by Dr. Mason Gaffney
Riverside, CA
Virgil wrote of Auri sacra fames, the "holy lust
for gold," and the troubles it causes mankind. Sacra can
mean either "holy" or "accursed," and Virgil meant that to
make gold holy is a curse because the lust knows no limit.
Gold lasts with no spoilage or maintenance, serving as an
infinite store of value and symbol of greed triumphant.
Thus it rather resembles land, as Thorstein Veblen brought
out in his last book, Absentee Ownership (1923), which
seems to owe a large debt to Henry George.
Economists write of "diminishing marginal utility"
when one acquires more goods, as though it were a universal
rule. So it is, for most people, with respect to goods
that spoil. A little consuming satiates one, and a little
more fattens and spoils you. Providing for the future,
however, and parading riches, and outshining rivals - these
"utilities" grow by what they feed on. Jesus urged people
to "store up treasures in Heaven, where moth and rust do
not corrupt, and thieves do not break through and steal."
Unfortunately, many people seek their Heaven on earth by
storing up treasures in land. Amassing capital need not
deprive others, one may do it by creating new capital.
Amassing land, however, necessitates evicting others, as
Isaiah observed, "until there be no place, that (one) may
be alone in the midst of the earth."
Economists also write of "superior goods." These
are goods on which you spend a higher fraction of your
income, as your income rises. Economists are trained and
conditioned to ignore land, so they cite other examples of
superior goods, but clearly land is the archetype. Boone
Pickens, Wm. Randolph Hearst, Ted Turner, Richard King and
his Kleberg descendants, the Bass brothers, the Koch
brothers, James G. Boswell, Walter Shorenstein and son, the
Whitneys, and others come to mind ... these are merely
samples from a large genus that would be even larger, if
only there were more land to hog.
Henry George in P&P gives three main reasons why
land-hogging drives labor off the land. Land speculation
is only one of them. A second one is the progress of
labor-saving technology. A third, found mainly in later
works, is increased demand for land, and land-using
products, due to increased incomes. He expressed it in
other terms than "superior good," but that is the idea. He
hints, too, at a fourth reason, somewhat overlapping the
third: "Take those miserable men who go on striving to add
riches to riches. What urges them still is not merely
habit, but the subtler gratifications which riches give --
power and influence, being respected, being men of mark in
the community". George is reading those "miserable men"
charitably. Today they exert power by contributing to Tory
pols, media windbags, and foundation intellectuals. Here,
the motivations are less grandiose, but defensive and
greedy as ever, to avoid being targeted and taxed.
Let us look at George's third reason for
land-hogging: increased demand for land, and land-using
products, resulting from higher incomes. George doesn't
say it, but we should note that these higher incomes come
in part from land itself, and are to that extent
self-generated, spiraling upwards with their own momentum.
Most home purchases, for example, are financed with the
help of the sale of a previously owned home. Thus the
demand for homes can keep rising, even though the hourly
wages of ordinary labor have been falling, in constant
dollars, since about 1975.
Land-generated incomes include two kinds of
"invisible incomes" that do not even appear in most data,
even though they are huge. One kind is capital gains,
so-called. These are mostly untaxed, thanks to dozens of
loopholes, and even those few that are taxed do not appear
in the national income accounts. Scriveners in the
Department of Commerce carefully snip them out. Washington
pols are fully aware of them, nonetheless. They brag on
them, and join the banks in urging homeowners to borrow on
them, and spend, to do their patriotic duty to stimulate
the economy. They just keep them out of the official
numbers. The amounts are so large they might give people
ideas about taxing them.
Many "capital" gains are simple land gains, from
the unearned increment to land values. Georgists are
sensitized to such gains, and should be on the warpath to
keep them from getting preferential tax privileges. There
is another kind of land income that the law calls a capital
gain that is less obvious and less well-known, but very
large. That is the excess of sales price over "tax basis,"
when one sells "income property." It works like this. "B"
buys an income property from "A". The cash-flow (revenues
less current expenses) is taxable income, except that B,
each year, can write off a fraction of the price from
taxable income, calling it "Depreciation." The part not
yet written off is called the "Basis." B generally manages
to write off part of the land value, too, because the IRS
is totally lax in guarding against that - never mind that
the land is actually Appreciating, not Depreciating. After
a few years, at her convenience, B sells to C, at a price
much greater than the remaining tax "basis," after all the
depreciation, of the income property.
Enter the tax on capital gains. There is now a tax
due on the excess of what C pays over the remaining basis.
This is called "recapture" of the excess depreciation.
That sounds comforting and fair, but it isn't. A)
recapture comes several years after the depreciation was
written off; B) with tax rates falling, recapture comes at
a lower tax rate; C) recapture is in dollars of lesser
value than the earlier excess depreciation; and D)
recapture is defined as a capital gain. By this
legerdemain, the ordinary rents of commercial property show
up, if at all, as capital gains. Thus they get a still
lower tax rate, plus all the other loopholes available to
defer or avoid all taxes on capital gains.
