Wealth and Want
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Corporations as Land Owners

Much of our best land is held by corporations. Land in the central business district is worth thousands, even hundreds of thousands, of times what agricultural land is worth.

But land is not limited to the earth under our feet. It also includes such things as the broadcast spectrum. We say that the airwaves belong to the American people, but in reality, they belong to a small subset: the owners of corporate stock, which is very concentrated in a narrow band of our society. They sell individual broadcast frequencies, reaping profits that a just society would recognize that they did not earn.

Land also includes our natural resources, for which very small royalties are paid.

Should the economic value of things that are in scarce supply, of which none of us can make more, be monopolized by a few individuals or corporations? Or is there a more just way to organize ourselves and our economy? Georgists seek to collect for the commons the value of that which none of us individually created.

The Most Rev. Dr Thomas Nulty, Roman Catholic Bishop of Meath (Ireland): Back to the Land (1881)

Land Monopoly Usurps God's Gifts to All.
Thus, on the highest and most unquestionable authority, are we forced to conclude that, owing to the monopoly which the landlords have usurped in the land of the nation, they sell out the "use of the original and indestructible powers of the soil"; of "the natural and inherent powers of the soil"; of "the natural powers of the soil"; that is to say, they sell the use of God's gifts like so many articles of private property, and as if they were purely the result of their own toil and labour. Read the whole letter

Mason Gaffney: The Property Tax is a Progressive Tax

Corporate shares are not taxable property, but of course corporate income is mostly derived from taxable property.(18) Some will object that corporations have many owners and should not be treated as single units. That is true, but again, it smacks of regression fallacy. Wealthy owners also have many corporations, and in general corporate shares are the most concentrated kind of asset.

Ownership of large property gives one control of other assets. Property is borrowing power and credit rating: all studies show interest rates to be very regressive with size and quality of collateral, and terms easier. But simple borrowing is only the beginning. With great wealth one goes into banking and exerts multiple leverage. The story has been told many times, if not as well, since Brandeis' Other Peoples' Money: collateral, leverage, conglomerates, interlocking directorates, mergers, lender suasion, industrial leadership, pyramiding, the Wallenberg Grip, subcontracting market power, control of dealerships, . . . . Control is power and status (psychic income), and control is a source of additional income, as revealed by the premium prices of shares during battles for control.

Data in Table I probably understate concentration, for four general reasons:

  • omitting the unpropertied,
  • accepting and reporting regressive assessments,
  • accepting the bias in partial inventories, and
  • accepting and reporting straw owners as separate owners. ...
Studies of foreign-owned farms in America have shown them to be larger than owner-occupied holdings. The 1900 Census of Agriculture (a high water mark in good government statistics) reported on farm landlords.
  • In-county landlords averaged 85 acres;
  • out-of-county but in-state landlords, 126 acres;
  • out-of-state but U.S. landlords, 159 acres.
  • Foreign landlords were highest of all.
    • 28% of them held over 2500 acres, while
    • only 10% of U.S. landlords did.19 ...
Many writers exempt corporate shares from taxable wealth, faulting the property tax for not reaching such "intangibles." Yet most corporate assets are very tangible at a price. In most jurisdictions the largest property taxpayers are corporations.(24) Studies based on individual ownership alone and omitting corporate wealth are simply not relevant.

A large genre of partial inventories is the farm study, of which every Agricultural Experiment Station must have issued one or more. Hardly anyone wealthy enough to own a large farm today lacks nonfarm income. One cannot afford to keep a large farm without using it as an income tax shelter - that is the "highest and best use" under our income tax law. Studies purporting to compare "farm income" with farm property taxes are founded on the obsolete premise that "farmers" are a separate class of people, and have no value.

