Michael Hudson on Real Estate Taxation
Executive Summary
- Real Estate Taxation
- Michael Hudson’s Statements
- Financial Sector Taxation
Introduction
Michael Hudson has been covering real estate for some time and is one of the very few experts on real estate taxation. The picture above is a good representation of how banks see the optimal real estate situation, people who are so in debt that they have to allocate most of their income to their mortgage. This is accomplished by both the mortgage deduction (increasing the price of houses and the desire to finance as much as possible with the bank) and also through moving taxation away from real estate (which adds very little of substance to the economy) and onto income and sales taxes.
Every now and then an article comes along that changes how you think about an issue. Michael Hudson writes more than his fair share of these types of articles which is why we consider him the most innovative economist that we have been exposed to. First let’s lay out the common assumptions regarding real estate and taxation.
- Promoting people to invest in real estate is good for the economy
- Housing should be tax advantages in order to promote “home ownership”
- The main way the middle class gains wealth is through the appreciation of their home
Michael Hudson calls into question all these assumptions and many of the other pro-housing assumptions that we have heard. From his article A Tax Program for U.S. Economic Recovery Hudson points out:
Hudson’s Statements
…you want to avoid having the tax collector lower property taxes, leaving more revenue available to be pledged to banks as interest on higher mortgage loans.
To get a lower-cost world, you have to counter political pressure from real estate owners and their bankers to shift taxes off rent-yielding properties onto labor and capital.
Most economists – even Milton Friedman – recommend that the more efficient tax burden is one that collects economic rent – property rent, fees charged for using the airwaves, monopoly rent, and other income that is basically an access charge.
(we were surprised by this as this is the first good idea we have heard from Milton Friedman who we and other progressives view as simply a tool for concentrated power)
Right. The financial sector translates its economic power into the political power to cut back real estate taxes. What has really been fueling the rise in property prices in this country has been the fact that real estate has been untaxed. What the tax collector relinquishes is now free to be capitalized into debt service on higher loans to bid up real estate prices. In 1930 about 75% of state and local finances came from the property tax. Last year it was down to 16%, so that’s from 3/4ths down to 1/6. Cities have shifted the property tax onto wages and salaries – income and sales taxes that increase the price of business. Taxes used to fall on property and hence were progressive, but now have turned regressive. The result is that “tax deflation” now reinforces debt deflation. This threatens to aggravate the depression we’re entering.
The venture-capital model that you’re talking about applies to enterprises that create new goods and services, especially products that weren’t produced before. But in real estate what you have is not so much a profit as “economic rent” and the free lunch of land-price gains that John Stuart Mill said landlords make in their sleep. The rental value of their property is determined by economic conditions and by local infrastructure spending to raise the rent-of-location, not by their own efforts and enterprise. Land and natural resources therefore should be the basis of taxation, because a real estate tax keeps down house prices and makes them more affordable. Homeowners may imagine that they are benefiting when property is un-taxed. But this simply leaves more rental income available to be pledged to the banks and capitalized into larger mortgage loans. So people end up paying the same amount of income to carry property as they did when real estate taxes where higher, but now they pay the banker instead of the tax collector. In fact, not only do they have to pay the same amount – but in the form of mortgage interest instead of taxes –they still have to carry the tax burden. This tax burden now takes the form of income tax and sales taxes. So you double the sum of taxes plus debt charges.
Analysis
This is an amazing revelation and it is 180 degrees from what is taught in business schools across the country and what is the common thinking among most people. Now that the real estate market has bust, many people are saddled with very large mortgages that they must service the debt on. These people are all hoping the real estate market comes back and are essentially debt peons, which is exactly what banks like. CountryWide is reported to have suggested a borrower who was having problems meeting their mortgage could “eat less.” For those the sold out of expensive markets at the right time and moved to low-cost markets (say retirees who sold in 2006 in San Jose and moved to Pittsburg) the housing bubble was great, as it was for real estate agents who pocketed exorbitant fees. However, for most of the rest of the population, the extreme tax benefits given real estate has meant the following:
- Financial discrimination against renters (who are generally lower income)
- A more expensive cost of living (thus a lower standard of living)
- An increased percentage of money flowing to banks
We have to say, after listening to the conventional wisdom for decades from real estate promoters, who really were preaching a bankrupt economic philosophy, it can certainly embitter someone. Increasingly we are beginning to wonder about the quality of economics that trickles down to the general population. Increasingly we find ourselves debating completely false economics information which is simply repeated by people who have a very strong focus on promoting things good for them, but really no abstract concept of economics and certainly not the history of economics. We are very thankful that Michael Hudson’s website is always available to provide both clarity and critical thinking that is so lacking in universities and media outlets.