Joshua Vincent: Land Value Taxation In Practice

Significant changes to any system of taxation require significant upheaval, and perseverance from citizens in and out of government. EarthSharing.org spoke with land value taxation proponent Joshua Vincent earlier this month, in a conversation covering attitudes towards land value tax, its applications, and the activism required to advance it. Watch the interview below, broken into three parts.

Vincent has been executive director of the Center for the Study of Economics since 1997. He has consulted for more than 75 municipalities, counties, NGOs and national governments. He works with tax departments and elected officials to promote land value taxation, and has testified as an expert witness on its impact. Vincent is the editor and publisher of Incentive Taxation.

Best Valuation Methods

Vincent lays out best practices for calculating land values, most of which “rely on values that have already been established by the assessor.” By looking at sales prices in an area, particularly of vacant lots but also of derelict buildings set for demolition, a fairly accurate picture of land value can be obtained.

Building values are more complex, but still absolutely necessary for revealing land values: by subtracting building value from a property’s total value, the ideal taxable land value can be calculated. Vincent says that “if we want to help capital and labour escape taxation we have to figure out what the building is worth, because that’s where the labour and the capital goes.”

The most effective valuation systems are in states that “update their assessments on a fairly regular basis, and they also change the percentage of land value to building value to reflect essentially what the market is,” Vincent says.

Using the example of an Atlantic City casino, Vincent says that while 20 years ago the property value would have skyrocketed due to market dominance and profit levels, today that profit has been reduced substantially. “Right now the land value is half of the total parcel value, because the building has lost its revenue-generating capacity,” he says.

Approaching City Officials

A land value tax is not just an end unto itself to reduce inequities in wealth. Vincent says the focus of any campaigners for land value taxation should be its application to almost any pre-existing problems in a city.

“You have to identify a problem that the community suffers from,” Vincent says, whether it be blight, population loss, or perceived high taxes. City officials will usually tend toward enlightened self-interest, and the revenue-neutral tax abatements that a land value tax allow are attractive to public representatives whose priorities are job creation and citizen well-being.

“We would then propose: well how about a universal permanent abatement on all buildings, and not just new buildings, not just condos, but all buildings past, present and future?”

Joel Bedford SoHo 1 via photopin (license)
Joel Bedford SoHo 1 via photopin (license)

One discussion is not enough to effect real policy change, and Vincent says any correspondence should be followed up with a second meeting, further information, and a push for the council to crunch the numbers of what is a very practical, “nuts-and-bolts” policy.

“The mistake a lot of reformers of all types make is they march into a city council chambers or a mayor’s office and say ‘here’s a reform, do it’, and then they turn around and leave. I think what we are putting forward is something that is practical, it is doable, and you can demonstrate immediately how it is doable.“

Who Is Likely To Oppose Land Value Taxation?

Entrenched interests exist that have made fortunes extracting rent from populations without investing back into them, and these interests comprise the most likely and vigorous opponents of land value taxation. Vincent points the finger at speculative, “absentee owners who have a business model that depends on blight and the decay of the neighborhood.”

“A lot of people that oppose land value tax are people that have adopted business models and used tactics to thrive in a declining city,” he says. “You extract rent, literally, from the tenants but you don’t put anything into the property; you let it run down. That’s the successful business model. And they will oppose a land value tax, because their buildings have fallen apart to such a degree that they wouldn’t benefit from such a land value tax.”

Automobile-intensive businesses are another example, and in the past, owners of flat-surface parking lots have voiced opposition to changes of the tax structure. Vincent says these businesses feed off the value of urban land, itself the product of the people and the government, but “they’re doing nothing to create that value, and they’re doing nothing for the community”.

Vincent points out that some among these interests have actively funded anti-land value taxation campaigns, like in Allentown in 1997.

Facebooktwittergoogle_plusredditpinterestlinkedinmail

Simulation Could Explain Why People Reject Smarter Economic Policy

If variety is the spice of life, then why are so many of us drawn to old habits? You might think of this phrase in the context of your Friday night plans, but economists are asking it about our approach to public policy. Despite a growing body of research indicating that the structure of U.S. property taxes could be vastly improved, we tend to be content with the status quo, and it hasn’t always been clear why. But now, using experimental economics, a professor at the University of Delaware is undertaking a one-year study to identify why people don’t respond to smarter economic policy that could greatly enhance their lives.  

Joshua Duke, Professor of Applied Economics at the University of Delaware, sees a big problem with how cities and municipalities in the United States tax property. Governments levy taxes according to the value of buildings and productive activities on the land instead of the land value itself. While property tax is by far one of the best taxes, especially over wage and sales taxes, it is still not as good as a land value tax. A land value tax is virtually the same as a property tax except that the tax is on the land value only, not the building. Property taxes have been structured this way for centuries, but Duke believes we could implement an alternative tax structure that raises tax revenue and stimulates economic development. This would run in contrast to the existing tax structure, which tends to generate and exacerbate wealth inequality by taxing regular people for working and exchanging, but fails to tax unearned income like that from passively owning an ever appreciating vacant urban lot.

By InSapphoWeTrust from Los Angeles, California, USA (Lower East Side) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons
By InSapphoWeTrust from Los Angeles, California, USA (Lower East Side), via Wikimedia Commons.
Duke’s interest lies primarily in land value taxation, a theory popularized by 19th century economist Henry George in which taxes are determined by the inherent value of land rather than what sits on it.

“The idea is that if you’re going to tax anything in society, probably the best thing to tax is the value of land. Not the value of the improvements on land, like a house, just the value of land, and the reason is that it’s non-distortionary**. That means that it doesn’t provide the incentive to do less property improvement than is optimal,” Duke said.