4. Accepting straw owners as separate owners. Large land assemblies are habitually arranged through straw owners. Thus one large owner often appears on records as several small ones. The Milwaukee CBD study, as reported, is premised on one certain block's having several separate owners, as recorded. Some time after the First Wisconsin Bank announced it was building on the assembled site,(25) we did not find it listed as owner.(26)(27) Small owners, on the other hand, are not likely to appear as large ones. Wealthy families wear several guises: banks, insurance companies, corporations, estates, utilities, etc. Property is assigned to children and relatives to split income. Rarely are these veils pierced by formal quantitative studies. Even the ICC has never found out who owns the railroads. But we can be quite certain ownership is held more closely in fact than on paper. Nor did we find Northwestern Mutual Life listed for more than its home office, although Gordon Davidson, director of real estate, stated the company had been acquiring land in our area "over the years."   Read the whole article

Mason Gaffney:  The Taxable Capacity of Land
  The question I am assigned is whether the taxable capacity of land without buildings is up to the job of financing cities, counties, and schools. Will the revenue be enough? The answer is "yes."

 The universal state and local revenue problem today is whether we must cap tax rates to avoid driving business away. It is exemplified by Governor Pete Wilson of the suffering State of California. He keeps repeating we must make a hard choice: cut taxes and public services, or drive out business and jobs. (When a public figure gives you two choices you know they're both bad, and he wants one of them.)

 The unique, remarkable quality of a property tax based on land ex buildings is that you may raise the rate with no fear of driving away business, construction, people, jobs, or capital! You certainly will not drive away the land. However high the tax rate, not one square foot of it will put on a track shoe and hop out of town. The only bad thing to say about this tax's incentive effects is that it stimulates revitalization, and makes jobs. If some people think that is bad, maybe this attitude is the problem. ...

 "Hold on again," I have heard, "how much revenue can land yield by itself?" It is my job to address that. I assure you it can yield more than local governments need. I have already pointed out you can raise the rate to any level without fear of driving away jobs, capital, people, or building. That is a remarkable quality in a tax, especially one as progressive as the land tax. I will also support the point in several other ways.

 The taxable capacity of land is camouflaged in our times by a consistent modern tendency to underassess it, relative to buildings. There are several studies in point. The most general one is the quinquennial Report of the U.S. Census of Governments. It actually understates the tendency a lot, by omitting the class of land most underassessed, that is, raw acreage in and near cities. ...

 "How about corporate stock?", I hear. "Should we exempt corporate wealth from the property tax?" Actually, almost all jurisdictions already exempt stock and all other "intangible" property. Not to worry, however, you tax corporate assets. When you rank property owners by value of holdings, the top ten on most tax rolls are all corporations. None of their multi-national profit-shifting through layered ownership of foreign subs, and creative transfer pricing, can hide their taxable property on your assessor's maps. This makes sense anyway. Why should you think you can tax a corporation for its business in Malaysia? What concerns you is its property in your town.

"Wait another minute," I hear. "Some corporations build bright new plants in cow pastures, with a high fraction of building value. If you exempt buildings, you let them off easy." There are cases in point, I concede, like the blue-collar industrial suburbs of Cudahy and South Milwaukee, Wisconsin. Probably you could have said that in Amsterdam, N.Y., when the rug industry was thriving there. Amsterdam's fate, however, draws a moral about that. An industry that depends on your land, your location, is likely to stay put; but an industry that brings in most of its own assets, in the form of capital, is mobile. What it brought in it can take out.

 "Take out buildings? Be serious!" you may say. Buildings look rooted to the spot, but that is illusory: those roots are temporary. Buildings depreciate. They may be milked through undermaintenance, and the capital consumption allowances (CCAs) reinvested elsewhere. After a few years the plant is an empty shell. They close it, flat-bed the equipment, and silently steal away. If they really need nothing but a cow pasture, they can find ten thousand others, anywhere, and reinvest their CCAs there. You are wise not to tax such plants out of town. You need them, but they can take their capital to greener pastures. Capital is mobile, both coming and going. Only land stays put.

 In other cases, industries occupy land of high value that is wrongly assessed low simply because industry occupies it, and it has not been subdivided. What has subdivision to do with it? The bias of assessors is to value industrial "acreage" low, relative to improved "lots," even though they lie cheek by jowl. It is a kind of wholesale discount for owners of "raw" (undivided) tracts.

