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A Fair Tax or not?
September 3, 2005 2:33 PM   Subscribe

Is a Fair Tax possible? HR 25, known as the Fair Tax of 2005, would replace all corporate and individual income taxes with a 23% tax on finished goods and services, with provisions to compensate for necessities. Some think it would work as promised, but I wonder if corporations would play fairly and pass their savings along to consumers, or just enrich the bottom line?
posted by Enron Hubbard (84 comments total)

 
This will go nowhere.

That said, the tax code needs to address the fact that while domestic work is taxed, foreign work is not taxed, so even if you pay people the same amount of money, it still costs less to outsource work.

I also think the Income tax is totally abused by politicians to bribe the voters. The fact is, republicans don't want to eliminate taxes for the poor, because if the lower classes are not taxed, then they won't be upset about over taxation.
posted by delmoi at 2:42 PM on September 3, 2005


The orporation is a great book, and movie. The book is better of course, and goes into more detail, but the movie is great as well.

Most of the large corporations pay absolutely NO taxes as it is, through tax loopholes, lobbying, illegal offshore accounts.. etc.

The only way to make them "play fairly" is if a large amount of people put pressure on them to do so, and the best chance of that occurring is if people are aware of what corporations of governments do that are... evil.. illegal.. immoral.. which ever you choose.
posted by JokingClown at 2:44 PM on September 3, 2005


I'd be all for completely revamping the tax code mostly to simplify things, but I'm still unsure if moving to a pure consumption tax is truly fair. I do like that it would encourage good behavior (put your cash in savings instead of buying a flat screen TV) through economic means. Hell, if it meant no taxes of any kind on investments, the market for stocks, bonds, CDs, savings, and retirement accounts would go nuts (note they said only finished goods and services, which sounds like every savings account is now tax free).

Has anyone done a study on how much the government would take in through this kind of tax vs. the current way and what relative percentage the lowest class would pay in the new system vs. current system? If anyone knows of such a thing please drop a link here.
posted by mathowie at 2:54 PM on September 3, 2005


If you make a lot of money, this would be a great thing for you. Is that fair?
posted by caddis at 2:55 PM on September 3, 2005


Most of the large corporations pay absolutely NO taxes as it is

Can you find me one DJIA firm that paid no taxes in 2004? Or are you making stuff up?
posted by Kwantsar at 3:00 PM on September 3, 2005


Other than GM or Ford, who may not have been profitable in 2004, that is...
posted by Kwantsar at 3:02 PM on September 3, 2005


Politicians are not going to raise taxes on the businesses and individuals that contribute to their campaigns. The upper class has no need to worry that their taxes will increase.

They do need to worry that the increasing numbers of poor and disaffected will overthrow this corrupt system.
posted by Jatayu das at 3:12 PM on September 3, 2005


I wonder if corporations would play fairly and pass their savings along to consumers, or just enrich the bottom line?

Of course not. "Passing the savings on to consumers" or any other type of altruistic behavior that didn't benefit the shareholders would be a breach of fiduciary duty. Corporations != charities, they exist to transfer money from the public to the investors. Some former presidents had some choice words on the topic.

IMHO labor should never, ever have been taxed. It's a basic human right to work in non-criminal enterprise. Taxing income earned from labor is like taxing you for not being in prison, or for breathing. Get rid of income tax, and make up for it by taxing investments. It's not a basic right to get more money by already having it.
posted by mullingitover at 3:13 PM on September 3, 2005


But then it punishes investing...
posted by TwelveTwo at 3:16 PM on September 3, 2005


Or are you making stuff up?

No need to make things up. This report covers 2001 to 2003, but there is no reason to believe that things have changed much since then in the tax code.

Of some 275 top US companies from the Fortune 500, 82 paid no income taxes even though they earned over $100 billion in profits. In fact, they got $12.6 billion in rebates -- a negative tax.
posted by JackFlash at 3:23 PM on September 3, 2005


Initially the coprorations would keep the additional profit for themselves. Eventually, competition would drive the extra padding out of the profit. Look at domestic car manufacturers who are looking for any means possible to discount their cars and still sell them for more than they cost to make. In that industry I'm guessing the savings would be passed on pretty quickly.
posted by obfusciatrist at 3:23 PM on September 3, 2005


Yup... A national sales tax, that'll be fair all right. Especially since it doesn't apply to purchases of stocks, bonds, etc.

I spend around 95% of my income. I have to because my income is barely sufficient to let me survive. I have no idea what percentage of his income Bill Gates spends, but if its more than 10% I'll be astonished. Thus nearly all of my income would be taxed under the "fair tax" while less than 10% of Bill Gates' income would be. That isn't fair.
posted by sotonohito at 3:24 PM on September 3, 2005


For heaven's sake. Corporations, as a whole, do pass savings along to consumers. Of course, sometimes there is price-fixing and collusion, but competitive pressures in the great majority of cases force down returns on capital. Even Marx would admit to that.

And, mullingitover, I agree with you that labor shouldn't be taxed, but taxes of investment discourage capital formation and eventually create unemployment. Economists may disagree about the extent of the unemployment that's created, but I doubt that many would claim that the consequences of increased tax on investment would be benign.

The best thing to tax is land.
posted by Kwantsar at 3:24 PM on September 3, 2005


JackFlash, the contention that "Most of the large corporations pay absolutely NO taxes as it is" is still unproven, and Heritage did a little piece refuting CTJ.
posted by Kwantsar at 3:28 PM on September 3, 2005


Tax simplification would be fantastic, of course, but this system sounds like it places a 23% tax on all americans. I do remember hearing the bill authors say in an interview that certain basic necessities, like food and housing, would be exempt from the tax, so that the net tax burden borne by the poor would be smaller. At the same time, though, the rich spend a smaller percentage of their income than the poor, giving them a smaller net tax rate. Even if these two factors balanced out, that would simply mean that the poor pay the same tax rate as the wealthy, which is (to me) insane. I can't imagine that the numbers would work out so that the next amount of taxes paid by lower class families doesn't increase.

I'd prefer a hybrid system. Add a smaller national sales tax, and use its revenue to significantly lower income tax rates across the board, including a large expansion of the bottom no-tax bracket.
posted by gsteff at 3:28 PM on September 3, 2005


In addition, this sounds like it would encourage americans to purchase more stuff from abroad, and the last thing we need now is a bigger trade defecit.
posted by gsteff at 3:30 PM on September 3, 2005


Kwantsar: Disney did it for at least one year between 2001 and 2003.
posted by mullingitover at 3:30 PM on September 3, 2005


I wonder if corporations would play fairly and pass their savings along to consumers, or just enrich the bottom line?

How do you define fair? I mean, the only taxes that corporations can pay comes out of what they get from their customers. This is why the tobacco companies could jack up prices when they settled with the gummint for all those billions. Or are you suggesting price controls?

Get rid of income tax, and make up for it by taxing investments.

Does this include my parent's retirement money? What's he cut off point, or is there one?

By the way, for an interesting, readable account about the history of taxes in general, try For Good and Evil by Charles Adams. He has a thing about income tax, but don't let that put you off. (Any other suggestions for reading on the topic welcome, by the way.)
posted by IndigoJones at 3:31 PM on September 3, 2005


mullingitover: They booked almost three billion in charges between 2002, 2003, and 2004.
posted by Kwantsar at 3:34 PM on September 3, 2005


A consumption tax is one of the most profoundly unfair and regressive forms of taxation. Far from encouraging savings, it benefits those for whom the basic costs of living consume a small portion of their income, and taxes most heavily the poor, for whom living expenses consume the vast majority of their income. It's a handout to people who don't need it, given to them by the demagogues whose offices they bought and paid for.
posted by [expletive deleted] at 3:39 PM on September 3, 2005


Sales taxes above 15-20% have generally failed because of fraud; above a certain point, the temptation to cheat becomes too great, and the anonymous nature of most sales transactions makes if far easier to cheat on a sales tax than an income tax.

The inevitable result of a high federal consumption tax will be that, just like the US government currently has to track where your income comes from to tax your income, they'd have to start tracking where you spend your money to effectively tax your consumption. I don't know about you guys but I'm far more comfortable with the privacy implications of the former than the latter.
posted by boaz at 3:50 PM on September 3, 2005


Sotonohito nails it. Flat taxes are regressive; consumption taxes doubly so. This "fair tax" would be just yet another way of enriching the rich.

But it sounds simple, and it has a cool name. So it'll probably get voted in.
posted by ook at 3:51 PM on September 3, 2005


I didn't want to explain too much to keep the size of the post down, but two things are important to understand about how this is supposed to work.