Duke is not the only economist to advocate for land value taxation . Professor Joseph Stiglitz, Nobel Laureate in Economics and author of ‘The Price of Inequality’ is one such prominent proponent of a land value tax.  Stiglitz considers rent-seeking behavior, like the privatization of land values, to be the primary element that generates inequality of wealth. Other economists, like Mason Gaffney, Fred Foldvary, Nic Tideman and Fred Harrison also support implementation of land value taxation.

According to Duke,“[land value taxation] really would make society a lot better. It’s one of these major things we could do. We don’t have to create anything, we can just change the way things are taxed and [as a result] increase society’s wealth,” Duke said.

Determined to understand why land value taxation is so rarely used, Duke is harnessing the power of experimental economics. He is constructing a virtual city, in which land value taxation is financially advantageous to all citizens. The citizenry will be composed of 100 students of business, economics, and engineering. Ultimately, Duke hopes to identify why people, given the option of introducing financially advantageous land value taxation, tend to reject this tax structure.

San Francisco California Before the Sun Rises via photopin (license)
San Francisco California Before the Sun Rises via photopin (license)

“Economics is all about simplifying reality. What we’re trying to do is reduce problems to the fundamental incentives that we want to study. You have an amount of income; how much of your income do you devote to improving your land and how much do you devote to consumption? Then do you feel that, over time, you’re being treated fairly by the tax system and do you vote to reject it? So we set up a little democracy using our computer program where participants in our experimental economics platform can vote,” Duke said.

Duke is already planning his next study. After the completion of this one-year project, he will use his findings to identify ways to help citizens overcome political objections to land value taxation initiatives. Ultimately, he hopes to aid economists and policy experts who are eager to see cities and municipalities usher in smarter economic policy.

 

 



**Distortion, in the most basic sense of the word, simply means change. In economics, it is almost always considered a harmful mutation in an idealized market, where there is perfect competition and no externalities, e.g. almost all taxes vis a vis reducing productive incentives, misallocating resources, etc. Just as breaking up inefficient monopolies encourages competition and benefits the market, land value taxation encourages competition and captures distortionary externalities. This encourages behavior that is good for markets and for people, which is what Duke means when he says that land value taxation is “non-distortionary.” In fact, shifting to land value taxation actually increases productive incentives, what we might call a positive distortion.

 

Facebooktwittergoogle_plusredditpinterestlinkedinmail

Bidding Wars Create New Headaches for Vancouver Renters

Finding a new apartment in a competitive housing market can be exhausting: constantly scouring classified ads, racing from one showing to another, hoping that your credit history and persona can charm potential landlords. But just when you thought finding an apartment couldn’t be more difficult, prospective tenants are finding themselves in rental bidding wars, as landlords exploit competitive real estate markets to maximize revenues.

Vancouver, British Columbia has a housing market rivaling the aggressive competition of New York City and San Francisco. The vacancy rate decreased from 1.8% in 2014 to 0.8% today, and the average rent is $2,230. Neither metric shows any sign of improving as the population continues to grow, partially driven by Vancouver’s strong job market.

29567276440_32154f9552_b
Photo: justenoughfocus Lights of Coal Harbour via photopin (license)

It is not uncommon for prospective renters to conduct searches spanning months, which can cause substantial disruption in their lives. But some landlords are now taking steps that will exacerbate this problem – once you find an apartment in your price range, bidding wars between applicants will probably increase the list price.

As Devin Cox and his roommate hunted for an apartment in Vancouver, they noticed that approximately a quarter of all rental applications asked prospective renters to list the maximum amount above the asking price they would be willing to pay. According to Cox, multiple landlords notified them of higher offers and gave them the chance to increase their bid.

This practice is not illegal, and is even being highlighted in classified ads. A recent Craigslist posting for a studio apartment noted that monthly rent would be determined by an on-site auction. While this practice might be gaining steam in Vancouver for the first time, it has plagued US cities with limited housing stock for several years, particularly New York City and San Francisco.

Housing advocates cite bidding wars as a reason to implement stricter rental laws. At present, Vancouver officials are taking no action to curb this practice. Bidding wars have been blamed for worsening Vancouver’s housing crisis, although no studies have investigated the full extent of their effect.

Bidding wars are another way in which landlords are taking advantage of Vancouver’s economic success. Yet, they are just a symptom of deeper issues. The city’s infrastructure, people, and businesses are enticing large swathes of educated workers to relocate there, increasing the value of land in the metropolitan area. This increasing land value is a social product that should be reinvested in the community. Unfortunately, this value is being depleted through rising rents that are far outpacing wages.

If Vancouver will not take steps to eliminate bidding wars, it should at the very least take steps to increase residential space. Government officials should consider implementing a land value tax (LVT).

American political economist Henry George argued that taxing productive activity discourages production. Taxing buildings punishes those who build vertically, and results in a reduction in urban housing and worksites. To encourage more construction, he proposed abolishing the building taxes altogether, and shifting all taxes onto land. He argued that land is our common inheritance, and we can achieve justice by sharing the revenue from land.

Photo: Caelie_Frampton 6th ANNUAL WOMEN’S HOUSING MARCH via photopin (license)
Photo: Caelie_Frampton 6th ANNUAL WOMEN’S HOUSING MARCH via photopin (license)

There are many nuanced arguments in favor of this strategy. George argued that sufficiently-high land value taxation would actually encourage landowners to develop residential and commercial space, adding value for others, in order to pay the land value tax as well as provide themselves a respectable return. This additional housing inventory would ultimately reduce housing costs. But also the increase in construction and development would create a high demand for labor, thereby reducing unemployment and improving wages.

Given the extreme nature of Vancouver’s housing market, officials should move quickly to keep Vancouver a place where all people can afford to live and live well. The Vancouver mayor and council can be contacted online, over the phone, in person, or using a mobile app, details of which are listed at vancouver.caRead more on the problems of bidding wars and speculation.

 

Featured image: James Wheeler Granville Island Bridge via photopin (license)

Facebooktwittergoogle_plusredditpinterestlinkedinmail

EarthSharing.org on Stanford Radio KZSU 90.1 FM Promoting the Recession Generation Event

WKZSU 90.1 FM Stanford University Radio Interviews EarthSharing.org

 

July 5th, 2016, Edward Miller and Jacob Shwartz-Lucas were invited onto Stanford University Radio to discuss an event they would organize in Oakland a few days later. The event was titled BIL Oakland 2016: The Recession Generation.

14365289_870977433164_151705472_n

The discussion revolved around the event’s aim of helping young adults to navigate the challenges of living in our harsh economic climate and rapid technological disruption.

Jacob and Edward discussed their motivations for putting on the conference. This included explaining their backgrounds, and what changes they want to see in the world.

photo credit: Jane Says via photopin (license)
photo credit: Jane Says via photopin (license)
Facebooktwittergoogle_plusredditpinterestlinkedinmail

Chinese Investment in US Real Estate Tops $110bn

The lessons of the 2008 financial crisis are quickly being forgotten. That market collapse was precipitated by an extraordinary rise of US land values, which was driven by the emergence of subprime lending on a mass scale.

Prices of residential and commercial real estate are once again on the rise. A major driver of this astounding rebound has been Chinese real estate investment. Chinese investors, seeking promising investments and a way to move their money out of the slowing Chinese economy, have poured $110 billion dollars into US real estate in the past five years. By contrast, the Chinese real estate market, which is putting a drag on the Chinese economy, has been called by many the largest land bubble in history. Chinese investments in the US market are inflating housing prices across the country and placing home ownership further out of reach of many Americans.

Over the past several years, Chinese investment in commercial properties has captured headlines. For example, in 2015, the Anbang Insurance Group purchased the Waldorf Astoria Hotel for $2bn and attempted to purchase Starwood Hotels for $14bn. However, the vast majority of Chinese speculative investment has been in the residential market, to the tune of over $93bn. Cities with the most rapidly rising housing costs–San Francisco, New York, Los Angeles, and Seattle–are popular markets with Chinese buyers. But as housing stock across the country continues to gain value, buyers are now turning their speculative intents to Chicago, Miami, and regions of middle America.

Chinese buyers are eager to speculate in the US real estate market. Not only because they see a lucrative investment opportunity, but because of concerns about the slowing Chinese economy. As the economy continues to slow and the value of the Yuan falls, citizens are eager to move wealth abroad and into dollar-backed assets, particularly in the form of land speculation. Despite efforts by the Chinese government to encourage domestic investments, speculation in US real estate by Chinese nationals is expected to exceed $200bn over the next 5 years.

photo credit: IMG_0953 via photopin (license)
photo credit: IMG_0953 via photopin (license)

When people speak of rising real estate prices, they certainly aren’t talking about bricks, they are talking about land. As a consequence of all this land speculation, Americans are finding it harder to obtain affordable housing and commercial space, and not only because of rising prices. Close to 70% of Chinese buyers pay cash, which is more appealing to sellers because deals can close much faster. This puts US residential buyers who require a mortgage at a disadvantage. Bidding wars with deep-pocketed foreign speculators also has the effect of pressuring US buyers with more limited liquid assets to sign off on larger mortgages than they can financially handle.

Prospective home buyers are not the only ones feeling the crunch. As homeownership becomes more unaffordable, the number of people in the rental market increases, driving up rents across the country. In 2016, rent increases are expected to outpace wage increases by about one percentage point. Faster than the general rate of inflation.

The periodic bubbles in real estate markets are a symptom of this rush to pocket the rising value of land, whether by foreigners or citizens. So far, the United States is not taking steps to curb either domestic or foreign speculation in real estate. Instead, Congress is going in the opposite direction by encouraging foreign “investment” in US property.

However, other countries are taking a stand. Hong Kong and Singapore have instituted a 15% tax on properties purchased by foreign buyers, a move that has slowed the rise in housing costs. Citing decreasing affordability of homes, Australia has instituted a similar tax. The Australian government also used legal means to intercede in the attempt by Chinese investment group Dakang Holdings to purchase the Kidman Farm empire, which controls 1.3% of the Australian landmass.

photo credit: Lavender Valley 2407 via photopin (license)
photo credit: Lavender Valley 2407 via photopin (license)

An alternative to such measures, which numerous eminent economists recommend, is a tax on land values. Land value taxation (LVT) is a twist on conventional property taxation, whereby improvements to the land are not taxed, but the land itself is taxed. Proponents argue that we ought to shift as much taxes as possible away from productive activity and onto land values. While other strategies would serve to limit foreign land purchases, taxing land values would actually halt idle landholding in general by making the speculative ownership of raw or underdeveloped real estate unprofitable.

When markets are operating correctly, profits are simply a return for productive activity, not a windfall that is achieved by excluding others as with the landed gentry in the feudal era. With LVT in place, Chinese or other foreign investors who wanted to make money by purchasing land would have to actually develop that land. They would need to attract residential or commercial tenants by providing desirable amenities and reasonable rents, and shouldering the risks involved in any sort of productive activity.