 For example, in West Allis, Wisconsin, the southwest corner of the Allis-Chalmers plant occupies the northeast corner of the 100% location, the most valuable commercial site in town. That land, with the same retail potential as the other three corners, is assessed as raw industrial acreage, as though it were in the boonies, with no recognition of its high location value for retail/office use. To make a land tax work, the assessor must be reinstructed to value that land at its highest and best use rather than as ordinary raw acreage. Exempting buildings would create the necessary pressure, thus solving the very problem that otherwise might be taken as a point against it. As noted earlier, the U.S. Census of Governments gives us no data on this point. You, however, can find it easily enough: tax assessments are public records, and you know your own town.

In still other cases "industry" surrounds and intersperses itself with vast swaths of vacant land. They hold it for open storage, parking, purported "future expansion," accessways, buffers, backlots, discouragement of competitors, etc. Many of Los Angeles' swankiest buildings of today arose over the former surplus lands of the cinema industry, which disgorged them before 1978 because they used to have to pay substantial taxes on surplus lands.

 "Corporate" is not coterminous with "industrial," anyway. Many corporations are in retailing. They own chain stores, malls, gasoline stations, auto dealerships, major real estate "developments," drive-ins, office space, department stores, banks, "power centers," etc. As to these, shifting to the land basis will shift more of the tax burden to them, because retailing has a higher land fraction than any other major land use (except vacant, golf courses, cemeteries, parking lots, etc.). That is because location is more critical to retailers than other businesses. You can tell this by their high rate of tear-downs and remodeling.

 Among its other effects, site-value taxation will induce some land to shift from retail to industrial use. Recall that exempting the building, or prospective building, lets buyers bid more for land. The higher the building fraction, the stronger is that force. Thus the present system, which is biased against buildings generally, is biased against industrial compared with retail uses. Removing that bias will help industry outbid retail for land -- not all land, of course, but land on the tipping point between the uses. Most towns today seem oversupplied with retailers, compared with their shortage of basic industries. Shifting to the site-value basis of property taxation helps redress that balance.

 "Let the market decide," some say. "No good can come from forcing land into use, against the owner's private judgment." Actually, the proposal to exempt buildings and focus property taxes on site values is premised on the market concept of consumer sovereignty; it's the present property tax that isn't. The case may be summed up like this: if the tax on a parcel varies with the use of the parcel, then the tax biases choices against the use more taxed. Economists call the land tax "neutral," for that very reason: it does not vary with use. It does not bias the choice of uses; the consumer sovereign prevails. "No other tax can make that statement."

 I do not view that as saying we should throw away other social controls over land use. I have written a short piece, "Land Planning and the Property Tax," showing how land taxation strengthens the hand of planners and helps them and the market work together. There are a few libertarians who would terminate city planning altogether, but that is pretty extreme, and not the proposal we should be considering here today. Rather, let us consider a measured proposal, an incremental change within the framework of present law and custom. ...

 Another attractive feature of land taxation is its interesting positive effect on the economic base of a city. It strengthens it by its tendency to hit absentee owners harder than resident owners. The land fraction in real estate is generally highest in the CBD of any city, so that is a favorite place for absentees to buy and hold. They like the steady income, and the "trophy" quality. The surplus in real estate is what attracts outside buyers, and land is what yields the surplus. About 2/3 of downtown Los Angeles is owned by non-resident aliens, for example. In a more workaday city, Milwaukee, the absentee owners consist of former residents, or their heirs, who grew too rich to abide the harsh winters.

 Consider the effect on your balance of payments. When you get more tax money from absentees, money that used to flow to Tehran, Zurich, or Palm Beach now flows into your local treasury to pay your local teachers and city workers, and relieve your builders and building managers. In this way taxing land actually acts to undergird the value of its own base.

 To stimulate building is also to uphold and fortify the tax base, even though you do not tax the new buildings directly. Some people fault the "depressing" canyons of Manhattan, between the skyscrapers. In my observation, it is not the canyons that depress Manhattan. When the GM building went up, Fortune Magazine reported it doubled the rents of stores across the deep canyon so formed. Its spillover effects were highly positive. What really depresses Manhattan are rather the centenarian firetraps and the activities they attract. They tend to downvalue other lands nearby, eroding the tax base.