As sotonohito said, 95% of his income goes for survival. The Tax handles this with a monthly rebate to each head of household equal to the tax for poverty level existence. Its not perfect, but it takes care of the poor.

The 23% rate would only be fair for individuals if the corporations lower their prices by the 22% they already build into the price of finished goods to cover the payroll taxes etc. they have to pay now. (In my estimation, this is highly unlikely.)

But as an added bonus, the tax covers income from illegal enterprises (drug dealers, etc.), which would be taxed when the crooks bought all their bling.

And what about the poor accountants?
posted by Enron Hubbard at 3:56 PM on September 3, 2005


Consumption tax is the wrong direction. Taxes on interest (return on capital) is too.

We need to tax land valuations, the LVT.

Funny how the debate never goes in this direction. Oh, those that own vast swaths of real estate would never want to see this move forward.

The argument for LVT is rather simple, actually. Rents are what they are due to supply & demand. Taxing rents CANNOT increase the rent paid by the consumer, and has the beneficial effect of diverting monies that are now going to landlords and banks back to community government.

I have seen no credible argument against the LVT, other than rising LVT may displace existing owners, and for that I'd like to see the LVT regime phased in over 25 years or so.
posted by Heywood Mogroot at 3:57 PM on September 3, 2005


First, this is the Fair Tax Act of 2003 (Introduced in House), so I think this conversation is moot. I don't see anything about it being introduced into the current session.

Nevertheless, reading the bill shows that it offers a baseline credit for families based on family size, and other refunds on things such as insurance payouts, business use, bad debt, and exports.

In otherwords, it appears everyone gets a handout from the government as a way to handle the poverty level. People who live within these means will effectively not pay any tax. Then, those who spend more than the poverty level are taxed reasonably.

This makes it seem progressive until the poverty line, then flat all the way up. That's practically how income taxes work out in the end today- the poor get credits, the middle-class get fucked, and the rich don't get touched.

I like the idea of a millionaire having to pay $500,000 for that $400,000 Ferrari. Your $20,000 Honda just became $25,000. It's not too hard a pill to swallow, but I could just be missing something.

Anyone else see any glaring holes with this?
posted by id at 4:00 PM on September 3, 2005


Does this include my parent's retirement money? What's he [sic] cut off point, or is there one?

Is a comfortable retirement a basic human right?

Taxing money that you earn by doing something that benefits society is simply wrong. Having a job is not a vice. Instead, why no tax inheritance money that's gained from coming out of the right vagina? Taxing gains from investments is no more wrong than taxing gambling, because that's essentially what investing is: gambling.
posted by mullingitover at 4:01 PM on September 3, 2005


Enron, even with a rebate, it's still going to shift tax burdens to less well-off people. This isn't hard to figure out.

First, tax rates on the wealthiest people will drop substantially, from over 35% to 23%.

Second, contributions from the wealthiest will further decline because their unspent income will go untaxed.

This implies a shortfall in tax receipts. To make it up, other people have to pay more taxes. These will, by definition, be less well-off people.

I enjoyed the bits where the proponents said that companies would pass their payroll-tax savings on to their customers, --and-- that employees would get their payroll taxes back as higher wages. Who knew that companies were so eager to pass their savings along, twice over?
posted by ROU_Xenophobe at 4:08 PM on September 3, 2005


Taxing gains from investments is no more wrong than taxing gambling

I disagree to the extent that owners of existing capital are putting their capital to work in the hands of others. This is a good thing; an excellent way to attract capital to our econony is to lower taxes on capital gains.
posted by Heywood Mogroot at 4:19 PM on September 3, 2005


This is just about the worst taxation idea ever, and it would drive almost the entire middle class - most of whom are mortgaged beyond their "real income" ability to support - into bankruptcy and poverty almost overnight. Which is exactly why it's being proposed.

Nothing "Fair" about it, it's totally regressive. Get out calculators and figure it out for yourselves.
posted by zoogleplex at 4:22 PM on September 3, 2005


Anyone else see any glaring holes with this?

A LVT is a much, much better source of tax income:

"In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago."
-- Milton Friedman, Nobel laureate in Economics

"For efficiency, for adequate revenue, and for justice, every user of land should be required to make an annual payment to the local government equal to the current rental value of the land he or she prevents others from using."
-- Robert Solow, Nobel laureate in Economics

"While the governments of developed nations with market economies collect some of the rent of land, they do not collect nearly as much as they could, and they therefore make unnecessarily great use of taxes that impede their economies -- taxes on such things as incomes, sales, and the value of capital goods."
-- William Vickrey, Nobel laureate in Economics and past
president of the American Economics Association


The VAT is just another bridge the PtB are trying to sell us.

BOHICA...
posted by Heywood Mogroot at 4:25 PM on September 3, 2005


When I think of a fair tax system I look for these general principals:

Everyone participates and pays some tax so everyone is invested in the system.

Those at the very bottom of the income scale pay, but pay little.

The more disposable income you have, especially the more you have above paying basic needs, the higher the percentage of that income gets taxed.

The top tax rate is not so high that it pushes high earners into tax corruption.

Most people feel like although the overall tax burden may be too much (hopefully they do not even have this feeling) that on the whole, imperfectly even, the burden falls somewhat fairly on all citizens.
posted by caddis at 4:25 PM on September 3, 2005


Taxing rents CANNOT increase the rent paid by the consumer

I don't quite understand this. Legally speaking, what prevents the landlord from raising the monthly rent to cover land-valuation taxation?
posted by Rothko at 4:27 PM on September 3, 2005


Just increase inheritance tax (as mullingitover mentions). I think something along the lines of 80-90% for everything over $10mil. should be sufficient.
posted by Civil_Disobedient at 4:28 PM on September 3, 2005


what prevents the landlord from raising the monthly rent to cover land-valuation taxation?

Same thing that prevents them from raising rents without it.

The economics argument here is really bullet-proof (though I'm no economist), this stuff has been been hashed out for centuries. The only reason LVT doesn't get any traction is that land-owning, legislating, and media-ownership go hand-in-hand-in-hand.
posted by Heywood Mogroot at 4:31 PM on September 3, 2005


Same thing that prevents them from raising rents without it.

Which is, nothing, unless you live in New York, which is why everyone lives in Condos.

Anyway, If it was up to me, I'd rase all government money via Capital Gains Tax.
posted by delmoi at 5:04 PM on September 3, 2005


Here's what I'd do. I'd make every publicly traded corporation hold their profits in escrow until the end of the government's fiscal year. And then hold a lottery where the profits of random companies was confiscated one at a time until that year's governmental budget was met.

Companies could still strive to make the most money possible, since odds are they'd get to keep it. Confiscating profits wouldn't drive a business out of business since by definition they'll break even for the year, and although more risk is introduced into investing, so what it is just gambling.

No, I'm not serious about this suggestion. Personally, I'm not opposed to the current tax code.

Every tax code is going to be less fair to someone and every tax code is going to be manipulable to some degree by those with the inclincation, the knowhow, and the impetus to do so.
posted by obfusciatrist at 5:21 PM on September 3, 2005


rent control, like all price controls, is a broken mechanism that addresses the symptoms but not the underlying fault (which is landowners pocketing publically-created value).

I've found the argument that landowners are getting something (a healthy chunk of their renters' wages and interest income) for nothing (access to land that the no landowner created) convincing, and I'd like to see what the world looks like with a just LVT regime before I start calling for confiscatory taxes on capital, since capitalism itself is a pretty damn effective wealth creation engine.

Note that the LVT does not tax the capital costs of the improvements (buildings). We are so silly in the US to actually tax improvements. This penalizes capitalists bringing better housing stock onto the market, and rewards lessors with crappy fully depreciated stock.
posted by Heywood Mogroot at 5:30 PM on September 3, 2005


I'm not clear on how adding a tax to all land does not raise rental prices. If you added $10,000 per hundres square feet in taxes to all property I find it hard to believe that the price to rent would not go up a commensurate amount. Especially if it were added on a national basis and therefore wouldn't have competition from nearby areas without the tax.

I'm not saying there isn't good economic theory for why it wouldn't, but would love an explanation. That wikipedia article doesn't really go into much detail. I'm really unclear on how you would determine the unimproved value of land since much of a piece of lands value is derived from its proximity to improvements on other nearby lands.

I see that Pittsburgh apparently tried something like LVT but abandoned it after they were unable to tweak it right (first not generating enough revenue and then overassessing). Is that endemic or was there something specifically flawed in their attempt?
posted by obfusciatrist at 5:57 PM on September 3, 2005


would love an explanation

Supply and demand.