This would result in a growth of construction activity and an increase in US housing supply. Increased construction activity and decreased cost for commercial and residential real estate would stimulate the rest of the US economy, simultaneously decreasing unemployment and raising wages.  In effect, taxation of land values would convert the current Chinese desire for US land into a sustainable means of growth for the US economy.

Featured image photo credit: Light River via photopin (license)

Facebooktwittergoogle_plusredditpinterestlinkedinmail

Marie Howland, 19th Century Gender Equality Pioneer

Young girls ironing laundry

Howard H. Aiken, a pioneer in computer engineering, famously urged others to “[not] worry about people stealing [your] idea. If it’s original, you will have to ram it down their throats.”

This reminder is useful when considering the reasons that groundbreaking ideas often do not make it into mainstream culture or history textbooks. Marie Howland, a passionate advocate for women’s economic independence in the nineteenth century, is an apt exemplar of Aiken’s claim. A woman of revolutionary ideas, she is hardly a household name. Howland, a white working-class woman, was among the first of both her class and gender to publish a novel in America and to participate in the women’s rights movement by challenging fundamental social conventions that limited the influence of women to the household and domestic sphere. Like other authors such as Jane Austen, Howland was deeply troubled by the way social conventions served to reinforce women’s systemic economic dependence on men. This has hardly been resolved; “equal pay for equal work,” one of the cornerstones of Hillary Clinton’s current presidential campaign, is merely one example of the issues that remain to be addressed towards Howland’s goal of achieving economic equality among genders. What is most compelling about Howland, then, is how relevant her ideas for the economic equality of women continue to be today.

A concise statement of Howard’s philosophy is that she wished to see opportunities for women to achieve financial independence. This idea necessarily challenged traditional boundaries separating the domestic and public spheres. Whereas a man might have various opportunities for wage-earning work outside of the household, a woman’s work was typically constrained to the household and its value not so easily quantified. Early on, this distinction led Howland to embrace the writings of French intellectual Charles Fourier. She admired Fourier’s suggestion that women be empowered to select their work – primarily in a communal setting (phalanx) with other women – and be materially compensated. It is important to distinguish here that while many women in working-class families were, in fact, compensated for employment outside of the household, Howland recognized that this did not absolve them of traditional household duties. Women, in many cases, worked a “second shift” on the homefront, remaining trapped by this economic and social model. As Cliff Cobb states in his introduction to a special issue on Marie Howland in The American Journal of Economics and Sociology, “[T]he only way to let women out of [their domestic] prison[s] was to knock down the walls that have separated the oikos (household) from the polis (public arena), the domestic and the non-domestic spheres.”

 

Woman working at Texaco Refinery
Port Arthur refinery, The Texas Company via photopin (license)

 

The Fourierist model, which remains obscure relative to other alternatives to Capitalism such as Marxism, might best be characterized as a combination of the communal elements of Socialism, with a view of humanity as an evolving entity striving towards a state of universal harmony in accordance to God’s will. Fourier understood the Divine model for social evolution as requiring a move toward communal living, reducing the inefficiencies of individual households by consolidating and redistributing the work required by the community. Notably, domestic work such as cooking, cleaning, and childcare was included in this model. By normalizing domestic work within the community marketplace, Fourier’s plan for communal living also implies a redistribution of the power dynamics that have traditionally separated the genders, privileging white males above everyone else. It was Fourier’s hope that altering domestic work and power in this way would facilitate the sharing of power in other spheres.

Late in life, Howland resided in the Georgist community of Fairhope, Alabama, which was based on the ideas of American political economist Henry George, favoring land value taxation rather than taxation on improvements or property. These ideas, implemented both in the United States as well as abroad, have yielded enormous economic gains. Not surprisingly, Howland found these ideas compelling and even necessary for realizing a more egalitarian world.

 

Fairhope, Albama.
Fairhope, Albama. By Stratosphere (Own work), via Wikimedia Commons

 

To be clear, none of this demonstrates that the core of Howland’s vision for economic liberation of women could not be better adopted by our contemporary society. If Aiken’s words are to be believed, we might argue that Howland’s ideas continue to pose challenges so significant that they are resisted by mainstream culture. The virtues of Howland’s ideas lay principally within the uncomfortable questions they pose. It is interesting, for example, to consider the widespread negative perceptions that persist regarding “feminism” as a disruptive – rather than restorative – social influence. The myth of an America offering equal opportunity to all regardless of gender, race, and other minority identifications persists. Which groups stand to lose ground should continuing inequality be recognized, and what type of social and economic justice, as envisioned by Howland, ought to be pursued? The economic theory of great disparity as a necessary evil (social Darwinism) remains so deeply ingrained in our national narrative that it is often revered as unassailable, forestalling conversations that might otherwise pose promising alternatives but that have the potential to alter our current economic paradigms.

If there is anything we can learn from Howland’s ideas, it’s that just work relations cannot be achieved within the Capitalist system, in its current form, nor can they be achieved by simply redistributing property. To secure a just system for women, Howland argues that the caretaking duties that women are often burdened with also need to be redistributed.

-Elizabeth Smith

Cover Image: Ironing Day- vintage stereoscope card via photopin (license)

Facebooktwittergoogle_plusredditpinterestlinkedinmail

The Simple Two-Part Solution to Poverty: Universal Basic Income and LVT

Imagine a society in which each citizen is guaranteed a minimum monthly income. People do not work to survive; they instead work to contribute to their country, supplement their income, and enrich their minds and bodies. Poverty rates have plummeted, and socioeconomic divides across an entire populace have shrunk. It may sound like a socialist utopia, but a number of countries are considering the idea of a Universal Basic Income (UBI), with some poised to implement it in 2016.

UBI has existed as a concept for hundreds of years. The idea was first posited by Johannes Ludovicus Vives in the 14th century and evolved via the work of Enlightenment figures like Thomas Paine and then,  in the 19th and 20th centuries, by Western economists and politicians . The idea even surfaced in the 1972 United States presidential campaign in the form of a negative income tax, with both candidates expressing some form of support.

The concept of a UBI has found support across the political spectrum. The Cato Institute, an American Libertarian think tank, has proposed that a UBI could be the better way for governments to redistribute income versus complex entitlement programs. Andy Stern, former president of one of the largest unions in America, the Service Employees International Union, believes a UBI is an effective way to target poverty at its core – a lack of income.

 

Child Living in Smokey Mountain Dump, Manila Philippines via photopin (license)
Child Living in Smokey Mountain Dump, Manila Philippines via photopin (license)

 

Centuries of hypothesizing notwithstanding, there have been few concerted efforts to implement a UBI until now. Y Combinator, a Silicon Valley-based company that provides seed money to startup companies, will be giving 100 families in Oakland between $1,000 and $2,000 per month for up to one year. Researchers will measure “happiness, well-being, financial health, as well as how people spend their time.” Finland is currently drafting a proposal for a UBI that would give each citizen 800 euros per month, and the Labour Party in the United Kingdom is considering backing a similar initiative.

Some economists warn that a UBI would be ineffective if not paired with other policy changes. A potential downfall of UBI is that the greater income of citizens would be captured by landlords via rising rents. Therefore, efforts must be taken to ensure that rents do not absorb government-supplemented income.

 

bbb low-cost housing, tegnestuen vandkunsten via photopin (license)
bbb low-cost housing, tegnestuen vandkunsten via photopin (license)

 

The addition of a Land Value Tax (LVT) to funding the UBI would limit, if not eliminate, the amount of income absorbed by rents while providing the necessary revenue stream to support it. Martin Farley, author of the “Transformation Deal,” has calculated that this approach would create a revenue stream to support at least a moderate UBI. Furthermore, since the burden of an LVT is on landlords, excessive rents captured by them would be recouped by the LVT and re-injected into the UBI program. In addition, LVT has been shown to promote the best use of land, generating more lower-cost yet high-quality residential and commercial space, a further benefit of UBI. It has been argued by many that the dual combination of LVT and UBI would work extremely well together to resolve a number inequities in any economy.

Economists from across the political spectrum will be watching Y Combinator, Finland, and other test programs closely as they experiment with a UBI. Success could mean an entirely new approach to the welfare state. Most important will be whether and how socioeconomic conditions change. And from those changes, new understandings may well arise to support ideas such as Land Value Taxation. For now, the world is watching.

Cover image: Money! via photopin (license)

Facebooktwittergoogle_plusredditpinterestlinkedinmail

4 Lessons on Economic Populism

By Alexandra W. Lough

Numerous articles and studies published over the past eight years on the effect of the 2008 financial crisis on the future of America’s “millennial” generation have reached the same conclusion: at its best, the future is uncertain; and its worst, the future is downright bleak.  It’s not difficult to understand why.  While the most highly educated generation of young adults in the nation’s history, Americans born between 1980 and 2002 also carry the highest loads of student debt and suffer one of the highest rates of underemployment.  As a result of their strained economic situation, many millennials are delaying marriage, starting a family, and buying homes—once considered central components of the American Dream.

Despite all this, millennials report feeling “hopeful” about their own futures and that of the country. And many have channeled that hope into the 2016 presidential race, in which recent polls show that young voters aged 18 to 29 are participating in larger numbers in primaries and caucuses than in previous elections.  The two candidates who have thus far attracted the most support from millennials include Bernie Sanders and Donald Trump, the so-called “anti-establishment” candidates who have promised to radically transform America’s rigged political and economic systems.  Although they stand on the opposite sides of many issues, both Sanders and Trump employ a certain type of rhetoric called “economic populism,” that decries crony capitalism and especially resonates with millennials and others who have yet to benefit from America’s economic recovery.

California journalist and bestselling author, Henry George, circa 1879.
California journalist and bestselling author, Henry George, ca 1879.

Before millennials cast their vote for one or another of these candidates, however, they should consider the modern origins of economic populism and the particular lessons of one of America’s most famous “economic populists”—Henry George (1839-1897). Never heard of Henry George? Think again. If you’ve played the popular board game Monopoly, at the very least, you’re familiar with his ideas which inspired the game’s founder, Lizzie Magie.

In the wake of one of the worst economic disasters in the nation’s history—the Long Depression of the 1870s—George, a middling California journalist, set out to expose and explain why industrial and technological progress seemed perversely to deepen poverty, inequality, and economic instability. In 1879, George published his findings in the aptly titled economic treatise, Progress and Poverty. The work became an international success and likely outsold every other book published in the nineteenth century except The Bible.

More than 135 years later, Progress and Poverty still holds key insights into the polarizing character of American capitalism and helps explain why vast disparities of wealth continue to accompany economic growth. More importantly, George’s ideas—and the amazing story of their life—provide important lessons to those seeking to build a more just and sustainable economic system. George’s ideas not only provide the necessary context for understanding the origins of America’s broken economic system but also the steps for constructing a more just and viable one.

LESSON ONE

The failure to treat land and natural resources as the common property of all people—as opposed to the private property of individuals—perpetuates crony capitalism, accounts for the growing divide between the wealthy and poor, and causes the pernicious boom and bust cycle that has afflicted the American economy since the late-eighteenth century.

Daguerreotype of Henry George circa 1865
Henry George, ca. 1865

 

Living and working in California in the post-Gold Rush Era, George closely observed the new and perplexing realities of industrial capitalism. Over the past century, human civilization had experienced unprecedented levels of technological development and industrial production. New sources of power including steam and electricity as well as improved methods of transportation such as canals, turnpikes, and railroads enabled mankind to produce and distribute more goods than ever before.

Despite the fact that society could produce exponentially more food, families continued to starve. Despite the fact that the nation’s leading industrialists earned more profit than at any other time in history, workers struggled to support their families. Despite the fact that America’s economy had become larger and more diversified, the nation continued to face worsening financial panics and industrial depressions.

Unlike other social commentators of his generation who attributed these conditions to overproduction, under-consumption, or a unsound monetary policy—Congress had recently passed the Coinage Act of 1873, which drastically reduced the price of silver—George concluded that at the heart of this dilemma was land. As he explained:

The reason why, in spite of the increase of productive power, wages constantly tend to a minimum, which will give but a bare living, is that, with the increase in productive power, rent tends to even greater increase, thus producing a constant tendency to the forcing down of wages.

By “rent” George referred not only to the monthly fee a tenant paid to their landlord, but to “economic rent”—which economists define as the profit one earns simply by owning something of value, such as land.

George continued:

Land being necessary to labor, and being reduced to private ownership, every increase in the productive power of labor but increases rent—the price that labor must pay for the opportunity to utilize its powers; and thus all the advantages gained by the march of progress go to the owners of land, and wages do not increase.

George defined land broadly to include not just the surface of the earth, but all the materials, forces, and opportunities freely supplied by nature. To George, buildings, houses, farms and other improvements to land represented wealth or capital, whose values could be separated from land. Unlike the value of capital, land value increased not as the result of any effort on behalf of the individual owner, but to the increase in the demand for land as a result of advancing population, the building of a railroad, the construction of a school, or a multitude of other public improvements. In other words, George argued that land values are social in origin, completely dependent on the development of the surrounding community.

The relationship between public improvements and an increase in land values was especially apparent in California and other western states. Following the announcement of a new railway route, for example, land values skyrocketed and investors raced to purchase large sections near the planned route. Speculators made a killing following the completion of the railway when they could sell the land for many more times what they had initially paid. Railroad officials often colluded with speculators to increase the price of land to help finance construction.

Unbridled speculation in land values, George correctly surmised in Progress and Poverty, had preceded every major North American economic panic since the late-eighteenth century.

cartoon_george-henry_fighting-corruption-1886

LESSON TWO

To break the boom and bust cycle and prevent deepening wealth inequality, the federal government should replace all taxes that penalize the working and middle classes with one “single tax” on the full value of land rent.

Prior to the passage of the Sixteenth Amendment, which enshrined the modern federal income tax into the Constitution, Congress mainly relied on public land sales and tariffs—taxes on imported goods—to finance the activities of the federal government. State and local governments raised revenue almost entirely from the general property tax. Both tariffs and property taxes, George pointed out, unfairly privileged the wealthy at the expense of the poor and middle classes.

By design, tariffs protect manufacturers by restricting and raising the price of imported goods and materials. Defenders of high tariffs claimed such taxes protected American jobs by reducing foreign competition. Opponents like George, however, pointed out that high tariffs make most goods purchased by laborers more expensive and thus, reduce the true value of wages.

Property taxes also tended to benefit the rich by failing to differentiate between the economic value of land and the value added by capital improvements. In many places, only improved land—that is, land with houses, farms, buildings, etc.—reached tax rolls, while the owner of many acres of valuable albeit undeveloped land entirely escaped taxation. Additionally, the rich were rather adept at “hiding” certain types of property—valuable jewelry, stocks, paintings, etc.—while also convincing tax assessors to underreport the value of property they could not hide—land.

To reduce corruption and more fairly distribute the tax burden, George proposed to eliminate all taxes save one tax on the full value of land minus the value of improvements. As he explained,

Were all taxes placed upon land values, irrespective of improvements, the scheme of taxation would be so simple and clear, and public attention would be so directed to it, that the valuation of taxation could and would be made with the same certainty that a real estate agent can determine the price a seller can get for a lot…

A tax upon land values is, therefore, the most just and equal of all taxes. It falls only upon those who receive from society a peculiar and valuable benefit, and upon them in proportion to the benefit they receive. It is the taking by the community, for the use of the community, of that value which is the creation of the community.

George’s proposal became known as the single tax and those who supported it were called “single taxers.”

Henry George: Everybody works but the vacant lot
The New York Public Library, Astor, Lennox, and Tilden Foundation
A billboard erected by a single taxer demonstrating George’s argument to shift taxation onto land values.

Through the single tax, George hoped not only to reform the system of taxation, but also abolish the system of private property in land, which allowed individuals to horde resources nature bestowed to all of mankind and profit from the efforts of the entire community. According to George:

The wide-spreading social evils which everywhere oppress men amid an advancing civilization spring from a great primary wrong—the appropriation, as the exclusive property of some men, of the land on which and from which all men must live…

It is the continuous increase of rent—the price that labor is compelled to pay for the use of land, which strips the many of the wealth they justly earn, to pile it up in the hands of the few, who do nothing to earn it.

Beyond righting a wrong, the single tax promised a host of other social benefits. Taxing only land values would generate all the revenue needed to operate government and doing so would produce ever greater levels of opportunity, as man’s right to the bounty of nature and his desire for a productive life was strengthened. Taxing only land values would ameliorate and one day eliminate the hardship caused by continually bursting bubbles of land speculation. Taxing only land values, George believed, was not just the application of sound public policy, but the acknowledgement of a spiritual duty.

 LESSON THREE

The unprecedented popularity of the single tax and all that it stood for prompted the beneficiaries of crony capitalism—the defenders of the status quo—to accept half-measures such as the federal income tax, while at the same time burying George under a mound of lies and epithets.

The simplicity and inherent fairness in the single tax drew followers from different walks of life and from all over the world. In 1886, the United Labor Party selected George as its candidate for Mayor of New York City. In a hotly contested and nationally followed race, the Democratic candidate Abram Hewitt narrowly defeated George, who earned more votes than any other third party candidate in the City’s history. He also outperformed the Republican in the race, Theodore Roosevelt, who placed third.

George was a profound influence on the religious reform movement known as the Social Gospel, both in the United Kingdom and the United States. One of his best known followers was the popular New York City priest, Edward McGlynn, whose outspoken efforts to bring a Georgist solution to the deepening poverty and inequality led him to be ex-communicated—and then re-communicated, in his lifetime and under the reign of Pope Leo XIII.

 

In this 1886 cartoon published in The Judge, the workingman is presented as caught between two competing forces—the ideas of Henry George and those of the Catholic Church.
In this 1886 cartoon published in The Judge, the workingman is presented as caught between two competing forces—the ideas of Henry George and those of the Catholic Church.

 

George’s growing religious influence in Europe and the United States coupled with the McGlynn controversy prompted Pope Leo XIII to issue the famous 1891 Encyclical Rerum Novarum, in which he reaffirmed the Catholic Church’s support for private property rights in land and also reminded Catholics of their spiritual duty to charity and the less fortunate.

Because he campaigned against private ownership of land, George’s detractors labeled him a socialist. In supporting private ownership of capital, however, George was clearly not a socialist. Karl Marx vehemently opposed George and the single-tax movement for misleading workers into believing that landowners rather than capitalists were to blame for their suffering. “Theoretically the man is utterly backward!” Marx wrote of George in 1880.

Despite the economic nature of his subject, George wrote for the common reader. He rejected the idea that one must possess a good deal of formal schooling to grasp the laws of political economy. His lack of academic credentials and increasing popularity threatened a growing number of professional economists who dismissed George’s theories as “half-baked” and “dangerous.”

The widespread appeal of the single tax together with the growing demand to lower tariffs, led many in Congress in 1913 to support a federal income tax. Although a good deal more progressive than today’s version, the federal income tax was a poor substitute for a tax on economic rent. The main problem with an income tax, according to George, was that it failed to differentiate between incomes justly earned and those earned from the labor of others. As he explained:

Nature gives to labor; and to labor alone…

Now, here are two men of equal incomes—that of the one derived from the exertion of his labor, that of the other from the rent of land. Is it just that they should equally contribute the expenses of the state? …The income of the one represents wealth he creates and adds to the general wealth of the state; the income of the other represents merely wealth that he takes from the general stock, returning nothing.

Henry George, ca. 1897
Henry George, ca. 1897

LESSON FOUR

Despite attempts to discredit George, his ideas inspired a generation of social activists on multiple continents who successfully built the single tax into a number of Progressive Era reforms and programs—particularly at the state and local levels—that continue to provide such basic human services as clean water, electricity, and public transportation to large populations all over the world.

Although the single tax was never fully implemented anywhere in the world, George’s ideas animated many of the most notable social reform movements of the era of high industrialism. In particular, local government leaders of the Progressive Era pulled heavily from the single tax to justify their efforts to raise taxes on public service corporations and transfer the provision of water, power, and transportation from private to public suppliers—a movement known as municipal ownership.

Similar to George’s single tax, which aimed at reclaiming and distributing socially created land values, advocates of municipal ownership targeted the socially generated wealth of public service corporations, which amassed huge profits by providing services required by all residents and using public property, such as streets, waterways, gas lines, and franchises, to do so. As Ohio State Senator and single tax advocate Frederic C. Howe explained in 1907,

The value which these corporations enjoy in the market is social in its origin. It is created by the community itself. No act of the owner gives them the earning power which they enjoy…Moreover, the franchises and privileges that these corporations enjoy are granted by the people themselves. They are created by law. No labor enters into their making. They are a free gift from all of the community to a few of its members.

In states with constitutional provisions against municipal ownership, urban reformers utilized the single tax in their efforts to increase taxation on the property of public service corporations, particularly that of railroads and streetcars.

The reach of the single tax into such seemingly disparate movements as labor politics, religious reform, and municipal ownership testifies to the importance of land and natural resources to the fundamental dilemma facing democratic society: how to encourage economic growth and provide an equal opportunity to all persons to engage in and benefit from the advancements of human civilization. To George the answer was simple: one tax based solely upon the wealth produced by land—the resource from the time of its creation that has always existed for the benefit of all men.

As the presidential election rolls nearer, young voters might fare well to remember George’s lesson that so long as the government continues to treat socially generated wealth as the private property of individuals, the benefits of industrial progress and economic recovery will not be shared equally; instead, those benefits will flow to those who control the greatest shares of economic rent.