 Consider the effect of floorspace rentals on ground rents and land values. Doubling floorspace rentals will more than double land values, through a kind of leverage effect. That is because all cash flows above a constant amount required for the building will inure as ground rents. The higgling and arbitrage of the market will see to that. Once that constant is met, everything above it goes to landownership as such, raising land prices which are the land tax base.

 When you observe cities much, the positive neighborhood effects of replacing old buildings with new are irresistible and contagious, raising land prices all around. The converse is also true: the negative neighborhood effects of letting old junkers stand without replacement are depressive. Thus, when you take the tax off new buildings, and put it on the land under old tumbledowns, you kick off a general process of revitalization that turns gloom into hope into optimism: optimism that boosts land prices and the land tax base.  Read the whole article

Michael Hudson and Kris Feder: Real Estate and the Capital Gains Debate
Capital gains taxation has been a divisive issue in Congress at least since the debates surrounding the Tax Reform Act of 1986, which, aiming to eliminate tax loopholes and shelters and preferences, repealed preferentially low tax rates for long-term gains.1 To bring effective capital gains tax rates back down again was President Bush’s “top priority in tax policy.“2 In 1989, Senate Democrats blocked a determined drive to reduce effective tax rates on the part of Bush, Republican Senators Packwood, Dole and others, and a few Democratic allies.3 The administration argued that the tax cuts would stimulate economic growth and induce asset sales, thereby actually increasing federal tax revenues; Congressional Democrats countered that the plan benefited mainly the wealthy, and that tax revenues would in fact decline.4 The Joint Committee on Taxation projected that budget shortfalls beginning in 1991 would sum to about $24 billion by 1994 --  and that most of the direct benefits would go to individuals with over $200,000 in taxable income. House Speaker Thomas S. Foley said that a third of the savings would be enjoyed by those with gross incomes over one million dollars. ...

What is missing from the discussion is a sense of proportion as to how capital gains are made. Data that is available from the Department of Commerce, the IRS, and the Federal Reserve Board indicate that roughly two thirds of the economy's capital gains are taken, not in the stock market -- much less in new offerings -- but in real estate. ...

This policy brief seeks to elucidate the role of real estate in the capital gains issue, indicating the quantitative orders of magnitude involved.. We offer two main observations.
  • First, generous capital consumption allowances (CCAs) greatly magnify the proportion of real estate income taken as taxable capital gains. Capital gains accrue not only on newly constructed buildings, of course, but also on land and old buildings being sold and resold. Our tax code allows for properties to be re-depreciated by their new owners after a sale or swap, permitting real estate investors to recapture principal again and again on the same structure. When CCAs have been excessive relative to true economic depreciation, as they were during the 1980s, capital gains have been commensurately larger than the actual increase in property prices. As Charts la and lb illustrate, capital consumption allowances in real estate dwarf those in other industries.
  • Second, very little of real estate cash flow is taxable as ordinary income, so the capital gains tax is currently the only major federal levy paid by the real estate industry. CCAs and tax-deductible mortgage interest payments combine to exempt most of real estate cash flow from the income tax. This encourages debt pyramiding as it throws the burden of public finance onto other taxpayers. ...
The result is that real estate corporations pay minimal income taxes -- some $1.3 billion in 1988, just one percent of the $137 billion paid by corporate America as a whole.21 Comparable figures are not available on non-corporate income tax liability, but the FIRE sector (finance, insurance, and real estate) reported negative income of $3.4 billion in 1988, out of a total $267 billion of non-farm proprietors’ income.22 These three symbiotically linked sectors thus were left with only capital gains taxes to pay on their cash flow.

The central point for capital gains tax policy is that taxable capital gains in real estate consist of more than just the increase in land and building prices. They represent the widening margin of sales price over the property’s depreciated value. The tax accountant’s book-value gains result from charging off capital consumption allowances as a tax credit against cash flow. The more generous are the capital consumption write-offs for real estate, the more rapidly a property’s book value is written down. The fiction of fast write-off is eventually “caught” as a capital gain when the real estate is either sold or refinanced.

Excessive depreciation allowances thus convert ordinary income into capital gains. Moreover, capital gains are the only point at which most real estate income is taxed  ...