When you tax labor, you get less work. When you tax capital, you get less investment. When you tax land, the quantity is unchanged.

Other things to consider:
1. Like Heywood said-- if landlords could raise rents now, they would, but the quantity demanded would decrease. People would take more roommates, live with their parents, etc. Then vacancies would go up, and landlords would lower their prices because it's better to have $800 per apartment at 100% occupancy than it is to have $1000 per apartment at 75% occupancy.
2. A tax on only the value of land would encourage people to build up. If you owned a 200'x200' plot that cost you $20,000 per year in taxes regardless of the value of improvements, you'd build the tallest building containing the largest number of apartments that you could reliably rent out, thereby increasing the housing stock.
posted by Kwantsar at 6:06 PM on September 3, 2005


I agree with Heywood about the LVT, it's a fine method of funding current govt expenditure.

But it still has a problem. It leaves all the land in the hands of the same landowners (and their descendants) forever. This means that the rich will tend to get richer, and the poor, poorer, forever into the future (though the LVT will somewhat slow down the process, it won't stop it).

To prevent this, there must be an additional, redistributive tax, as well as LVT.

As civil_disobedient suggested above, one possibility is an inheritance tax on the rich, so that a dead landowner's children can only inherit the first (say) $2 million worth of property, while the remainder (or perhaps 80-90% of the remainder) is redistributed equally among the population.

We'd all get a check every month, based on our share of the property of all the rich folks who died recently.

This modest proposal would, among its many other benefits, doubtless enrich American society's continuing debate on the morality of targeted assassination.
posted by cleardawn at 6:14 PM on September 3, 2005


I just love the way US bills are named... It must've taken some real acting skill to present this bill with a straight face.
posted by pompomtom at 6:23 PM on September 3, 2005


Thanks Kwantstar. That let's me look at it in a way that I was missing.

On your second point, though, doesn't that run into conflict with strict regulatory requirements for land use? In much of San Francisco, for example, it is against the law to build "the tallest building containing the largest number of apartments that you could reliably rent out." There is an artificial cap in unit number or in building height.

Similarly there are regulatory limits to how much demand could be contracted. There are minimum size limits on apartments and miximum occupancy laws.

Would regulatory issues such as these not distort things?

And there is a point below which landowners will not lower rents just to gain occupancy. In the SF building I worked in there was a restaurant space that sat empty for almost two years. According to the building management this wasn't because there were no interested parties but because there were no interested parties that could afford the rent that the building managers felt they needed to charge. Due to all the regulatory compliance and other associated expenses. To pull numbers out of my head they were willing to leave the space unoccupied while asking $8,000/month rather than have it occupied at $6,000.

The wikipedia article says that the primary benefit of LTV is not revenue generation but rather promotion of efficient use of land as you describe. How does LTV mesh in highly regulated environments where the goal is not necessarily efficient use of land (such as height limits in dense residential areas).
posted by obfusciatrist at 6:31 PM on September 3, 2005


It leaves all the land in the hands of the same landowners (and their descendants) forever. This means that the rich will tend to get richer, and the poor, poorer, forever into the future

yeah, well, it's a first step. It is estimated that $2T of our economy is rents right now, and taxing that more should be quite an effective stimulus.

To pull numbers out of my head they were willing to leave the space unoccupied while asking $8,000/month rather than have it occupied at $6,000.

If they were getting taxed $4000/mo for that space they would probably want to have it leased out.

How does LTV mesh in highly regulated environments where the goal is not necessarily efficient use of land

Inefficient use --> higher ground rents for everyone. Lower density is a form of consumption, so people would be paying more for the privilege of less development.

But how well the LVT would work in practice in the US is still an open question. I kinda like the underdeveloped areas of California, and do wonder how much "growth" we can sustain. But I also feel we should Fill The Bay, so what do I know :)
posted by Heywood Mogroot at 7:06 PM on September 3, 2005


Ah, cleardawn solidified the nagging feeling in the back of my mind that there was something other than regressivity that is fundamentally wrong with this LVT idea.

It would be the first step leading toward a "landed-gentry" scenario where non-landowners would be tenants in perpetuity, dependent on the graces of the owners for their living space.

Yeah, great idea. /sarcasm
posted by zoogleplex at 7:09 PM on September 3, 2005


The main reason the income tax still goes on is because it is just so damned efficient. The revenue stream is steady, huge, and more or less predictable; withholding makes it hard for most of us to dodge, and there are few accounting scams that can legally cut out the government's share.

On a practical level, anything that doesn't meet these criteria (given our government's insatiable desire for revenue) is going to be a non-starter.
posted by IndigoJones at 7:24 PM on September 3, 2005


It would be the first step leading toward a "landed-gentry" scenario where non-landowners would be tenants in perpetuity, dependent on the graces of the owners for their living space.

huh? How is that different from the Prop 13 status quo?

The LVT targets land speculators who are holding land unproductively, and also the parasitical landlords who are profiting from the labors of others.

An LVT regime is the exact opposite of what your are arguing.
posted by Heywood Mogroot at 8:19 PM on September 3, 2005


The Fair Tax is actually a pretty good idea, and that's why it probably won't ever pass. For those concerned about the regressiveness of it, it offers something called a "prebate". This means that the effective tax rate of a poor family can actually be negative. Spending on education is tax-exempt, and the government actually sends every family a check equal to the estimated sales tax they have to pay on necessities.

The tax will initially increase the cost of consumer goods (by 23%, of course), but they should drop relatively quickly due to market pressures. Right now, consumer products have the corporation's tax burden embedded into their prices. This is estimated at about 22% of the price of every product. So products will cost about 1% more than they do now, but people will have much more money to spend, due to the lack of income tax.

I admit that I haven't read the Fair Tax book, but I've listened to Neal Boortz, the syndicated talk-show host who coauthored it, and talks about it all the time. He's done an excellent job answering questions about the Fair Tax, and he's definitely swayed me.
posted by galamud at 8:28 PM on September 3, 2005


"An LVT regime is the exact opposite of what your are arguing."

Well, let me follow my train of thought.

Given the LVT, we have to look at the fact that there will at no time be 100% "occupancy" of all available land, in the sense that each piece of land is generating income for the owner. Many pieces of land would probably not generate sufficient income for the owners to pay the taxes on it - anyone owning such land would have to have substantial sources of income other than the land itself.

Some landowners would not be able to make the payments on their land if it's not sufficiently "occupied," forcing them to either sell the land or default on their taxes, resulting in asset seizure by the government. So, the land would either become government property, or it would tend to be bought up by entities (people or corporations) who have enough extra money to buy and attempt development. It's probable that owners with substantial financial assets and interests would buy up such land to offset their other income, as a tax writeoff.

I think the tendency would be for land to be slowly but surely subsumed by the wealthiest interests, resulting in a modern-day version of an almost feudal land ownership scheme. Wealthy owners could effectively shut out any smaller players, who might only be able to sublet, never own, pieces of land.

Or, if paying the LVT on unproductive land as a tax writeoff isn't possible in the system, then the land would slowly be accumulated by the government.

That sounds like it could turn into tenant serfdom, to me. I have to think about this in the current actual scenario where about 1% of the US population has about half the money. Not a level playing field.

This is just a spot thought process on my part, of course, as the LVT concept isn't all that clear to me. Seems like this angle should be considered.

"The tax will initially increase the cost of consumer goods (by 23%, of course), but they should drop relatively quickly due to market pressures."

That's quite a hypothetical, given that once prices go up, the sellers rarely if ever let them go back down. Since the tax is applied to every item and therefore every seller, there's no increase or decrease of competition. I think in practice, we'd simply see an instant 23% price increase across the board, permanently.

Thus making the "Fair Tax" anything but, as it only taxes money that people spend. 95%+ of us spend almost everything we make just to get by, which now costs 23% more. Perhaps that would be offset by losing the income tax, but I'm highly skeptical, looking at the way the real world works.
posted by zoogleplex at 8:47 PM on September 3, 2005


How does LVT mesh in highly regulated environments where the goal is not necessarily efficient use of land

Inefficient use --> higher ground rents for everyone. Lower density is a form of consumption, so people would be paying more for the privilege of less development.

So, the landowner will spread the tax among the people renting his land; as you would expect. Thus, the rent is higher than it would have been without the LVT tax. Am I missing something?

I'm just not seeing why an LVT expense would not raise rents in the way that property taxes do. The renter has to cover the expenses (and make some amount of profit). You add a new expense and you add to the rent.

I can see where you're saying that if you say they will pay X amount that the owner would like to add as many units as they could and the end result is neutral. But in an environment where you simultaneously say that a new tax in the amount of X will be paid and you aren't allowed to add any new units, that will raise rents. Or I am completely missing something and I don't think I'm stupid.