Make your blood boil? If not, you must have missed
something. Yet, the story gets worse. "A" has already
done this once, before selling to B; B sells to C who now does it again, then sells to D who
does it again, and so on, until the building collapses.
The net result is that the income properties of the
U.S.A., worth trillions of dollars on the market, are
yielding almost no net income at all, according to the
keepers of the national income and product accounts (NIPA).
They borrow their numbers on this matter from the IRS, and
then excise the capital gains. As Michael Hudson writes,
NIPA scribes evidently believe that commercial property is
being run as a great charity. That should help us
understand why so many powerful pols are so eager to untax
capital gains. It is the only tax that is paid on the
ordinary income from real estate, the great source of
campaign contributions.
Are our leading economists wise to this?
Remember, the NIPA accounts omit all items that Congress
has defined as "capital gains," and most commercial rents
are converted to that form. It would appear the economists
are not aware, because many of them, when asked whether
land can yield significant revenue, look at these same NIPA
accounts, note the small share of income from rents, stop
looking, stop analyzing, stop questioning, and declare ex
cathedra that land rents, and therefore values, are
trivially small. I could name names, but just look at the
donors behind the prominent think tanks and universities
whose staff pontificate on economic issues. Meantime, this
untaxed land income is a major source of demand for more
land. That's why they can afford it, and bid it up, while
you cannot.
Now for the second kind of invisible land income.
This is the imputed value of owner-occupied land. Congress
does not include this in taxable income, but lets owners
deduct the interest and property taxes paid to acquire and
hold such land. The NIPA scribes do, however, make a stab
at including it in national income. The stab is weak for
several reasons:
- NIPA includes only one residence to a family.
Many middle-class Americans own at least one vacation home;
many rich ones own several, each in a prime location. In
Pitkin County, CO (Aspen), most of the property tax bills
are sent to out of state addresses (like that of Ken Lay in
Houston); likewise in the San Juan Islands of Puget Sound,
and hundreds of other prime resort areas. Rich aliens,
with primary residences offshore, own many of the condos
and coops on and near Park Avenue, Manhattan.
- NIPA calls it "housing." That betrays the fact
that they make little effort to include land, separate from
buildings.
- NIPA omits the vast and growing areas used for
hobby farming, riding to the hounds, breeding race horses,
blood sports, sport fishing, winter sports, water sports
and sailing and joyriding, country clubs with golf and
tennis, parking, polo, cemeteries, parks, habitat, ATVs and
snowmobiles, hiking, privacy, protecting views, excluding
unwanted neighbors, breeding show cattle, shoreline and
marina access, private ponds, ... it goes on and on, longer
than catalogues from L.L. Bean and Eddie Bauer and Troybilt
Brushcutters, which serve this constituency.
- NIPA almost certainly undervalues even the
primary residence that it does count. Everyone else does,
why shouldn't NIPA?
When an owner dies, the capital gain is declared
untaxable forever (aka "the angel of death provision"). If
the owner sells before dying, the first $500,000 of gain is
untaxed, for a married couple. Nice folks, those IRS
people - if you're a landowner, and married.
It's not just examples like those above. Let us
look at how affluence affects consumer choices. We
substitute golf for billiards and pool and cards; motoring
for biking; ATVs for hiking and jogging; travel to luxury
resorts for tending our own gardens at home; jet and
private aircraft for passenger trains; private
one-passenger cars for buses and trolleys and ferries;
skiing and snowmobiles for skating and snowshoeing;
powerboats and yachts and jet-skis for swimming, canoes,
and sailboats; irrigation for natural rainfall, and lavish
careless flood irrigation for conservationist drip
irrigation; soil depletion for contour farming, terraces
and laborious husbandry; chemicals and mines for organic
fertilizers, which then become pollutants; pesticides for
biological and integrated pest management; herbicides and
polluted runoff for cultivating and weeding; upstream
mining and land-raping for downstream processing and
recycling of materials into products; urban sprawl for
renewal and recycling of central sites; air conditioning
for wider eaves and double glazing; and so on.
Then we feel crowded, pressing on the limits of the
earth, a la Malthus. Looking to place blame, we hit upon
the poorest immigrants, huddled six to a room in crowded
shacks in Santa Ana and Arvin, commuting by foot or bicycle
or farm labor bus, and we beef up our border patrols. Is
this balanced thinking and judgment?
It is not just affluence that drives such waste, it
is public policy that, with remarkable wrongheaded
consistency, subsidizes the wasteful while taxing the
thrifty and conservationist choices. It's not just the
lust for gold, it's the gold that feeds the pols who feed
the lust. What can break into this vicious circle of lust
and greed? If you can think of something better than a
strong Georgist movement, wake the town and tell the
people!
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Prof. Mason Gaffney may be emailed at m.gaffney@pe.net