The greatest accounting distortion for the real estate industry occurs in the case of re-depreciation of buildings that already have been depreciated at least once. This redepreciation occurs following ownership transfers; the CCA is attached not to the physical asset, but to the change of ownership. As the building is resold at rising prices, investors are allowed to re-depreciate them again and again -- and to write off these CCAs against their income, as if they were suffering an erosion of wealth. Thus, most capital gains in real estate represent “repeat gains” over unrealistically written-down book values. This accounting fiction enables real estate investors to continue indefinitely to take their income in the lightly taxed form of capital gains.

Landlords already deduct from earnings as normal business expenses their maintenance and repair expenditures, undertaken to counteract the wear and tear of buildings. A rule of thumb in the real estate industry is that such expenditures typically consume about ten percent of rental revenue. More importantly, although nearly all land gains are made fully taxable, there is little reason to assume that physical deterioration should be compensated by a special allowance to enable the landlord to recover his capital investment within a given number of years.

... Significantly, today these buildings have been fully depreciated and therefore are probably about to be sold, at least for book-keeping purposes -- owners may buy their own buildings under different partnerships, or swap them for similar buildings with other owners. Their new owners can begin to depreciate them all over again, after duly paying capital gains taxes on the buildings’ increase over their near-zero book value. If they do not sell and re-depreciate their buildings, the owners will have to begin paying income taxes on their operating cash flow that hitherto was sheltered by depreciation allowances that have now run out. This lends a renewed note of urgency to the persistent campaign to cut capital gains tax rates.

Because excessive depreciation allowances favor real estate speculation relative to industrial production, they discourage new direct investment and employment. To reduce the capital gains tax -- the only significant remaining source of federal revenue from real estate -- would divert even more savings into the purchase and sale of existing buildings.  ...

How Mortgage Debt Converts Rent into Interest

Depreciation rules are not the only reason why the real estate sector declares little taxable income. Out of their gross rental income, landlords pay state and local property taxes, a tiny modicum of income tax, and interest on their mortgage debt. A large proportion of cash flow is turned over to lenders as mortgage payments. Since the early 1970s, interest paid by the real estate industry has been much larger than the figures reported for net rental income. As Charts 3a, 3b, 3c, and 3d illustrate, real estate investors and homeowners have become the financial sector’s prime customers. According to the Federal Reserve Board, 1994 mortgage debt of $4.3 trillion represented some 46 percent of the economy's $9.3 trillion private nonfinancial debt, and a third of the total $12.8 trillion U.S. debt.27 NIPA statistics indicate that about 70 percent of loans to business borrowers currently are made to the real estate sector, making it the major absorber of savings and payer of interest. ...

No capital gains duties are levied on estates passing to heirs. Indeed, inheritors of real estate may begin re-depreciating their income-yielding buildings afresh at the new (typically higher) transfer price. The estates bequeathed by the richest one percent of the population (over $600,000 in value) are now taxed at a 55 percent rate if not sheltered, but of course these are the estates most likely to shelter inheritance and gift bequests. For instance, assets given as gifts are taxed only at the time they come to be sold.30 If the capital gains tax were reduced or abolished, the deferral would become permanent.

Most capital gains reaped by business partnerships accrue to real estate firms, which shelter personal income by avoiding incorporation. IRS statistics ranking capital gains in terms of how long the assets were held show that many of these gains represent quick “flips." Often these are land that has been rezoned from a low-value to a high-value use. Retaining the capital gains tax would have little effect on deterring such speculation.

Properties held for longer periods of time by these partnerships typically are sold or swapped after having been fully depreciated. Swaps’ have long been permitted to the real, many almost perpetually free of income taxation. The logic for this loophole seems at first glance to be much like that for personal homeowners’ exemptions in selling a home to move somewhere else, without having to pay a capital gain tax in the process; but the analogy is specious. Homeowners cannot take a depreciation tax credit unless their property generates rental income, and most do not generate any income against which to claim CCAs31. In contrast, the capital gains which commercial real estate investors record for income-tax purposes are calculated, not merely on the gain in the property’s market price (as with owner-occupied homes), but on the excess of selling price over depreciated book value.
31 Homeowners do receive imputed rental income, which is not subject to the income tax.
Major commercial real estate investors such as pension funds, insurance companies and other large institutions are exempt from capital gains taxes, as are foreign investors. In addition to playing a dominant role in real estate, these institutional investors own nearly half of all U.S. equities ...