But I'm willing to read. The proponents of LVT, if you could have everybody read just one one book on the topic, what would it be?

I just realized that I've been saying LTV rather than LVT and that "LVT tax" is likely as stupid as ATM machine.
posted by obfusciatrist at 8:53 PM on September 3, 2005


Taxing capital gains wouldn't stop capitalism one bit. The idea is preposterous.

"Gee, I have 100 million dollars I was thinking of investing, and making some money off - but the gov't might take a percentage of my gains, so doggonit! I'll just put it in this sock under my bed where it will make....nothing."

What, you think people are so damn greedy that if they can't make really high profits off their investment, they wouldn't possible settle for merely high profits?
posted by jb at 8:57 PM on September 3, 2005


Some landowners would not be able to make the payments on their land if it's not sufficiently "occupied," forcing them to either sell the land or default on their taxes, resulting in asset seizure by the government. So, the land would either become government property, or it would tend to be bought up by entities (people or corporations) who have enough extra money to buy and attempt development. It's probable that owners with substantial financial assets and interests would buy up such land to offset their other income, as a tax writeoff.

I think the tendency would be for land to be slowly but surely subsumed by the wealthiest interests, resulting in a modern-day version of an almost feudal land ownership scheme. Wealthy owners could effectively shut out any smaller players, who might only be able to sublet, never own, pieces of land.


Actually, that is EXACTLY what a lot of historians say that the historic Land Tax (introduced into late seventeenth century England) did. Smaller landowners were pressured out of the landmarket when their land didn't produce enough profit to cover the land tax.

See, I knew that history degree would come in handy.
posted by jb at 9:04 PM on September 3, 2005


And now, murkily I remember that from my own studies of history. So there's a precedent, excellent.

LVT, not a good idea. My guts were right.
posted by zoogleplex at 9:34 PM on September 3, 2005


Some landowners would not be able to make the payments on their land if it's not sufficiently "occupied," forcing them to either sell the land or default on their taxes, resulting in asset seizure by the government.

There are a myriad of policy tweaks to address this. One is a progressive LVT on parcels valued above the median value in a community.

So, the land would either become government property

Not usually. The point of LVT is to encourage liquidity in the real estate market, so one would expect the land going to a developer who could put the land to more productive use than the current owner.

or it would tend to be bought up by entities (people or corporations) who have enough extra money to buy and attempt development. It's probable that owners with substantial financial assets and interests would buy up such land to offset their other income, as a tax writeoff.

Tax writeoffs don't make any sense when talking about LVT. Land becomes a fixed cost, and one's payment of LVT

Note that rich people buying up land is no different than the status quo. Right now, 1 out of 6 single family homes bought in California are purchased by REITs and rented out.

LVT kicks this evil practice in the balls by removing the speculative value of land ownership. Rising prices --> rising rents --> rising taxes --> no speculative profit.

Smaller landowners were pressured out of the landmarket when their land didn't produce enough profit to cover the land tax

If the present owner is producing less profit compared to other people who wish to use that particular land then they should pay the difference or yield the property.

I see tons of empty, weedy lots where I live, places where landholders are sitting on their land waiting for progress to come so they can jack up their selling price.

Given the immense amount of land being held at insanely low book values, I think with the LVT regime there will be more, good land freed up for people to find to put to use.

It's a complicated subject and I don't pretend to have the answers tho. I just like LVT from the pure morality, efficiency, the kicking of slumlords and land speculators in the 'nads, and
egalitarian nature of the LVT (take what you want, but pay the community for it).
posted by Heywood Mogroot at 9:38 PM on September 3, 2005


And now, murkily I remember that from my own studies of history. So there's a precedent, excellent.

a rather inapplicable precedent, since the Land Tax of 17th century England (with revenues going to the Crown) is not equivalent to a LVT regime.

If you're interested in more than dismissing this idea out of hand, check out some stuff on Henry George.

Now, I have no idea if the LVT will actually work, but from what I've read I think it is loads better than what we've got now.
posted by Heywood Mogroot at 9:51 PM on September 3, 2005


Heywood... "Not usually. The point of LVT is to encourage liquidity in the real estate market, so one would expect the land going to a developer who could put the land to more productive use than the current owner."

You can't develop all the land. Who gets to own land that can't be developed (for whatever reason)? We actually NEED some empty weedy lots; incessant development of every hectare of real estate is counterproductive and unsustainable. Should these all revert to government ownership?

"If the present owner is producing less profit compared to other people who wish to use that particular land then they should pay the difference or yield the property."

Who arbitrates this?

"a rather inapplicable precedent, since the Land Tax of 17th century England (with revenues going to the Crown) is not equivalent to a LVT regime."

These days the difference between our government and the former English Crown are getting awfully murky, don't you think?

The Crown, back then, granted landed estates to its Dukes and Barons and Lords, and to its non-titled wealthy supporters, who administered them as they saw fit. Even if England had a more enlightened, chartered parliamentary at that time than the rest of Europe, it still led to a relatively small group of people snapping up all the land.

Frankly, I don't trust this government - or really, people in general - enough to let them do either a deceptively-named "Fair Tax" or this LVT scheme. Humans always game the system, and those with the most power always game the system to not only give them advantage, but to perpetuate that advantage.
posted by zoogleplex at 10:05 PM on September 3, 2005


Um...Heywood - the Crown was (and still is) the government of England. It's a monarchy.

The Land Tax funded William III's wars, along with heavy deficit spending. Actually, they pretty much revolutionised finance and laid way for a huge collection of capital (that some people connect to the Industrial Revolution, but it's very complex) - all through deficit spending. Kind of makes you go hmmmm.

on preview - zoogleplex: The last feudal ties, many of which were symbolic, save for a few things like Wardship, were ended by the Civil Wars of the seventeenth century, never to be used again. By the time of the Land Tax, those estates were held in freehold, essentially private property (or as private as property ever gets in a monarchy, like the UK or Canada). They not feudal in the least - the owners were not obliged to serve in war, to send soldiers or even to send money for war. The land grabbing was 1066.

They were hereditary landlords, who bought and sold their estates from other landowners and lived off rents from farmers. Some land was also held in freehold by the farmers - and there were still some confusing thing about having "lordship" of a manor, which might give you some weird rights - like to demand that everyone fold their sheep on your land, so that you get the benefit of the manure.

The ties between Crown and aristocracy (titled nobility or untitled gentry) were different - the nobility all had seats in the House of Lords, the gentry voted for MPs for the house of commons. Their allegiance was often tied to the crown through offices (from Secretary of State to local JP), but it wasn't really feudal. Their land was their own - and the Crown (due to the spendthrift ways of Henry VIII and Elizabeth's reluctence to impose taxes) was running out of its own land, and even in the reign of James I/VI really straining to pay its bills in peacetime, let alone war. This caused a lot of tension in the years leading up to the Civil Wars (along with religion, etc).

The land tax, and money borrowed on the promise of the land tax, allowed William to fight contemporary super powers. But some historians do believe that it was a burden on the smaller landholders. Not necessarily the poor (who didn't usually own much land, or maybe had a customary lease on some), but some farmers and smaller gentry. Certainly the largest landowners were growing in terms of how much land they held.
posted by jb at 10:27 PM on September 3, 2005


Heywood:

So I was talking with one of my friends about what to tax, and his big things were: Gasoline -- to encourage public transport -- and cigarettes. I immediately noticed a) he barely drove and b) he didn't smoke.

I gather you don't own any land.

I have absolutely no objection to taxing land at the time of its sale. But I think there's something positively Kelo-ian about extracting high taxes from someone because of the amount of money someone else would give them, if only they'd sell. I grew up in San Francisco, in a house my family had purchased years before I was born. Would San Francisco be a better city if we had been forced to move due to property tax increases?

Put another way, under property tax regimes, a temporary bubble evicts long term tenants in favor of short term speculators. This is not good social policy -- in fact, one of the enduring lessons of Katrina is that Cuba's social capital allows for zero-death hurricanes in a way our financial capital just can't seem to manage.

And speaking of Katrina -- lots of people with nothing but their homes...would NOLA been a better city had they been property taxed out of their homes?
posted by effugas at 11:28 PM on September 3, 2005


the kicking of slumlords ... in the 'nads,

No, it would be kicking their tenants in the 'nads, and the poorer, the harder. Shelter is a necssity of life - it doesn't work on a simple supply/demand model because it always has a base level of demand. In some places, it is literally life or death. You get shelter, and you just don't eat.

