It’s Time to Give Up on Solving ‘Income Inequality’

Anyone who needs a reason to retire the term “income inequality” need only look to the Institute on Taxation and Economic Policy (ITEP), which recently released its fifth edition of its “Who Pays?” report on the impact of state taxes on household incomes. As with previous years, it dispiritingly finds that most states’ taxation structures are regressive, which means poor and middle-income households pay a higher proportion of their incomes in taxes than the highest earners.

As for specific taxes, the ITEP concludes that income taxes, particularly on individuals and corporations, are the most progressive, while sales and excise taxes are the most regressive. On property taxes, sandwiched between the two, the report states:

Overall, the property tax is a regressive tax.

What the ITEP is saying, in other words, is that taxes on property fall hardest on households that don’t own property. If this sounds like nonsense to you, it’s because it is. Usually we think that taxes fall first on that which is being taxed, so households and businesses with lots of property ought to be paying the bulk of state property taxes. Or, as economist Mason Gaffney wrote in his 1971 paper, “The Property Tax Is a Progressive Tax” (pdf), “To own property is to be rich, in the measure that one owns, and to tax the quality of richness should not be presumed to burden the poor more than the rich.” The ITEP begs to differ.

So, how does it justify its position? Take a look at its chart:

 

ITEP--Comparing Types of Taxes

Notice that the ITEP is measuring the impact of these taxes against household incomes. As a result, it should come as no surprise whatsoever that it finds income taxes to be the most progressive: The ITEP assumes its very conclusion. But as we all know, some high-income people own very little property, and some people with substantial real estate have very little income. By structuring its analysis the way it has, the ITEP unwittingly (I hope!) advocates that we excuse the very wealthy from paying the kinds of taxes on their wealth that are hardest to evade—and are most just to collect.

By contrast, using property as the independent variable makes the property tax progressive: Wealthy households and corporations own lots of valuable property and so they shoulder more of the tax burden. Wealthy people also vicariously own more real estate than the poor, and often in ways that are difficult to detect, like participating in wealthy, untaxed nonprofits. What percentage of private golf course members are renters?

Moreover, if you assess the impact of income taxes on property owners, there’s a strong chance that you would find that the income tax is regressive. Why? It’s not just that some big landowners have low incomes; rather, many landowners own property in states they don’t even live in, making the ITEP’s state income tax estimates even less useful. It’s hard to see why productive local working shlubs should pay income taxes while foreign landowners don’t.

Obviously we can play this game of switching dependent and independent variables to make most taxes appear progressive. I’m sure the entities with the largest consumption expenditures also pay the most in sales and excise taxes, so it’s necessary to explain why property ownership should have primacy. Here are a few reasons:

One, the land value component of real estate is not created by landowners, and if you don’t believe that show me how landowners increase the price of vacant lots. Land value is a spontaneous surplus, so taxes on it do not reduce production or cause unemployment. Just about every honest economist since Adam Smith has recognized that taxes on land are taxes on monopoly incomes, so they do not raise the price of renting land and are wholly absorbed by the monopolists. There are many, many, additional compelling reasons to favor land value taxes.

Two, the leftover portion of the property tax that falls on buildings is split between landowners and land users. In cities that hamper construction with excessive zoning or historic preservation, the stock of buildings becomes fixed like land is, so the property taxes are again absorbed by the owners as a monopoly tax.

Three, corporate inversions cannot reduce property taxes, nor can real estate be hidden abroad. There are assessment issues, but these are trivial compared to expecting people to tell the government how much money they actually make.

So why does the ITEP nonetheless caution that “a portion of the property tax on rental property is passed through to renters in the form of higher rent — and these taxes represent a much larger share of in­come for poor families than for the wealthy”? Let’s forgive it for sloppily equivocating the word “wealthy” with “high income.” One possible answer is that the ITEP is simply wrong on the theory and is further persuaded of its wrongness on account of its lazy methodology that finds property taxes to be regressive for high earners.

Another answer is that the ITEP is fear-mongering: You can’t escape property taxes even if you’re not directly paying them. Ooh, scary. (Curiously, the ITEP doesn’t terrorize anyone over income taxes’ deadweight losses due to higher labor costs.)

The response to anyone scaring you over secret rent payments to the government is … Unless you’re living on bare land with no value, you must pay rent to benefit from our highly productive society. This isn’t some nefarious conspiracy; it’s a non-negotiable facet of capitalism. Everyone pays rent.

Everyone, that is, except people who own lots of property and pay comparatively little for it in taxes, like John C. Malone, who owns 5 percent of Maine (44th most regressive according the ITEP’s state rankings) and just avoided $200 million in personal income taxes to the federal government. (Who knows how much his state of residence would’ve gotten.) These lucky duckies get a break thanks to income tax payers, and they can certainly afford to find ways to escape their own income taxes as Malone apparently did.

Once it’s clear that income taxes are welfare checks to the propertied elite, it becomes obvious that they cannot solve our society’s distributional problems. If anything, the ITEP’s muddled report suggests that income taxes trick people into thinking that high incomes in themselves cause those distributional problems, leading to the authoritarian solution of equalizing incomes. So let’s give up on “income inequality” and instead focus on financing government with taxes on property, or better still, non-producible assets like land value.

3 comments

  1. Property taxes *may* be a tax on *being* rich.

    (But how do you want to view *debt*-financed mortgages…mortgages behind the vast majority of US residential properties? Are you rich if you’ve borrowed 80% of the ostensible – and eminently volatile – value of your home?)

    But income taxes definitely *are* a tax on *becoming* rich.

    Wonder who really finances ITEP.

  2. If you’re going to tax (and ethically you shouldn’t, you should instead rely on user fees and dues) then you should first collect the values that society as a whole generates — like the value of locations — before even considering touching the values that individuals create — like the value of buildings, businesses, and jobs.

    Do that, and everyone would prosper much more than now, you’d make economies so efficient. Technically, you’d not shrink your tax base (as do income taxes) but you’d grow it. Your land dues or land taxes would discourage speculation in land and encourage development of land (to pay the charge), so your “tax base” would actually grow.

    What would you do with so much public money? Share it! Pay resident voters a dividend. Heck, all the money we spend for land and resources is a common wealth since nobody made them and everyone makes them valuable. And then you won’t have to worry about regressively and income inequality at all. Higher land values would just mean fatter dividends. More at Progress.org.

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