Bill Batt: Painless Taxation

Abstract
Real tax reform could do away with those taxes that are resented by the large proportion of our population. We could replace all taxes on wages and on interest by instead taxing economic rent. Rent is windfall income; it is income that arises not from the efforts of any person or corporation; it comes about as a surplus gain from common social enterprise. There is ample moral warrant for society to lay claim to that which it has created, as well as to that which no individual or party has earned. Analysis increasingly makes clear that economic rent in all its forms is far larger than official government figures indicate; in fact it is likely sufficient to supplant all current taxes on labor and capital (wages and interest) which are acknowledged to have so many negative effects. Recovering economic rent in all its manifestations by taxing its various bases actually can foster economic performance and yield other benefits that make it the natural source of revenue for governments. Such a tax is essentially painless. ...

Tax Principles

The starting points should be the lessons that have been learned over the course of the past three hundred and more years about what is a good tax. Most basic textbooks in public finance enumerate them in very clear form, and they constitute benchmarks against which to measure the soundness of any particular tax. They are listed as few as three or as many as eight such principles but little disagreement exists as to their substance, regardless of ideology or government. Most commonly enumerated are neutrality, efficiency, equity, administrability, simplicity, stability, sufficiency.[3] Tax theorists typically measure revenue structures according to any or all of these criteria: ...

The principle of equity is central to any discussion of tax design. Tax design requires concern with both what is fair and the extent to which it must sometimes be compromised to satisfy the other principal criteria. Fairness can be evaluated according to what is termed "horizontal equity" -- the extent to which those in similar circumstances will pay similar tax burdens, and "vertical equity" -- how well those in different classes bear different burdens in the tax structure. It is this latter perspective that leads to the use of terms like "proportional," "progressive," and "regressive" in referring to tax structures. A tax is progressive with respect to income if the ratio of tax revenue to income rises when moving up the income scale, proportional if the ratio is constant, and regressive if the ratio declines. There is an ancillary question of whether taxing to reach greater equity should employ measures of income or of wealth, difficult as this is to measure. Such questions of equity are a matter particularly central when discussing the property tax. ... read the whole article

Bill Batt: The Fallacy of the "Three-Legged Stool" Metaphor

Most studies of property tax regressivity stumble squarely into the pratfall of regression fallacy. The problem in brief is this. Income and property are positively related but the scatter of points is loose, with great individual residuals from any fitted curve, and a high error of estimate. We want to know which rises faster as they rise together. The answer depends on which we arbitrarily select as the ranking variable. Let us say we rank by income on the abscissa and find the top 10% have 30% of the income and 25% of the property (a hypothetical number). It looks as though the property tax is regressive. But now rank them by property on the ordinate. The top 10% are now a different group -we have taken a stratum of points at right angles to the original column. Some of the humble have been exalted, and the mighty laid low. This top 10% has say 50% of the property and 25% of the income, and the property tax looks progressive (in terms of income).(31)

When the Census of Housing ranks families by income, rent payments do not keep up with income.(32) But ranking them by value of dwelling units, value quintuples while income only doubles.(33) That is the difference a technical detail or two can make.

So which top 10% do we mean? Most studies have uncritically chosen income as the proper ranking variable, by assumption, thus practically preordaining the conclusion - and largely invalidating it. ...

On Defining Income and Wealth

Dick Netzer, like others, uses AGI as the reference standard against which to match the property tax and find it regressive.(40) A certain citizen in 1970 reported no AGI, but heavy property taxes, which might make the property tax quite regressive were it not Ronald Reagan. Yet he is not alone, and it seems harsh to select a measure that makes the property tax regressive because it is the only tax many rich men pay. General Oppenheimer has written a fine set of manuals on how to reach Zero AGI by losing money farming,(41) and they work so well that taxable farm income is down to about $3 billions while the USDA estimates farm income at $14 billions.(42) I do not think that AGI will do.

It is not just farming. Property is the paramount tax shelter. How does it cover thee? Let me count the ways. There is

• expensing of intangibles and soil and water conservation,
• percentage depletion,
• capital gains rates,
• deferred realization,
• non-distribution of profits,
• nonrealization,
• conversion of interest into cost recovery by watered sales prices,
• accelerated depreciation,
• multiple depreciation,
• de facto expensing of capital improvements,
• deduction of interest,
• covert write-off of undepreciated land value,
• deferral of tax beyond date of sale, and many others.

At the same time, property is a large source of income that is not counted in AGI. Unrealized accruals and imputed income are the most obvious, and each is a huge item.

Thus the ownership of property tends on a large scale to reduce AGI and increase real income. When we rank by AGI, property owners move into lower brackets than they belong; non-owners move into higher brackets. Property tax payments move into the lower brackets, pre-ordaining a finding of regressivity which is totally illusory.

At least two studies have sought to correct for the Reagan Effect. Both corrected only partially, and with spectacular results.   Read the whole article

• Reassess Land Frequently
• Use the Building-Residual Method of Allocating Value
• Federal Income Taxes

• A. Rich and Poor
• B. Timber and Timberland
• The Role of Timber and Timberland
• Two More Areas Deserving Attention
• Offshore Oil
• Tax All Natural Resources Uniformly and Comprehensively

There are rich jurisdictions and poor. Professor Tideman's paper in this conference alludes to this matter in passing. Let us support his point with some numbers.

In California, you might think that farm counties like Tulare have a lot more taxable value per capita than cities, but au contraire. Tulare County reports assessed values per capita of $38,100; the whole State averages $60,000 per capita. Suburban Marin County weighs in with $95,400; urban Los Angeles County has $59,000; Orange County has $74,000.

Within counties, disparities among cities and school districts are much greater. In Tulare County, one pathetic little povertyville, the City of Parlier, has just $10,000 of assessed value per capita. Here are some assessed values per capita from different California cities in the County of Los Angeles: Lynwood, $21,500; Beverly Hills, $294,000 (14 times Lynwood); City of Industry, $5,533,000 (257 times Lynwood).

This is why some critics call the property tax "regressive." It has given some plausibility to the otherwise bizarre claim that switching to a sales tax is less regressive than sticking with the property tax. Within each city a property tax is progressive, but when your data meld cities like poor little Parlier and Lynwood with Beverly Hills, you sometimes find poor people paying more of their income in property taxes than rich people, and getting less for it. Switching just the local property tax to land ex buildings will do little or nothing to correct such disparities, and therefore make little progress toward overall social justice, and the wide support that will evoke. There is, in fact, a natural cap on local property tax rates imposed by local particularism: the City Council of Beverly Hills will not raise taxes in Beverly Hills for the benefit of voters in Parlier.

To avoid such regressivity we must work out some formula for power equalization. The most straightforward formula is simply a statewide land tax. On this I must again applaud Dick Noyes in NH - not for what he says, but what he does. What he says is that the genius of NH is its local control of revenues; what he does is initiate bills for a statewide land tax.

There are many other tax enclaves and exemptions by which much property stays off the tax rolls. I have a long list, with about 35 items. Here I'll just focus on two: timber and oil. Read the whole article

Bill Batt: Comment on Parts of the NYS Legislative Tax Study Commission's 1985 study “Who Pays New York Taxes?”

Except in the implicit recognition involved in their analysis of shifting, the distinction between land and improvements was opaque. This is a remarkable oversight, because improvements typically depreciate at the rate of 0.5 to 1.5 percent annually; only land values appreciate.9 And in view of the fact that assessments in New York localities have historically been very infrequent, one can understand how the land values are in reality a far higher proportion of parcel value than assessments would suggest.10 This means that in a period of seven years, for example, a property parcel could easily increase in price by 50 percent, far more if recent real estate market history is to be illustrative. Moreover real estate prices varied greatly in their rates of change during this time span; upstate New York was largely stable, but downstate localities experienced huge booms and busts.

Recognition of this would tend to favor what is known as the “new view” of property tax incidence, an acceptance of the idea that ”the burden of the tax on improvements remains with the owners of capital in the form of a lower net return instead of being shifted to users of property in the form of higher rents or prices.”11 Proponents point out that “the tax on improvements is essentially a nationwide tax on capital . . . [and therefore] its incidence will depend on the characteristics of supply and demand for capital nationally rather than on a single market.”12 The effect of this is to make the tax "highly progressive.”13 Nonetheless, in a small footnote, Messrs. Pomp and Phares elected to go with the “old view” in stating that, “it seems most appropriate to assume that the new view does not apply to the analysis of tax burdens within one specific state (underlining in original). Thus, the old or traditional view was adhered to in the analysis. . ; that is, the excise effect of the tax was considered dominant.”14 The ubiquity of New York's property tax, and that it has over 1,300 local assessment and tax districts, may well have escaped their notice.

This point is significant because the authors took great pains on several occasions to emphasize that the New York real property tax was the “most regressive element in the State's tax structure.”15 In the Executive Summary, two of the thirteen bullets stressed that ”the dominant influence in the tax system is the local real property tax,” and that ”the local property tax is highly regressive, particularly the owner-occupied component.”16

This was portrayed graphically, along with an accompanying table, using fourteen separate tax brackets showing effective tax rates ranging in a U, or a “reverse J curve,” from a high of 20.51 percent of income for the lowest group, to 3.37 percent for the second to highest group.17 Nowhere in the Report is there an indication of what income measure was employed – Federal Adjusted Gross Income or Taxable Income, most likely. But it may also have been household income. If so, this could well have excluded significant income sources, particularly from those households receiving social security income and/or retirement income for New York State or local pensioners which is not taxable for state purposes. Whatever, this was recognized implicitly in the observation that ”many persons are only temporarily in the lowest class ($0 - $4,199 for 1980) because of retirement, short-term unemployment, and so forth. If their income were measured over a longer period of time, rather than on the basis of only one year, they would not fall in the lowest class. Thus, the [drastically high effective tax rate] figure for this class . . . overstates the true burden on this group.”18 ... read the whole commentary

Mason Gaffney: A Cannan Gets the Range

Differences among city tax bases are actually, however, extreme. One desperate little farm town in Fresno County, Parlier, has just $10,000 of assessed value per head. Here are some assessed values per head from different California cities in The County of Los Angeles:

• Lynwood, $21,500;
• Beverly Hills, $294,000 (13 times Lynwood);
• City of Industry, $5,533,000 (257 times Lynwood, and 553 times Parlier) .

Destitute Slab City (Unincorp.) in Riverside County has no land values at all. (It is an abandoned military base between a bombing range and the fragrant southern end of the Salton Sea, with rotting algae and dying fish.) One would not expect much support in The City of Industry for a proposal to share land as common property with the transients who park in Slab City, which has no public services except a species of public schooling, nor would we expect the transients to stay in or return to Slab City if they could park on the streets of Beverly Hills, camp in its parks, attend its schools, and beg or "work for food" on Rodeo Drive.

This is why some critics have called the property tax "regressive." Balkanization of the property tax gives some plausibility to the otherwise bizarre claim that switching to a sales tax is less regressive than sticking with a property tax. Within each city the property tax is progressive, but when your data meld cities like poor little Parlier and Lynwood with Beverly Hills you sometimes find poor people paying more of their income in property taxes than rich people, and getting less for it. ... read the whole article