And renters pay every single property tax increase, because it just makes their rent go up. In some cities, like Toronto, renters pay much much more than homeowners - the property tax on rental is considerably higher, but most renters aren't aware of how much they pay.

If you want people to be able to buy their own homes, increased property taxes are not the way to go. Actually, property taxes on owner-occupied residences can be very unprogressive at times, especially when you are looking at property owned by people who have decreased their income (like retired) or whose property has swelled in value beyond their current income.

We should just tax income, period. Tax work income, investment income, property income. If you have a house that has ballooned to a million dollars in an insane bubble, but you are living on social security and food stamps, you don't pay much, if at all. If you own property you rent, and make income from - you pay taxes on it.

It is simple. And it's not about trying to even out society - it's about paying in proportion to your ability. Sorry to go all biblical, but it's just like the story of the woman in the temple who leaves a tiny offering, but it was a good offering because it was what she could afford. You make a million dollars a year? You give more, or feel the wrath of God in a nice firey hell when you're done enjoying this life.
posted by jb at 11:48 PM on September 3, 2005


Actually - we need to tax gasoline to reduce usuage. It's a very effective measure. When cigarette taxes were high in Ontario, people didn't quit, but they smoked less - especially teenagers (trust me, I was a teenager when the prices dropped - we all doubled our consumption). It was a very effective health measure.

Now we have to take measures for the health of our planet.
posted by jb at 11:50 PM on September 3, 2005


And renters pay every single property tax increase, because it just makes their rent go up.

This is entirely contrary to my understanding of economics, and zillions of quotes from learned economists, from Ricardo and Smith to Friedman.

What makes land values / rents go up, to some degree, is government largesses like the mortgage interest tax deduction here in the US... people factor this monthly bonus into their finances and raise their bids on housing proportionally.

Same thing with the recent tax cuts, freeing up this extra 3-5% of income for most people just drove that money into the housing market.

Same thing with other Great Society helps that go to entire classes of people. Put $500/mo in everyone's pocket and the first thing that money is going to go toward is paying more rent, since the landlords will charge exactly what the market will bear, and given the fixed supply, they are in the driver's seat in this negotiation.

And our current tax policy of taxing land value (at time of purchase) and improvements at ~1% each encourages speculation and chintzing out on stock, and keeps aging stock on the market since there's no tax gain for putting new stuff in.
posted by Heywood Mogroot at 12:19 AM on September 4, 2005


Put another way, under property tax regimes, a temporary bubble evicts long term tenants in favor of short term speculators.

Speculation in*what*? A 100% LVT takes ALL PROFIT from increasing land values. The status quo is a speculator's dream.

As for rising land values pushing out longterm owners, there are remediations for that, like putting off rising taxes on a property to its disposal.

When I came to the Bay Area in 2000, (I had lived here previously 1972-77) I just knew something was insane, but couldn't put my finger on it. Having discovered Georgist ideas in 2002, now I know, all this market churn is NOT a productive employment of resources, the landlords (both residential and commercial) are/were raking off SO MUCH off of the productive labors of everyone else.

I saw this before, but didn't have an economic framework (other than communism) to see where the problem, let alone the solution, was. Georgism zeroes in on this problem like a laser.
posted by Heywood Mogroot at 12:25 AM on September 4, 2005


You can't develop all the land. Who gets to own land that can't be developed (for whatever reason)? We actually NEED some empty weedy lots; incessant development of every hectare of real estate is counterproductive and unsustainable.

I agree, that's where zoning boards comes in.

Should these all revert to government ownership?

Yes and no. I don't pretend to be Mr Answer Man wrt LVT, but in thinking about it I do see perhaps a lesser liquidity in eg. SFH sales since the speculative value of SFH investment would ideally be shot to hell under this regime. So local government might be involved in flipping these properties that are harder to move.

"If the present owner is producing less profit compared to other people who wish to use that particular land then they should pay the difference or yield the property."

Who arbitrates this?


The market. You pay tax on the parcels you want to keep. Others can file to pay more tax. Improvements are a separate issue, and for SFHs I can see large exclusions and whatnot to keep the arbitrary churn to a minimum.

Frankly, I don't trust this government - or really, people in general - enough to let them do either a deceptively-named "Fair Tax" or this LVT scheme.

Fair enough. I just want to raise awareness of it so by the time I pass on things are better for our grandkids. Prop13 was a horrible mistake, yet few people can see it.
posted by Heywood Mogroot at 12:33 AM on September 4, 2005


"Prop13 was a horrible mistake, yet few people can see it."

On that, we agree completely.
posted by zoogleplex at 12:49 AM on September 4, 2005


And renters pay every single property tax increase, because it just makes their rent go up.

This is entirely contrary to my understanding of economics, and zillions of quotes from learned economists, from Ricardo and Smith to Friedman.


I'm no learned economist, but I have lived in a slum. And Ricardo and Smith can blow it out their asses. They didn't have a clue as to how economics works, any more than Marx - and at least some of hs social observations were on. If they knew how everything worked, they wouldn't be still paying economists to study it.

Landlords need to make a profit - if their property tax is high (to the tune of something like 4 times the equivalent value in owner-occupied property tax), they have to pass on those costs, or they will cease to make a profit and go out of business.

And people will pay that rent, even if it's too ridiculously high and making them skip meals, because the alternative is freezing to death.

I'm sure the next time you're living on a street corner, or with a family in a one bedroom, that economic theory will be very useful.
posted by jb at 1:32 AM on September 4, 2005


Landlords need to make a profit - if their property tax is high (to the tune of something like 4 times the equivalent value in owner-occupied property tax), they have to pass on those costs, or they will cease to make a profit and go out of business.

Landlords, in the absence of rent control, are already charging what the market will bear, right?

They can piss and moan all they want, but taxing economic rents -- not the ENTIRE rent, but just the surplus profits over opportunity cost[1] -- is always a very good thing to target for taxes.

[1] Under a LVT, the value of a parcel is determined by what the market wants to use that parcel for, and this becomes the basis for taxation. Theoretically, nobody will in fact drive taxation above the most productive usage of that parcel.

This taxation is not confiscatory per se, since it only taxes this economic rent -- the ground rent -- of the parcel itself, not the capital improvements the landlord has constructed/purchased. If the market (or zoning board) wants housing for that parcel, LVT guarantees the most cost-effective housing will be built on that parcel. Zoning decisions can shape the outcome to any degree desired.

I'm sure the next time you're living on a street corner, or with a family in a one bedroom, that economic theory will be very useful.

The status quo is raping people left and right, right now. Half the country rents, and probably a further 20% [SWAG] are now in over there heads. I see no reason why the LVT regime won't improve things dramatically, eventually.

As it stands now, land ownership is the gold standard of wealth preservation and income generation. I find Georgist arguments that this income generation largely comes from the appropriation of value created by the community to be convincing.
posted by Heywood Mogroot at 3:04 AM on September 4, 2005


Heywood - You don't seem to understand, but rents are not subject to pure supply and demand forces. There is an floor of demand - unless the actual population of a place goes down, landlords can charge much more than is healthy for a market, because housing is a necessity. If your landlord ups your rent, you don't say "Hey, that's too high, I think I won't buy housing this month". No, you suck it up, and pay. And do without something else.

As for your land tax - it's all admirable that you want to even out land ownership. I can't see why that would be a bad idea. But your proposed method is flawed. It wouldn't do what you think it would do. Applied judiciously, it could rejuvenate downtown cores, and force infill development. I don't see how it could limit sprawl, considering developments on land that was less valued for being farther out would then just make more profit. But it wouldn't do anything to make land ownership more equal.

As for the current system raping people now - well, that's capitalism for you. Best system in the world.

You want people to be able to own more land? There are different ways. My university offers staff grants of $25,000 towards a new home if they buy near the university to help rejuvenate neighbourhoods. That's pretty unusual.

Personally, if I were dictator of the world, I think I would just make it illegal to buy a house for the purpose of speculation. If things got really tight, I would make it illegal to own more than one house per household. No one needs two homes when someone else goes without. But then, I don't really give a rat's pitooie about the sanctity of property when the welfare of another human being is concerned. Just the way I was raised. You don't let people pay to get ahead of someone else who needs medical care more urgently, why should you let people buy up property only to rent it to others? It's like letting people buy up all the grain only to sell it for a higher price to the poor. That used to be illegal. Should be again.
posted by jb at 3:19 AM on September 4, 2005


If your landlord ups your rent, you don't say "Hey, that's too high, I think I won't buy housing this month". No, you suck it up, and pay. And do without something else.

