threat to the political class. Many children return to the parents’ home and live there, providing elder care, using the environmental footprint of the house to a higher degree and continually improving the well built home.
Hordes of young, pliable, recently arrived social reactionary out of town strangers living in the same house with a huge jump in assessment and a commensurate debt level are a joy to the political class.
Social activists hate stability. Obama’s HUD is busy rewriting laws so that “racist” communities, i.e. too many whites in a given zip code, must rezone to allow high density housing (projects). Hopefully, President Trump, will dismantle this attack on our communities. The law is called Affirmatively Furthering Fair Housing, AFFH. Promoting different architecture is a cover for promoting a different society.
http://www.nationalreview.com/corner/419766/affh-admission-stealth-caught-video-stanley-kurtz
“The key exchange comes between 1:21:08 and 1:23:59 on the video. In response to a question from Reeves about what “getting serious” about housing policy would mean, Turner cites AFFH, arguing that the rule could bring “incredibly important” changes to America. Slyly, she acknowledges that AFFH isn’t so much enforcing the original legal obligation to “affirmatively further fair housing,” as it is changing our understanding of what that obligation means. (In other words, AFFH is stretching a directive to prevent discrimination into a mandate for social engineering.) Turner then says that it would take decades for AFFH to fully transform society along the lines she desires. (I’d add that the rule won’t take nearly that long to gut local government in America.)
What’s interesting is that when Turner finishes her discussion of AFFH by saying that the rule “sounds very obscure, but I think it could be hugely important,” Reeves breaks in and says: “Perhaps it’s important to keep [the AFFH rule] sounding obscure in order to get it through.” (In other words, to get the AFFH rule enacted before public opposition and congressional Republicans can block it, we’ve got to keep its existence and importance quiet.) At this point, the audience laughs sympathetically. Then Reeves adds: “Sometimes obscurity is the best political strategy, particularly in this area.”
You don’t often see a direct admission by AFFH advocates that they are trying to fly under the political and media radar, but here it is—and at a Brookings event that Reeves himself emphasizes was being streamed by bureaucrats at HUD.”
I completely agree. We will never sell our CA home just to move up to a bigger home. It is nice to know I will likely be able to afford my property taxes until I pass away.
Dave
November 22, 2016 at 1:04 pm
Very interesting take on proposition 13 – I have never heard some of those arguments, but it seems logical.
Property taxes seem very different when applied to dwellings as opposed to when they are applied to the land estates of the Manorial Class. I know too little history to speak with any authority — but since when has that constrained opinions — I believe property taxes helped break the old feudal systems of England.
Here — the same logic for property taxes seems misplaced and achieves strangely shaped goals. We have the old driven from their homes. We have the young — renters many — taking advantage of the schools in an area and paying a proportion of the property taxes to support the schools — but less I think than home owners. In my state if you own more than 5 acres and make a fairly minimal income from the land you are taxes as if you were a farmer — I guess a “family farmer” fossil from the 1930’s. Money spent on schools and roads and other improvements accrues to home and land owners in part of the increase in the value of their property — location, location, location.
In California, at least, vacant land pays next to nothing in property taxes.
The tax bill has three components:
1. Land
2. Improvements
3. Adds-ons like school and other bonds, voted on by 2/3 or the electorate and “fees” such as sewers, fireflow, mosquito district etc.
Our state, SC, changed the tax system ten years ago so that owner occupied housing was no longer responsible for any school taxes. This pushed the burden onto commercial buildings and residential landlords, who now pay almost three times the property taxes that they’d pay if their residences were owner occupied. Sales taxes also went up to make up the difference between property taxes under the old system and the new, but the results have consistently fallen short of what was advertised.
If you are a landlord, and your dwelling is rented 100% of the time, you pay about three months of income a year to property taxes. Seventy-five percent occupancy is more realistic in our area, however, so property taxes plus income taxes if you make money at it take a great deal of the revenue for landlording. My take is that the system has reduced the number of single family homes available to rent, has increased rents in general, and driven a lot of people into apartments, which I call ‘the new slums.’
We also have a system that favors farm property, with ‘farm’ liberally construed. If we didn’t have it, no one would be able to hold on to their land. A downward spiral in property values would threaten both governments and financial institutions, so I think the current agricultural exemption is a good thing.
My township in Western NJ recently started using a new basis of determining property tax. I guess it’s to take advantage of the many townhomes built on a relatively small sliver of land versus single-family homes built on larger acres. The innovation is that property taxes are now being calibrated on the number of toilets in the home. Yes, 2-3 years ago the local tax collector sent around a survey asking everyone how many toilets they have in the home. For a longer period of time they’ve been monitoring the amount of water used by a home (to calibrate against the separate sewer tax). It’s annoying but interesting to wonder who is thinking this stuff up. Ninety percent (90%) of our property tax is used to run the schools, however, the tax collector doesn’t ever inquire about the number of children or students in the home.
It is hard for me to understand the objective of all the tax innovations. Michael Hudson’s analysis really helps to grasp that there’s a method to the madness, only it likely does not benefit me.
My property tax on a townhome there has more than doubled in about 10 years. It is getting worryingly high because retirement is approaching for me and I wonder about the future affordability of living in this area, although the mortgage has been paid off. It might be necessary to turn one of the bathrooms into a walk-in closet.