Wall St.'s Next Profit Scheme -- Buying Up Every Piece of Your Home Town
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School teaching is an exhausting occupation. That is one reason why teachers are one of America’s strongest labor unions. Their wages have not risen as fast as their expenses, because they have agreed to take less income in the short run in order to get pensions after their working days end. These contracts are now under attack – to pay bondholders. States and cities are now insisting that bondholders cannot be paid without stiffing their labor force.
So we are now seeing the folly of untaxing property and replacing tax revenues with borrowing – paying tax-exempt interest to the nation’s wealthiest bondholders. Cutting the property tax base thus finds its twin casualty in the wave of defaults on pension promises.
Real estate taxes have plunged from two-thirds of urban revenues in the 1920s to just one-sixth today for the United States as a whole. Federal grants-in-aid also are being cut back, and state aid to the cities is following suit. But instead of making housing more affordable, these tax cuts have “freed” rental value from the tax collector only to end up being paid to the banks.
Here too, California has led the way. In 1996 its voters approved Prop. 218, requiring any new tax, fee or property assessment to be approved by two-thirds of voters. (A few exemptions were made to keep local sewer and water systems viable.) This stratagem “starves the beast,” with the “beast” being public infrastructure and social services. Police forces are being downsized and social programs are cut back. And as urban poverty increases, crime rates are rising, imposing an “invisible” cost of living.
The most important economic fact to recognize is thus that whatever the tax collector relinquishes tends to be capitalized into mortgage loans. And by leaving more rent available to be paid as interest, cutting property taxes obliges homebuyers to go deeper into debt. Lower property taxes thus mean higher housing prices – on credit, because a home or other real estate is worth whatever a bank will lend to new buyers. So by capitalizing the after-tax rental value into a flow of interest, bankers end up with the rent – and hence, with the property tax cuts.
That is what a free market means today – income created by public-sector investment, “freed” to be paid to banks as interest rather than to be recaptured by government.
Most urban revenue is a free lunch created by taxpayer-financed roads, schools, sewers and water systems. But neither real estate speculators nor their bankers believe that this investment by taxpayers should be recovered by taxing the increased site values created by providing these public services. Instead of making the public sector self-financing as it expands public services to create wealth, private owners are to get the benefit – while banks capitalize the gains into larger mortgage loans, which now account for 80% of bank credit.
The core of the bankers’ “false consciousness” – the cover story with which Tea Party lobbyists are seeking to indoctrinate U.S. voters – is that taxes on land and financial assets punish the “job creators.” Going on the offence, the beneficiaries of this public spending claim that they need to be pampered with tax preferences to invest and employ labor, while the 99% need to be kicked and prodded to work harder by being paid low wages. This false narrative ignores the fact our greatest growth periods are those in which U.S. individual and corporate tax rates have been highest. The same is true in most countries. What is stifling economic growth is the debt overhead – owed to the 1% – and tax cuts on free lunch wealth.