You're describing the status quo, yes. Economic theory says landlords do not leave money on the table, and I have seen nothing to falsify this.

What LVT does is take money flowing to mortgage companies and landlords and redirects it to the community coffers. It is a beautiful theory. Again, whether it works or not in practice is a debatable thing. But what's noteworthy is this debate CANNOT take place in the media/legislative fora -- too many cash cows of too many powerful people are on the firing line.

I don't see how it could limit sprawl

It's not a magic cure-all, no. But zoning is still a tool that can be used to shape its effects.

As for the current system raping people now - well, that's capitalism for you. Best system in the world.

I see LVT to be a vastly superior tax in that it levels the playing field for the capitalist and the wage earner vs. established money that has insinuated themselves into the position of landlords, extracting money from the productive in return for granting right of access to their properties.

I'm a lefty-libertarian, but think geolibertarianism would almost be practicable given a good LVT regime, since under any system wealth seeks rents, and capturing ground rents is an age-old aim of established wealth. Removing this parasitical element from the economy would be quite liberating.

I think I would just make it illegal to buy a house for the purpose of speculation. If things got really tight, I would make it illegal to own more than one house per household.

? So much for capitalism... any Brits have an opinion on "Buy to Let"? To me, it's the ultimate evil, but I have no problem with people having as many houses as they're willing to pay market rates for their claims. That's the subtle beauty of LVT, it puts market forces in harmony with social policy.
posted by Heywood Mogroot at 3:37 AM on September 4, 2005


a) Economic theory != reality. There are many theories, which are currently being tested by economists, against reality. And they argue a lot. Economics isn't a science - it's a social science, no more exact than sociology. It's a crazy complex thing, involving market pressures, human needs and actions, cultural forces, not subject to simple and clean adherance to natural laws.

b) what do you mean by "do not leave money on the table"?

I didn't say there was no effect of supply and demand. When the vacancy rate in an area is high (due to more units than people looking for them), rents can drop. But when vacancy rates are low, rents will rise much higher and do not fall. Sure, maybe it only goes where the "market will bear", but the market will bear three families living in a two bedroom in New York, which just isn't healthy for society and more than most people can bear.

My point was that your plan would mean increasing the tax burden on land - and this extra cost will be passed on by landlords to their tenants. They will not take a loss to avoid raising rents. And in any large city, there is always someone else to come in, especially when you are talking about the lower end of the rental (which are exactly the people most vulnerable).



? So much for capitalism... any Brits have an opinion on "Buy to Let"? To me, it's the ultimate evil, but I have no problem with people having as many houses as they're willing to pay market rates for their claims. That's the subtle beauty of LVT, it puts market forces in harmony with social policy.


I didn't write off capitalism. Like I said, it's the best system we've got. I wasn't being sarcastic. But that doesn't mean unfettered capitalism is a good idea. We fetter capitalism all the time - we don't let just anyone practice as a doctor, we insist only pharmacists sell drugs, and in some places (not enough) we have rent controls. I was just proposing extreme form of rent control. (you might also notice that I also proposed myself as dictator of the world.)

I still don't get why you think the LVT would actually put market forces in harmony with social policy. It seems it would encourage over development. As a landlord, if I had to pay more property tax, I would be most inspired to turf my poor tenants and remake over into a luxury building much more expensive. And if I'm doing that in a valuable market (like New York or Toronto or even New Haven CT), I'll get new tenants, no problem. Sure, the rents on the whole fricking city will be going up, and some people will be entirely priced out of the market, and end up inadequately housed or homeless. Actually, that's already happening. God, I'm really starting to dislike individualism and freedom - we should just bring back feudalism. At least then the rich had an obligation to take care of the poor. Not that they did, of course, but at least the poor could complain more.

The point is that any kind of property tax can hit people who aren't making any profit from it. If you own your own home, but have little other income, and that land raised in value, you could get hit by huge tax bills that would force you to sell your home. This isn't socially progressive at all - this would send land to someone else with more money who will use it for development.

This method of taxation sounds like it could be put to good use by cities to encourage denser development, but would be stupid to base a national government on. Not all development is even land based. So the TD Bank should pay the same tax on its office building downtown, after billions of dollars of profit, as a non-profit organisation in the building next door?
posted by jb at 4:17 AM on September 4, 2005


I've been hearing (wouldn't say "listening to") Neal Boortz for nearly 20 years, and I'll say this: in the beginning I was intrigued by what he said, but I eventually figured out that everything he said or reported was flat wrong. At some point I stopped bothering to check, but it is useful now to know what the truth is, simply by taking what Boortz says and rotating it 180 degrees.

Here's what Atlanta columnist Doug Monroe had to say this week about Neal Boortz and the Fair Tax sham. [alas, the paper it's in recently switched to a new "online solution" which has been horribly dysfunctional, so this link may or may not work]

If nothing else, one interesting thing is that the "23%" is calculated totally backwards. It's actually 30%.

But none of this matters. It's all about semantics and marketing (see: death tax) and this is being well handled on both counts. Neal Boortz is nothing if not good at staying on message -- and cutting off dissenting opinions. Some form of this proposal, probably just the bad parts, will be law by this time next year.

Freedom is on the march!
posted by intermod at 8:23 AM on September 4, 2005


For those concerned about the regressiveness of it, it offers something called a "prebate".

So it's a regressive tax with a notch cut out at the bottom -- meaning that the desperately poor, who already pay no taxes, would continue to pay no taxes. But It's still a regressive tax. All the "prebate" does is shift the burden up to the middle class.

And thanks for that link, intermod; I especially liked this bit:

the former head of Congress' Joint Committee on Taxation has said the rate under the fair tax would need to be 59.5 percent for the first five years and then 57 percent after tax revenues to be "revenue neutral" to 1999 revenue

Nice.

Meanwhile, the LVT: sounds even more ridiculous, if such a thing were possible. Sure, put the entire tax burden on one segment of society, and then pretend that that segment won't have to pass the buck by raising their prices.

If I'm a landlord, and my taxes rise to the point where I'm no longer making a profit, then I'm either going to have to raise my rents or squeeze more people into the space I've already got to make up the difference. So I either cater only to the wealthy, or become a slumlord. Either way it's the renters who end up footing the bill, because they have no choice; they've got to live somewhere. No amount of armwaving or economist name-dropping is going to change that.

Heywood, I'm sure there are infinite subtleties to your argument that I'm missing, but reading this thread it sure sounds like you started with "a simple property tax! yeah!" and then as people raised objections, you kept adding oh, but we'd regulate that, or that'd be up to the zoning boards, or there'd be remediation for this and that other flaw... 'taint so simple anymore.

What LVT does is take money flowing to mortgage companies and landlords and redirects it to the community coffers.

What any tax does is take money flowing to whoever made it in the first place, and redirect it to the community coffers. Why choose landlords and mortgage companies, specifically? It kinda comes off like your thinking on this is entirely based on an allergic reaction to the SF Bay Area's rental market, which is a little bit like studying mammals by only looking at zebras.
posted by ook at 11:09 AM on September 4, 2005


Ah, yes I see, so because the tax is "embedded," not added on afterwards, that's why the math is backwards.

So, if I wanted to buy a car that now costs $22,000 plus 8.5% sales tax, as here in CA, the price after tax would be $22,000 + $1,870, or $23,870.

With the "Fair Tax," the price would be calculated so that tax represents 23% of the FINAL PRICE AFTER TAX, not 23% of the base price.

Let's do some algebra! Thus the formula would be:

Final Price = base price + (final price x .23)

Lets use simple variables. Final price = "p," base price = "b." Formula becomes:

p = b + .23p

Dividing each side by p, we get:

1 = b/p + .23

Now we can subtract .23 from both sides:

.77 = b/p

Now, multiply both sides by p:

.77p = b

Now divide both sides by .77:

p = b/.77

(I have to do all the steps because my math is way rusty.)

So, for our car with the 22,000 base price, we get:

Final price after Fair Tax = 22,000/.77 which is...

$28,571.43.

So our tax jumps from $1,870 to $6,571.43, a difference of $4,701.43.

And indeed, $6,571.43 is 29.87% of 22,000... so the effective tax rate on all goods is, yes indeed, almost 30%. Doug Monroe is exactly right.

That's pretty goddamn sneaky, don't you think?

This, my friends, is what we call an Ignorance Tax - because it sounds mighty pretty and "fair," but it's really a cruel, regressive tax designed to rip off people who can't do math, or can't be bothered to do math.

Like most of the population of America.

Using this tax, the price of everything would jump 30%, permanently, and most people wouldn't notice that extra 7%. Poor people would be suddenly even more disenfranchised.