Reported capital gains in real estate were understated as a result of exclusions. On the other hand, much direct investment included the cost of land, commercial buildings, and plant and equipment. Taking this into account, we estimate that roughly 70 percent of the capital gains calculated by the IRS for 1985 probably represent real estate. Even this estimate may understate the role of land and real estate. In 1985, anticipating the planned 1986 tax reform which would raise the capital gains tax rate from 20 to 28 percent, many investors sold their securities that had registered the largest advances. Some 40 percent of the capital gains reaped by selling these stocks probably represented real estate gains. A major spur to the LBO movement driving up the stock market was an awareness that real estate gains were not being reflected in book values and share prices;36 as land prices leapt upward-funded in part by looser regulatory restrictions on S&L lending against land -- raiders bought publicly traded companies and sold off their assets, including real estate, to pay off their junk-bond backers. In effect, not only were rental income and profits being converted into a flow of interest payments; so also were capital gains. ...

IRS estimates of capital gains measure only the small proportion that individuals are obliged to declare after all the exemptions and exclusions have been utilized. There is no estimate of the volume of capital gains generated each year, and no adequate breakdown as to where these gains occur. This statistical lacuna means that the economic cost of assorted tax loopholes is not being calculated. There is no sound statistical basis for calculating the total returns being taken by investors, or the proportion of those returns paid in taxes.

When statistics are lacking, it often is because some interest groups are benefiting in ways they prefer not to see quantified and publicized. If land assessments lag behind actual increases in market value, for instance, land speculators, as well as homeowners, will pay less than their legislated tax share. Also -- and of direct relevance to our thesis -- the failure to distinguish statistics on land values and other real estate gains from non-real-estate capital gains in industry and finance makes it easier for the real estate industry to get its own taxes reduced along with industries in which capital gains tax cuts do indeed tend to spur productivity.

Academic economists likewise have been remarkably slow to address this shift away from earned income to capital gains. It is true that nineteenth-century land reformers such as John Stuart Mill and Leon Wahas defined land-value gains as an “unearned increment,” and urged that they be collected by the community at large, whose economic activity was, after all, responsible for creating these gains. Ever since Henry George brought matters to a head in Progress and Poverty (1879), however, economics has largely dropped the analysis of land-value gains, and indeed, of land itself42

Wealthy investors have won congressional support for real estate exemptions in large part by mobilizing the economic ambitions of homeowners. Most families’ major asset, after all, is their home. Two Federal Reserve studies trace the rise in gross house value from 26 percent of household wealth in 1962 to 30.1 percent in 1983 (falling back to 28.5 percent in 1989).43 Household real estate assets substantially exceeded holdings of stocks, bonds and trust funds (20.5 percent in 1989), liquid assets (17 percent) and total debt (14 percent).44 The giveaway to real estate interests is thus presented ostensibly as a popular middle class measure. The real estate industry (and the financial sector riding on its shoulders) have found that the middle classes are willing to cut taxes on the wealthy considerably, as long as their own taxes are cut even lightly. It is no surprise that President Clinton’s first major concession to the pressure for cutting capital gains taxation is directed at homeowners, despite the fact that preferences for home ownership cannot be justified as a boost to entrepreneurial investment. Such is the foreshortened economic perspective of our times.
43 1962 Survey of Financial Characteristics of Consumers, and its subsequent Survey of Consumer Finances for 1983, 1986, 1989, and 1992.
44 Details are reported in Bureau of the Census (1988).

The LBO movement epitomizes the real estate industry‘s strategy, applying the developer’s traditional debt-pyramiding techniques to the buying and selling of manufacturing companies. Raiders emulated developers who borrowed money to buy or construct buildings and make related capital improvements, agreeing to pay interest to their mortgage bankers or other lenders, putting down as little equity of their own as possible. Having set things in motion, the landlord uses the rental income to carry the interest, principal, taxes and maintenance charges while he waits for a capital gain to accrue. The idea is to amortize the loan as slowly as possible so as to minimize annual carrying charges, while paying them out of the CCA.