Alexandra (Alex) holds a Ph.D. in American History from Brandeis University. She currently serves as the Director of the Henry George Birthplace and is preparing a book manuscript based on her 2013 dissertation, “The Last Tax: Henry George and the Social Politics of Land Reform in the Gilded Age and Progressive Era.”

 

 

Facebooktwittergoogle_plusredditpinterestlinkedinmail

How Cities Breed Poverty

Richard Florida’s The Rise of the Creative Class posited that the clustering of knowledge-based, or “creative” occupations in cities and metropolitan areas drives urban economic growth. Florida now says, though, that such clustering also “generates distinct winners and losers both across and within cities and metros.” This is the central takeaway of the recently published study that Florida conducted in collaboration with Roger Martin, Melissa Pogue, and Charlotta Mellander, his colleagues at the Martin Prosperity Institute.

Florida’s work distinguishes between knowledge-based occupations in science, technology, and design and “routine” occupations in the manufacturing and the service industries. This most-recent study combines that approach with the work of Michael Porter, author of the landmark work The Competitive Advantage of Nations, published 25 years ago. Porter’s work, which looked at the role of industrial clustering in economic development, distinguishes between locally-oriented industries and traded industries—those that export goods beyond their immediate geographical areas. Florida and his colleagues at MPI have synthesized these two approaches to generate four occupational-industrial categories–creative-in-traded, creative-in-local, routine-in-traded, and routine-in-local. By analyzing data across 260 metropolitan areas comprising three quarters of the U.S. population, they have shed light on the role these four types play in innovation, economic growth, and inequality.

Proud, Distorted, Dream Job via photopin (license)
Proud, Distorted, Dream Job via photopin (license)

 

What They Found

There is a clear connection between traded and creative industries. 45 percent of those working in the traded industries are in creative occupations, compared with 36 percent in local industries. “Not surprising,” says Florida, “as traded industries compete on innovation and creativity.” These creative-in-traded jobs are distributed very unevenly around the country, with high concentrations, or geographical spikes, in a few cities, with the highest concentrations on the East and West Coasts. Creative-in-traded employment is a key driver of both innovation and economic growth and has the most positive association with higher wages. Of the four categories, creative-in-traded occupations have the highest wages by far, with average wages 31% higher than than the next highest category, creative-in-local, and 182% higher than the bottom category, routine-in-local—which makes up 45% of all workers. Both routine-in-local and routine-in-traded occupations fall below average wages, and the wage gap between creative and routine workers has grown over time.

What troubles Florida and his colleagues is the strong link between a concentration of creative-in-traded employment and economic disparity. The higher a metro region’s share of overall creative-in-traded jobs, the greater the income inequality. While all four categories see higher wages on average in metros with a higher proportion of creative-in-traded occupations, routine occupations do not see wage increases high enough to make up for the higher housing costs driven by a city’s desirability among those in higher-paying creative occupations. As a result, those in routine occupations, especially routine-in-local, are pushed to less advantaged metros with fewer high-paying jobs, creating a vicious cycle in which the disadvantaged sink lower and lower into poverty.

Tightly Packed Moving Truck
All my worldly possessions… via photopin (license)

 

What can be done?

The most difficult challenge, according to Florida, is that there are simply not enough creative jobs to go around. The proportion of creative jobs is increasing, but only very slowly—at about 1.4 percent per year. The solution, says Florida, is the conversion of routine occupations to creative occupations. He calls on business and industry to lead this transformation “by increasing the creative content of what is currently routine work,” and says that there is much to be gained in doing so in terms of productivity, customer service, and quality. Those cities that are able to convert more of their workforce from routine to creative occupations, he says, will be more competitive.

The economist Henry George noted this puzzling phenomenon over a hundred years ago. He asked why it was that as production and density increases so, too, does poverty. You would think that as society is able to produce more wealth in cities there would be more wealth to go around. However, it is precisely because certain people earn more that landlords are able to charge more rent.

 

A traditionally working-class neighborhood
The calm before the storm via photopin (license)

 

Unlike creative ventures, which require innovation and risk-taking, owning a vacant lot in the middle of a city requires relatively no effort or risk, as land values in these areas are continuously going up in value. If an urban property owner waits long enough, they can realize an enormous return without lifting a finger. The creative industries popping up around their rental properties will enable the slumlord to charge much higher rents. This slumlord needs neither assume the financial risk of building a new structure to house more of the new creative industry workers nor continue to house the routine workers. Rather, the slumlord will often just charge increasingly exorbitant rents to the routine workers, effectively forcing them out, and then house the creative workers in the same conditions for higher rents. The creatives are willing to pay these rents due to the desireable location and the short supply of rental units. Supply is suppressed because other landlords are also complacent and prefer to avoid the risk of developing their land to its highest and best use. Some will just knock down the buildings altogether to lower their property tax bills.

If, however, landlords were taxed on the basis of the value of their land, they would be incentivized to provide more housing units in order to pay the tax and make a profit. People would still move around based on the demand for particular locations, but there would be more housing for everyone. Thus, all things being equal, rent would be lower overall. What we think of as the peripheral areas of the cities, where the routine workers can afford the rent, would likely be twice as close to the city center as the areas they can currently afford to live in. We would not need other taxes if all or most revenue was coming from land. If we scrapped all of the taxes on routine workers’ wages, food, transportation, etc., these things would become more affordable, too, dramatically increasing creative employment and reducing poverty in cities. To see what that would look like, you can read our article Visualizing Earth Sharing.

 

Cover Image: gentrification, void places via photopin (license)

Facebooktwittergoogle_plusredditpinterestlinkedinmail