Just so you know, my effective Federal tax rate is 28%, and I'm not poor, I make around $70K a year. For anyone with an effective Federal income tax rate of less than 30% - which means anyone making less than around $100K, I believe - this would INCREASE your tax burden. Mine would increase by 2% - not unweatherable - but people with a tax rate of 15% (many millions of Americans) would see their Federal tax burden DOUBLE OVERNIGHT, with a massive loss in buying power.

Oh, and by the way - will the Federal government mandate that the States cease charging their own sales tax? Or localities stop charging theirs? The price of that $22,000 car would jump up to $30,441.43 - adding 38% to the price!!

This is class warfare, plain and simple. Another tax break for the rich, most of whom make their income via capital gains - which the politicians are doing their level best to eliminate entirely - and spend far, far less of their money as a percentage of income. Just another step at driving everyone who isn't wealthy - especially those without inherited wealth, aka an aristocracy, since they're trying to eliminate the Estate Tax - into serfdom, over time.

Whomever is represented by the Senators or Congresspeople who are proposing this, you should recall them immediately and run them out of your state on a rail.

Anyone who thinks this is a good idea and makes less than about $100,000 a year, look at the mathematical truth. Unlike people, numbers don't lie, especially in such a simple equation.

This is just blatant outright lying to you. GET ANGRY ABOUT IT or you'll be screwing yourselves, and everyone else you know. I take that pretty personally.

Thanks, intermod, that's what we needed.
posted by zoogleplex at 11:44 AM on September 4, 2005


Why choose landlords and mortgage companies, specifically?

Morally, because they didn't "make" the land they are charging access to; all of us have a common right to land.

Economically, taxing land rents -- an economic rent aka free money -- is the most efficient and effective tax.

Practically, housing costs are completely out of control right now, and the LVT is a most practical solution for bringing the market back to earth.

In our current system, the capitalized ground rent is part of the mortgage we pay. Under the LVT system, only the improvements would be mortgaged. How much is that $500k "house" built in 1965 really worth in California? Everybody with a brain knows it is worth about $50k (if that) and the land is worth $450k. Under a LVT regime , $50k (~$500/mo) would be your mortgage payment and the remainder would be taxes paid to government.

IOW, no need for a SALES tax or a VAT or even a state income tax. Henry George was called a "Single Taxer" for this reason.

Plus the house wouldn't BE $500k in the first place since the speculative value of real estate would approach zero, and we'd be building higher density and more modern stock since we'd stop taxing construction like idiots, and REITs wouldn't be taking stock off the market.
posted by Heywood Mogroot at 12:28 PM on September 4, 2005


"a simple property tax! yeah!"

strawman. I've seen many arguments against LVT, but the only credible one is the one you attempt here:

If you own your own home, but have little other income, and that land raised in value, you could get hit by huge tax bills that would force you to sell your home. This isn't socially progressive at all - this would send land to someone else with more money who will use it for development.

Yes, yes, the 'Old Widow Jones' gambit. There are remediations for that. Exclusions for median-level housing. Allowing tax bills to accumulate until disposition of the property.

You can pick around the edges of a LVT, but the fundamental fact as I see it is it's a much superior system to what we have now.
posted by Heywood Mogroot at 12:37 PM on September 4, 2005


Well, great Heywood, but this post is about the "Fair Tax." Can we get off the LVT and get your opinion on that? Please review my math above.
posted by zoogleplex at 12:49 PM on September 4, 2005


If I'm a landlord, and my taxes rise to the point where I'm no longer making a profit, then I'm either going to have to raise my rents

Good luck with that!

or squeeze more people into the space I've already got to make up the difference.

And have the city fine you up the ass if your improvements are unsafe.

failing those remediations, they will have to sell out to their lessees, and will have to find other avenues for their rent-seeking. Win-win. In the end, the LVT becomes a market force to condominiumize everything, a net good since crappy housing stock is one of our society's problems.

With capital improvements taken out of the tax base, and ground-rents flowing INTO the tax base, I think we'll see a lot saner and more creditable uses of our land resources than what we have now.
posted by Heywood Mogroot at 12:49 PM on September 4, 2005


zoo: apologies. Yes, I had read that, and the VAT is really 30% off the top and not a 23% rate.

I'll go now. I tried to drum up discussion on the LVT here.

The VAT is just so stupid that I don't even want to talk about it, but I have to admit it is much, much more politically possible than the LVT.

Which makes sense, since our present congress is going to be doing what is best for them and those who hold their strings and not for the country as a whole.

As Juan Cole said so aptly, "sometimes your just fucked".
posted by Heywood Mogroot at 12:55 PM on September 4, 2005


Morally, because they [landlords] didn't "make" the land they are charging access to

Most investors don't "make" the product they invest in and earn money from. Banks don't "make" the money they lend out and earn interest on. Yet you say above you're in favor of lower capital gains taxes. Can you spot the inconsistency here? Because I can.

Meanwhile, landlords do "make" the buildings, amenities, and maintenance which is what people are actually renting. So even if you accept the premise that it's immoral to earn money from something you don't directly produce, that would seem to put landlords on the side of sweetness and light.

all of us have a common right to land.

I'm sorry, when did we revert to nomadic hunter-gatherer status?

Economically, taxing land rents -- an economic rent aka free money -- is the most efficient and effective tax.

You keep repeating this, but I have yet to see you support this statement in any way. Efficient? With the thicket of exceptions and regulations and exclusions and zoning laws you've had to erect even in this thread to make the scheme seem even halfway implementable? Effective? How?

Practically, housing costs are completely out of control right now

In some parts of the country.

and the LVT is a most practical solution for bringing the market back to earth.

As several people have pointed out, even citing historical precedent, your LVT would cause rents to rise, not lower them. I mean, come on: you make it more expensive to provide a service, then that service will be more expensive. Pretty basic stuff. You tax landlords, they'll raise rents. And renters will have to pay or go homeless, because you're taxing all the landlords, so they're all going to raise their rents.

failing those remediations, they will have to sell out to their lessees

Okay, so I'm beginning to see the problem here: you're insane. Those renters, who can't afford the exorbitant rents the landlord now has to charge to make up for this LVT, are now magically going to have enough money to purchase the building and take that tax burden on themselves?
posted by ook at 8:13 PM on September 4, 2005


Most investors don't "make" the product they invest in and earn money from. Banks don't "make" the money they lend out and earn interest on. Yet you say above you're in favor of lower capital gains taxes. Can you spot the inconsistency here? Because I can.

Capital is unspent income, savings. People making their savings available to others to risk (in return for interest income) is a net societal good. People making their *land* available to others is debatable, since the *land* would still be there without the landlord's involvement in the transaction.

Meanwhile, landlords do "make" the buildings, amenities, and maintenance which is what people are actually renting.

of course. We're talking about ground-rents, not building rentals here. Note that ground rents are MUCH larger than building rents in most areas.

You keep repeating this, but I have yet to see you support this statement in any way.

I have 3 quotes from noted economists above; I can find a million more if you are interested since this is Econ 101 stuff.

Efficient? With the thicket of exceptions and regulations and exclusions and zoning laws you've had to erect even in this thread to make the scheme seem even halfway implementable?

Fallacious mischaracterization of my argument.

Effective? How?

Removing private capture of publically-created ground rents and the speculative premium of land ownership. Encouraging more intelligent -- productive -- use of existing parcels, including renovation and replacement of existing housing stock.

your LVT would cause rents to rise, not lower them. I mean, come on: you make it more expensive to provide a service, then that service will be more expensive. Pretty basic stuff.

Only if you're naive. Landlords will always charge as much as the market will bear. All LVT does is remove the unearned increment aka economic rent aka free money aka rack rent element of the landlord's profit.

In easy-to-understand terms, LVT removes the location monopoly the landlord enjoys. Theoretically, any management company would be able to bid for "ownership" of a particular parcel and improvement. The amount of LVT they are willing to pay for this is their bid.

In any case if landlords could raise rents in their market they would already. By taxing the unearned increment -- the economic rent above -- they have no-one to shift this additional cost to.

This is not controversial among economists.

are now magically going to have enough money to purchase the building and take that tax burden on themselves?

Sure. They won't have to capitalize the ground rent in their purchase, which means they won't be paying interest on the land cost at all. In this scenario the expense of ownership would be depreciation + maintenance + interest on the mortgage for the improvement + LVT on the ground-rent.

