The Surprising Way Inequality is Driven by Taxes

The old story continues. In the United States, income inequality is getting worse as wealth continues to concentrate excessively in the upper classes at the expense of the lower and middle classes. This is becoming more evident as lower-income individuals and families are forced to tighten budgets to cope with the rise in housing and transportation costs, which are outpacing gains in wages and making it difficult to afford basic necessities. As a result, low wages earners are losing economic self-determination, and forced to depend on their employers or the government for assistance.

It was never meant to be this way. One of the most important natural laws of political economy is that human desires are unlimited, which means that there are always markets with which to create exchangeable value as measured by currency. This intersects with another natural law: the creation of value requires access to forces and opportunities within the physical world, referred to by political economists as “land.” Every occupation requires both space to operate and raw materials extracted from the physical world. In more developed economies, tools such as machines and structures crafted from those raw materials–“capital” in the discourse of political economy–help create larger amounts of exchangeable value from human exertions, referred to as “labor.”

Economies work for everyone when people (labor) using tools (capital) access the physical world (land) and create exchangeable value in the form of goods and services. They then trade those goods and and services for what they want and need. When this ideal is realized, everyone is able to economically self-determine.

 

 via photopin (license)
via photopin (license)

 

Unfortunately, that is not what’s happening. Startling new data from the Pew Charitable Trust shows the extent of economic suffering for lower-income households, for whom, unsurprisingly, housing is the primary factor driving budget woes. In 2014, low-income earners on average spent $9,178 on housing, up from $6,897 in 2013. The Pew Charitable Trust notes that this is the largest single-year increase in housing spending over the past 19 years. Such a steep increase in housing costs makes it even more difficult for these low wage earners to afford adequate food and transportation. Workers in all income brackets are finding it increasingly difficult to generate the necessary income to meet housing costs, but the weight of this particular dual challenge bears greatest on the poorest of Americans.

Those numbers are more startling when put into perspective. Low-income is defined as a family of four making less than $45,622 annually, which accounts for 32% of all families in America. Currently, basic necessities such as food, transportation, and housing consume nearly 50% of these families’ total budgets. As housing costs continue to rise, this percentage will increase, preventing low-income families from accumulating any substantial wealth over time.

So why exactly are housing costs increasing so dramatically?

At present, U.S housing inventory is at a historic low and continues to shrink. Widespread foreclosures over the past 9 years drove many families into the rental market, increasing competition. Increased demand for housing should spur an uptick in housing construction. However, we have not seen this happening. A decrease in average wages and assets in the wake of the financial crisis has put home ownership further out of reach for many Americans. Consequently, investors are not jumping to construct new properties. Construction of residential properties is at its lowest level in 40 years.

 

185 Fore Street Construction via photopin (license)
185 Fore Street Construction via photopin (license)

 

Fortunately, steps can be taken to ease this housing crunch for all, and especially for low-income families. The Land Value Tax (LVT) (instead of traditional property taxation), first proposed by American political economist Henry George, has been demonstrated both in the United States and abroad to increase the stock of residential and commercial space while enabling greater economic self-determination for all. The enhanced economic self-determination stems from an increase in commercial space, which makes it easier to both start and expand businesses, leading to an increase in employment and wages.

Henry George hypothesized that the tax on the value of structures (“improvements”) in the traditional calculation of property taxes penalizes landowners for building on their property. To encourage more construction, he proposed that taxes on improvements be abolished and replaced with higher land value taxation. Such a system would encourage landowners and developers to build residential and commercial space to generate the income necessary to pay the land value tax, thus providing them a respectable return on investment as they provide value to others.

Given that no end in the housing crunch is in sight, government leaders must take action quickly to abate the high housing costs that are strangling low-income households.

Cover image: left! via photopin (license)

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