Wealth and Want
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Lock-in Effect

California's Proposition 13 has had a wide range of undesirable effects. Among them is the tendency for people to remain in homes that are too big for or otherwise unsuited to their current needs, while others who seek such homes must build them somewhere on the fringe. Also, people who no longer need to be close to their work are incentivized to remain in those choice sites, while those who do need access to those workplaces must commute long distances. If the market were permitted to work, housing prices in California would be much lower and more people would live closer to their work.

Michael Hudson and Kris Feder: Real Estate and the Capital Gains Debate

While it is often true that the prospect of earning capital gains is what induces new investment to be made, applying further rate cuts to real estate gains cannot be expected to spur much new construction activity under present fiscal institutions. Clearly a “capital” gains tax cut cannot cause the production of more land; land (as distinct from capital improvements) is made by nature, not by the landowner. As to buildings, more of the tax benefit would go to speculators in existing capital than to investors in construction and renewal. We also doubt that a further rate reduction is likely to accelerate real estate turnover by reversing a “lock-in effect.” Turnover is strongly affected by depreciation rates. In periods of rapid write-offs -- most strikingly during the 1980s, when real estate could be written off faster than in any other period --  buildings tend to be sold as soon as they are depreciated. The 1986 reforms reduced the incentives for this rapid turnover, but the principle is clear: When depreciation rates are high, there is a powerful tax-induced incentive to sell a building when it is fully depreciated.24 The basic motivation at work, of course, is to avoid taking investment returns as taxable income. Investors prefer to declare as much of their income as possible in the form of capital gains, which are taxed later and at a lower rate. Read the whole article

Mason Gaffney:   Privatizing Land Without Giveaway (1990)

Normal yearly turnover in the U.S. land market is 3-4 percent of parcels, and much less than 3 percent of value (because small parcels turn over faster). Most of even that small turnover is zero-sum, buyers being financed by sales of what they owned before. Net movement of money in or out of land is a small percentage of total value turned over, and a minuscule share of total land value. ...

There would be no land gains if land rent were to be 100 percent socialized, and if the market expected it to remain so. In practice those circumstances are unlikely, and some would consider them undesirable: the easiest and most accurate way to appraise rent is by monitoring the market in land titles.

When land and/or minerals are "ripening" over an extended period of ownership, a property tax during the ripening period can be shown to collect exactly the proper share of the increment, but only under ideal conditions. First, the market and the foresight of market agents must be so perfect that value rises roughly along a curve of compound interest. Second, tax assessment must follow that perfect market closely.

In practice even rough perfection is, alas, rare. A gains tax is a good way of "mopping up" excess rent that escapes the basic rent tax. It can also be very productive of revenue: in Taiwan the land gains tax raises four times as much as the basic land tax, partly because the gains tax is always based strictly on current sales data. The land tax should be based on current sales data as well, to be sure, but in Taiwan and many other jurisdictions it often is not.

This writer recommends announcing at time of privatization, and regularly thereafter, that landowners should expect a high tax rate, 80 percent or more, to be imposed on land gains. It should be contrary to public policy for land to attain a value based on expected future resale. Possessory interest with allocation to highest and best current use, and not land speculation, is the desired emphasis.

Instead of being made illegal, resale gains should be closely monitored to audit the system of rent collection. Gains are evidence that basic rent taxes are too low or that market agents expect them either to fall or to fail to keep up with rising rent. A rise in gains is an early warning to view the land tax administration with alarm and move swiftly to correct it. Experience shows that buyers quickly acquire a mental vested interest in collecting rent and avoiding taxes based on what they paid, or others are now paying, for land titles.

A problem with gains taxes is the "lock-in effect." Holders with surplus land may refuse to sell to avoid tax. A gains tax may be very high, however, without a serious lock-in effect, when coupled with a high ongoing rent tax. The latter compels owners to dispose of surplus lands. Indeed, the "ripening cost" theorists believe it forces premature sales for conversion to new uses. If there is any merit to their rationale we should favor strengthening the lock-in effect. So should they, as a litmus test of their rational consistency and constructive purpose.

The greatest cause of the lock-in effect of the capital gains tax in the U.S., however, is not the tax itself but one of its major loopholes: the ability to avoid it via the step-up of basis at time of death. There should of course be no such provision, which is a kind of negative inheritance tax mainly benefitting heirs who have done nothing to deserve it. Legacies, devises, gifts and other transfers without arm's length consideration should trigger valuation and tax. So should death itself, when property has to be valued anyway.

Land gain should be defined as the excess of net sales price over depreciated cost basis. An administrative problem to note and solve is the manner of recording capital outlays and their depreciation, in the (presumed) absence of a general income tax.

A supplemental tax on land transfers is desirable as a tool of disclosure. It should be based on gross value of lands transferred (not just gain, and not just equity). Many American states have such taxes, at very low rates, simply to supply data for land assessment. While rates should be nominal, penalties for perjury should be severe: the public has a right to know how much others are getting for its property.... read the whole article


Mason Gaffney: Geoism, Recession and Control of Monopolies

As for the coming "boom," I simply repeat my observation that there is no U.S. economy; there are only regional economies competing with one another as well as with other nations. We have the beginnings of speculative booms in some places, stability in others, and continuing recessions in others. People who cannot sell their houses because they owe more on them than they are worth cannot take their services elsewhere to seek employment. So much for the mobility of the labour force. This is one of the unfortunate sides of the American dream of home ownership; when a lease expires, one simply does not renew.... read the entire article

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