Damn sight better than renting aka flushing your money down the toilet every month.
posted by Heywood Mogroot at 11:42 PM on September 4, 2005


Heywood, isn't the LVT really the land destruction tax? If you don't exploit the land you can not afford the tax so your incentive is not to leave land as open space but to develop it. We have too much development in most places, especially crowded places like the coasts. Without some sort of exception, it is death to open space and death to farming. Of course in taxes, exceptions are the good intentions that pave the road to Hell. As for rents, won't this raise them, by favoring uses that generate more $/acre than rental units. Why deal with pesky residential tenants when you can now build high value commercial space without added tax burden?

As for all the arguments that landlord can't raise rents because of the market, when the cost goes up for all landlords, as would happen with the LVT, then all will raise rents together until we reach a new and higher stable rent structure. Without the LVT, if I raise my rents, another landlord will say, "hey, I am still making a tidy profit, I will keep my rent the same and pick up caddis's tenant." If I raise my rent because of the increased tax, the other landlord will also be seeing the increased tax and will be less likely to want my departing tenant as there is no profit in it. The assertion that landlords will not raise rents rests upon the assumption that they have large profit margins. Usually they don't.
posted by caddis at 1:21 AM on September 5, 2005


Morally, because they [landlords] didn't "make" the land they are charging access to

It seems to me that if we were basing economics solely on morals, we'd all have to be out and out communists. Though the Hutterites do seem to be getting by fine that way - expanding farming in Saskachewan.
posted by jb at 1:39 AM on September 5, 2005


It seems to me that if we were basing economics solely on morals, we'd all have to be out and out communists

I find the moral/theoretical argument interesting, but being a pragmatist, not compelling.

But any rate, I think I've given enough pragmatic argumentation to show that I'm not basing my argument "solely on morals" as you assert.

The assertion that landlords will not raise rents rests upon the assumption that they have large profit margins. Usually they don't.

Yes, in general the bulk of realized profit from landholding comes from capital gain upon sale, not the operational margin. It is exactly this profit, subsidized by wage earners, that the LVT will ideally zero out.

I see nothing wrong with that. If more condos were built we'd have less renters and the world would be a much better place.

As for LVT encouraging development, I see no major complication with retaining the idea of zoning. It's not like the LVT is returning us to a state of nature; the simplest proposals ("split rate" property taxes) are for taxing unimproved land values at ~4% and construction at 0%. That would give the bulk of the benefit of a LVT regime.

If you want to see disasterous land tax policies, I suggest heading over to Maui. Developers, since they control the politics of the state, can park land for a miniscule tax, which results in vast buildable lots being held vacant, much shitty housing stock, and a real fucked up island.
posted by Heywood Mogroot at 2:42 AM on September 5, 2005


Yes, in general the bulk of realized profit from landholding comes from capital gain upon sale, not the operational margin. Exactly why rents will go up. Rentals will not be managed at an operating loss.

As for LVT encouraging development, I see no major complication with retaining the idea of zoning. I think you answered this one for yourself. Developers control or strongly influence local politics in most places with a strong profit potential for development. (With LVT, by the way, this will likely be even more places.) If they don't influence the current crop of government, they will get the next, or the one after that, then boom, up goes a big ugly building. Once in, they won't leave and turn the land back to open space. If we do ever implement LVT, and you have no scruples, become a developer, quick.
posted by caddis at 6:46 AM on September 5, 2005


Heywood: "Capital is unspent income, savings. People making their savings available to others to risk (in return for interest income) is a net societal good."

Ah, ok, everyone's skipped over this one. The problem with the assertion that capital is unspent income is that in the present day, that's not really true for all the "capital" out there.

We don't operate on a hard-currency system anymore, we work on fractional-reserve, where the Federal Reserve bank creates "capital" out of nothing at all, by simply printing money and lending it to a bank at an "arbitrary" interest rate.

While on the face of it, we citizens putting our savings in a bank where the bank lends it out and pays us interest is indeed a good thing, you have to remember that the money we are paid by our employers (or whomever) has been invented by the Federal Reserve, lent out to a commercial bank, who then lends it out directly to a business entity, or another bank, or another lender of some kind. It gets to your employer, through them borrowing it/receiving it as payment; the employer then pays it to you, and you either spend it or put it in savings, where it generates interest for you and for the bank.

The money really exists on thin air, on the "promise" of some actual work somewhere creating its value; in reality most of the money out there is just "magically" creating more money out of nowhere because it gets lent out for interest about 8 times before it gets to you - and when you put it in the bank, you're re-adding it to the system to make another go-round of "imaginary" value adding.

The whole real estate market is full of this making money out of thin air, which is why many people are so worried about Fannie Mae and Freddie Mac. Lenders have borrowed money from banks at 4%, lent it to home-buyers at 6%, and then sold out the loans to Fannie Mae for cash (which they pocket), leaving Fannie Mae with an enormous amount of unsecured debt paper. This has sent the housing market through the roof (the Bubble), creating more "value" out of thin air and inflating Fannie Mae's unsecured debt even more, as every new loan they buy is for more "gee I hope we get it" money. It's interest added onto interest added onto interest with nothing actually backing it up but the hoped-for ability of the home-buyers to pay all that money back.

It's kind of amazing that the whole thing has held together for so long; it's because increases in productivity with decreases in expenditures for that productivity - net energy output, actually - have been continuous throughout the Industrial Revolution and the Technological Revolution... thanks to cheap energy inputs. (Which are likely to get way more expensive shortly, but that's a whole 'nother thread. It's all interrelated tho.)

Anyway, the upshot is that much of the monetary "value" of the land you would like to tax is based on the market value of the US dollar - which is certainly not guaranteed in the long run.

Hrm, I don't know as I've properly communicated what I'm thinking here. As I did with the Fair Tax and which was borne out by actually doing the math, I've got a gut feeling that the "imaginary" value of our currency also has a lot to do with what's wrong with the LVT idea... I'm just not forming the concrete analysis in my mind.

I'm thinking that instituting an LVT would fundamentally change the way the value of money is calculated, since the land and development/use thereof would be what generates the Federal Government's income. There is also precedent for that in history, where feudal states, and even the landowners within, backed their trade currency with the value of their land. This also put all the power in the landowners's hands, as their holdings exerted great influence over the value of money everywhere. It's not clear how that would work in today's system with a unified fractional-reserve currency, as back then it was all hard currency of some kind, gold and silver etc.

I wish I could put my finger on it, but there's something wrong with the LVT in that sense as well. My instincts are certain of it, just can't articulate it.
posted by zoogleplex at 1:07 PM on September 5, 2005


"If you want to see disasterous land tax policies, I suggest heading over to Maui. Developers, since they control the politics of the state, can park land for a miniscule tax, which results in vast buildable lots being held vacant, much shitty housing stock, and a real fucked up island."

While I agree that's a problem, again this points to the LVT depending on a constant growth economy, i.e. constant increase in energy input engendering constant population increase engendering constant capital generation. In a place like Maui, an "isolated" island with sharply and fundamentally limited land available - especially potentially productive land, given it's a mountainous volcanic island - the LVT would fall apart rapidly under either population explosion (which LVT would encourage, indirectly) or from the opposite, a reduction in energy (capital) input from outside the island.

An island with sharply limited land options like Maui has to generate some intrinsic value from its land as opposed to "potential development" value - otherwise it will be dependent on imports for everything important. At this point I'd guess the imported capital of tourist money allows Maui to send that capital back to the mainland for things it cannot produce itself (like gasoline and beef) in any sufficient quantity. That's not a healthy position for Maui, especially if all the land is developed in what would seem the "economically sensible" way given the current situation - to attract more tourist dollars - which would surely be encouraged under LVT.

If that happened, and for any reason the created maximal tourist presence were to drop off, all the land developed to support the tourist base would now be valueless, and very expensive to repurpose into something the islanders left there would need - like agricultural land.

It's a mess over there on Maui, but it's not just because the developers control the politics. It's because it's in the middle of the Pacific Ocean, and the mass-energy-transport mechanism of the mainlands can't reach it. Energy is expensive there, so development can only go so far.

BTW, I used to live in a little town in Downeast Maine that depended largely on tourist dollars for its annual income. Those tourist dollars have dried up quite a lot as most vacationers can afford to fly to Florida or Europe, whereas driving all the way up Route 1 is a very long trip. In fact, growth of tourism there is strictly limited by the amount of traffic that Rt. 1 can carry. I watched the effects of tourists abandoning the area over time while I was there and since I've left, and it's not pretty. They're barely holding on up there... although the local banks have been expanding like crazy and adding huge new buildings.

LVT in that town would have very ugly results, economically. There's not enough outside input to hold the value of the land up. You're not going to be able to put in a six-lane highway for people to travel there and increase that outside input.
posted by zoogleplex at 1:58 PM on September 5, 2005


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