For many decades securities analysts have pored over corporate balance sheets in search of undervalued real estate whose book value does not reflect gains in market value. From the merger and acquisition movement of the 1960s through the takeover wave of the 1980s, the raider’s strategy has been to borrow money to buy the target company’s stock, and then sell off its real estate and other assets to repay the creditors, hoping that something will be left for himself after settling the debts incurred in the process. For the bankers and other creditors, LBOs were a way to put savings to work earning higher rates of interest.  The ensuing junk bond commotion pushed interest rates over 15 percent for high-risk securities, whose major risk was that quick capital gains and the cash flow available from re-depreciating properties would not cover the interest payments to the institutional investors rounded up by Drexel Burnham and the other investment bankers who underwrote the takeovers.

The object of building, like buying and selling companies, is thus by no means only to earn rental income. Most cash flow is pledged to lenders as debt service in any case. In a world of income taxation subject to loopholes, sophisticated investors aim not so much to make profits as to reap capital gains -not only in the stock and bond markets, but also in real estate, other natural resources, and the monopoly privileges that have come to underlie much of the pricing of securities today.

As developers borrow money to finance real estate purchases, lenders, for their part, use the real estate sector as a market to absorb and service the economy's mounting stock of savings, applying most of the rental cash flow to pay interest to savers. The end result is that most total returns are taken by the wealthiest ten percent responsible for nearly all the economy's net saving. Viewing US economic statistics from this perspective shows that not to calculate capital gains in the national income accounts alongside directly “earned” income helps foster the illusion that more equality exists among Americans than actually is the case. The fact is that earned income is more equally distributed than unearned gains.

This distinction between real estate (and by extension, other natural resource industries and monopolies) and the rest of the economy helps explain the familiar economic rule that inequalities of wealth tend historically to exceed inequalities of income. The reason is that the wealthiest layers of society control even more of the economy's assets -- and the capital gains on these assets -- than they do its income. They also obtain a larger proportion of cash flow and other non-taxable income than they do of taxable “earned” income.

This phenomenon has long been known, but not well explained. Edward Wolff has shown that wealth is more unequally distributed than income, but he leaves capital gains out of account in explaining how the American economy has grown more top-heavy.45 It is unequal wealth that is primarily responsible for generating inequality of incomes. The more the returns to wealth can avoid taxation by being categorized as capital gains, the faster this inequality will polarize society.
43 Wolff (1995), p. 27. “The top one percent of wealth holders has typically held in excess of one-quarter of total household wealth, in comparison to the 8 or 9 percent share of income received by the top percentile of the income distribution. ”

Given the current US depreciation laws and related institutions, to lower the capital gains tax rate across the board is to steer capital and entrepreneurial resources into a search for unearned rather than earned income. It rewards real estate speculators and corporate raiders as it shifts the burden of taxation to people whose primary source of income is their labor. The budget crisis aggravated by such a policy also ends up forcing public resources to be sold off to meet current expenses -- sold to the very wealth-holders being freed from taxation. In this way wealth consolidates its economic power relative to the rest of society, and translates it into political power so as to shit? the tax burden onto the shoulders of others. The first element of this strategy has been to defer revenue into channels that are taxed only later, as capital gains. The second has been to tax these gains at a lower rate than earned income -- a  fight that has broken out in earnest following the 1996 presidential elections. ...  Read the whole article

Jeff Smith: Sharing Natural Rents to Sustain Human Society

Noticing rent, realizing its social nature, accepting that it's to be shared, and understanding that wages and interest should not be expropriated, for most people that's a new way of thinking. Thinking such thoughts leads to a new way of conceiving economics, too. Ecological economics becomes not just a branch of economics but a whole new discipline, needing a new name. In geonomics we maintain the distinction between items bearing exchange value that come into being by human effort — wealth — and those that don't — land. Keeping this distinction in the forefront makes it obvious and non-controversial that speculating in land drives sprawl, that hoarding land retards Third World development, that borrowing to buy land plus buildings engorges banks, that so-called "interest" is quasi-rent, that the cost of land inflates faster than the price of produced goods and services, that over half of corporate profit, says the Urban Land Institute, is from real estate. ... read the whole article


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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper