Monday, September 27, 2010

land value taxation and the ECCA closure debate: oligarchs in the shadows?

In a comment to my last post about land value taxation, Edmonton Journal columnist David Staples asked me a few follow-up questions of the sort that one would one expect from any good journalist. A good journalist is, of course, an invaluable aide to any politician or pundit who has some useful policy ideas but is short on charisma, eloquence, or just ability to speak plainly and concisely, since the journalist can take the idea, add the missing eloquence, concision, and straightforward presentation, and then present the concept to the public for mass consumption. I'd make a few more asides about the relationship between good journalists and politicians who are long on charisma and eloquence and short on policy substance, but that's an extended topic in itself I'll leave for another day.

So without further ado (I've edited or ignored a question or two; the first lesson successful political candidates learn is to not answer the questions they are asked, but rather the questions they prefer to be asked to the extent that it is possible to do so without getting called on the evasion):

You don't tax the building, just the land, is that it? And you tax the land based on what exactly?

Yes, a given plot of land would be taxed the same by the city regardless of whether there was a skyscraper on it or a dilapidated old shack. The tax payable would be determined by the market value of the land. Just how the market value of the land would be determined could be complicated; suffice to say that this paper attempted to do so and concluded that, for example, for the average property transaction in Clareview a decade ago, 35% of the sale price reflected the value of the land.

Who will pay more and who will pay less under this system?

To continue with that 35% example, if I were a property owner and city assessors concluded that, based on a hypothetical sale of my property at market value, more than 35% of the value I would receive would represent land value, I would pay more. A typical owner who would pay more would be the owner of a single detached bungalow, especially if the building was run down. A typical owner who would pay less would be a high rise condo dweller.

How will it drive people to live in the inner city? Examples?

Offered examples are typical hypothetical since the case for land value taxation hasn't been as developed as an empirical argument as much as as a theoretical one.

By far the biggest and most contentious hypothetical example in the Edmonton context is the city centre airport lands. One of the biggest arguments for closure of the ECCA concerns the opportunity cost of not having more dense development there. Under land value taxation, the marginal tax cost of throwing up a residential high rise or commercial skyscraper on what is now a runway would be zero. These buildings will be more competitively priced to potential occupants than, say, a suburban bungalow (the market will capitalize the present value of a bungalow lot's future tax liability into its sale price).

To leave aside these questions to make some observations about the ECCA debate, note that instead of advancing a call for land value taxation, which would support closure of the airport if it were straightforwardly efficient to do so, most of the advocates for closure have instead called for closure by city council decree. For a lot of people like me who are naturally skeptical of centralized government planning, we are suspicious of the numbers arguments that have been trotted out in defence of the decree. Are costs being fully accounted for? Do the pro-airport councilors really want the buildings, or the tax revenue they hope the improvements would generate? Convert the land to high density residential and, yes, at first glance this should obviously generate a lot more tax revenue for the city than the status quo, but absent tax reform the increased revenues are coming from improvements to the land, an elastic source, and whenever elastic sources are taxed dynamic scoring is required. There is a feedback loop, in other words, that makes any definitive analysis quite complex.

Amidst this complexity and uncertainty, questions about how the incumbent council can come to a definitive disinterested conclusion arise. In 1990, for example, many economists wrote to Mikhail Gorbachev, advising him that "[w]hile the governments of developed nations with market economies collect some of the rent of land in taxes, they do not collect nearly as much as they could..." Land value taxation was nonetheless not adopted in the wake of the collapse of the Soviet Union, because it wasn't in the interests of the would-be oligarchs:
...a least distorted way for Russia to recover was by a tax on economic rent, that is, the value of land and natural resources that exists independently of labor and capital investment. The aim is to untax industry and labor, and make Russia's natural resources monopolies finance the government. But these are precisely the assets that Yeltsin's kleptocrats were the first to grab.

Sunday, September 26, 2010

election in E-town: land value taxation vs what's interesting

A blogpost about an election next month in Alberta's capital city may not interest all readers, so I'll first make some observations about policy that would apply to all municipalities before making some snarky remarks about some of the more colourful candidates in Edmonton.

Whereas shifting the tax burden off of investment (most directly, off of business) on to consumption, especially consumption that creates a negative externality (e.g. environmental damage), is the perhaps the most popular policy prescription of economists at the macro level, at the municipal level the call is for land value taxation.

According to Canadian economist and Nobel Prize winner William Vickrey:
removing almost all business taxes, including property taxes on improvements, excepting only taxes reflecting the marginal social cost of public services rendered to specific activities, and replacing them with taxes on site values, would substantially improve the economic efficiency of the jurisdiction.
In other words, aside from tax revenue that can be roughly categorized as user fees, taxes on real estate improvements ("one of the worst taxes", in Vickrey's words) should be minimized in favour of taxes on site value "("one of the best taxes").

Vickrey is not alone here. Others have claimed that
Economic theory and, to a lesser degree, empirical evidence support the claim that taxing land values instead of wages, profits, or capital values would improve economic performance and could improve people’s lives. (p. 10)
Indeed, 7 other Noble Laureates besides Vickrey have endorsed the idea, although one should be careful about transferring the authority that a Nobel Prize implies in a particular field of economics to another field, case in point being Vickrey's dubious defence of large budget deficits. Vickrey may be a hard-core Keynesian, but on the merits of land value taxation, Milton Friedman agrees with Vickrey: "the least bad tax is the property tax on the unimproved value of land, the Henry George [right] argument of many, many years ago."

Note also that the benefits of a location well served by civic services and public infrastructure will be capitalized into higher land value such that the revenue returned to the government by site value taxation is proportionate to the added economic value generated by its services.

If a land value tax system were implemented, the tax payable of property owners would change according to the proportion of the property's value attributable to land. According to a study of a decade ago titled "Implementing a Land Value Tax in Urban Residential Communities," property sales in the Edmonton neighbourhood of Clareview suggested that, on average, land represented 35% of sale value.

A half-way house towards a shift to a land value tax is split rate taxation, whereby the tax rate on the value of the land is set significantly higher than that on improvements. According to a 2003 study, more than 700 cities around the world use a split-rate property tax system. In North America, however, the land value tax idea has seen little implementation.

Now how does this relate to the election in E-Town on October 18? Money issues are not everything, of course (consider the fact that statistics showed a drop in west-end crime because of the work of volunteers from the Beulah Alliance Church), but taxation does matter and moving to land value taxation would stimulate urban core development while preserving the environment and reducing urban sprawl. The candidates who have talked most loudly about the value of these objectives, however, have typically done the most to undermine them by supporting higher property tax rates, especially on businesses (which include non-owner occupied condos and hotels, which would have amongst the highest building to land value ratios) relative to single family residences (which would have amongst the lowest).

At 1:34 of the video below, you see councilor Don Iveson contending that more spending on transit would encourage more people to move into the city centre, his logic being that more municipal government spending would increase incomes. Why this increased income wouldn't be spent on housing in the 'burbs, or where this additional money for transit is supposed to come from, isn't explained.

What's particularly galling is that in the process of getting on city council, Iveson took out Mike Nickel, the one candidate in recent years to take issue with the prevailing policy that sees businesses pay higher tax rates than individuals.

I'd give Iveson due credit for running a campaign 3 years ago that up-ended an incumbent, but I think that the significance of that campaign has been rather oversold. To begin with, Iveson "lost" to incument Bryan Anderson. It just so happened that at the time a 2nd place finish still got one a seat at the council table. As Alex Abboud has noted, had the new ward system been in place in 2007, Iveson would have lost to Anderson in the new Ward 10 that Iveson is currently running in, and in the more southerly new Ward 9, which constitutes the rest of the bulk of the old ward, Iveson would have finished third (30% Anderson, 28% Nickel, 25% Iveson). The straightforward explanation for why Iveson beat Nickel is that Iveson was ideologically left, Nickel right, and everything north of the Whitemud, and especially north of 61 Ave, between Whitemud Creek Ravine and the river (on the west) and Gateway Blvd (on the east) tilts left, getting even more left as one progresses north to the U of A campus and the river, such that in the far north of the old ward that is now Ward 8, Iveson swamped Nickel 38% to less than 15% (with Anderson taking 27%).

The lesson from this is that in 2010, the only incumbent in any serious danger is Tony Caterina in Ward 7. Whether one looks at provincial voting patterns or federal, it's clear that Caterina, as a former Alberta Alliance candidate, is out of step ideologically with the Alberta Avenue area he is running in, his general reasonableness notwithstanding. Brendan van Alstine has been campaigning for a very long time now, and the Iveson case suggests that whether he fits with the area's ideological lean is quite likely more important than the campaign. Scott McKeen is also running here, and although normally someone who throws his hat in the ring so late in the game is unlikely to win, McKeen might have started fund-raising and door-knocking long ago, with him keeping it on the QT in order to remain the Edmonton Journal's salaried civic affairs reporter for as long as possible.

I'm actually going to be living in Ward 7 until the end of October - I met van Alstine and one of his campaign people when he was out with his dog on 118 Ave Thursday evening - but legally I've remained resident at my parents' place in Clareview for years, such that if I was going to vote it would have to be in Ward 4.

In Ward 4 we've got a Satanist in the candidate mix, which has attracted criticism to such a degree that you'd think he was in league with the Devil or something. The candidate's unforgivable sin is rather his profanation of the Queen's English. Now maybe Mr Robb (photo at right) is correct that "the contraversial closure of the ECCA... will result in huge property tax increases, many deaths, and destruction of a historic site" and maybe he isn't. But what is most certainly not correct is having the first letter of the alphabet represented twice in "controversial." And as for describing the airport closure as "a blantant disregard for democracy," is not the combining of the word "blatant" with "bland" a watering down of the alleged blatancy? Also running in Ward 4 for "city councel" is Ken Atkinson. "Councel" might be more tolerable here if Mr Atkinson hadn't managed to use the dictionary spelling elsewhere on his blog. I mean, you'd think that with two variant spellings, he'd have cause for pause and a bit of a think about which of the two variants he's going to run with.

UPDATE (Sept 27):

In response to a comment this post continues on the matter of land value taxation.

Saturday, September 18, 2010

the marshmallow test

Discipline is the price of freedom.
In the late 1960s, a Stanford psychology professor left a succession of 4-year-olds in a room with a bell and a marshmallow. If they rang the bell, he would come back and they could eat the marshmallow. If, however, they didn't ring the bell and waited for him to come back on his own, they could then have two marshmallows. Film of the kids showed some of them squirming, hiding their eyes, or turning around so that they couldn't see the marshmallow. Some of them ate the marshmallow immediately. Others rang the bell within a minute. About 30% delayed gratification for the full 15 minutes that passed before the researcher returned.

Years later the researcher, Walter Mischel, suspected from stories he had heard about the subjects later in life that there was a relationship between waiting for the second marshmallow and future academic performance. In the 1980s Mischel sent out questionnaires to all the reachable parents, teachers, and academic advisers of the 653 subjects who had participated in the marshmallow experiment, who by then were in high school. He found that the child who could wait fifteen minutes had a SAT score that was, on average, 210 points higher than that of the kid who waited only thirty seconds. Researchers continued to track the subjects into their late 30s and also found that low-delaying adults were more likely to be overweight and more likely to have had problems with drugs.

The implications of what has become known as the "marshmallow test" are significant. As cerebral conservative pundit David Brooks has observed, "[i]f you're a policymaker and you are not talking about core psychological traits such as delayed gratification skills, then you're just dancing around with proxy issues." Yet earlier this week when Brooks lamented the current state of America - "The nation is overconsuming and underinnovating" - he saw many self-described political conservatives as part of the problem: "[i]f Republicans decide that even the smallest tax increases put us on the road to serfdom... the country will careen toward bankruptcy."

Some time ago a commentator responded to my flogging of the HST issue to state that conservative opposition to the HST "has nothing to do with the merits of HST and everything to do with restraining the growth in government." If, with no small indulgence, we were to assume that the HST reform were not revenue neutral but a revenue raiser, the difference between the enacting the reform and not enacting is still not the difference between big government and small but but between big government and big government with a deficit.

The "starve the beast" doctrine has been discredited by the record of self-identified conservative governments in office. Early last year, Andrew Coyne noted that, in Canada,
[Our "conservative" government has put us] on course toward a massive and permanent increase in the size and scope of government: record spending, sky-high borrowing, and—ultimately, inevitably—higher taxes. And all this before the first of the baby boomers have had a chance to retire.
Since 2000, federal spending per Canadian in inflation-adjusted dollars has risen more than a third. The US government has also hardly been the picture of restraint these past ten years, despite Republicans controlling all of the House, Senate, and Presidency for much of the decade.

I'll repeat the point for emphasis: smaller government is realized by smaller government, not lower taxes. Cut taxes, in particular consumption taxes, and all that one has done is move total consumption, private and public, forward in time, the exact opposite of what is, or was, understood to constitute fiscal discipline.

There is, in fact, nothing particularly magical about China's meteoric growth. The country's consumption/investment ratio is massively skewed towards investment relatively to "the West." And the Chinese government understands this, which is why the currency is deliberately undervalued: consumption is more expensive (imported consumer goods cost more) while investment is cheaper (demand for the exports produced by more property, plant, and equipment is higher). A cheap yuan is a transfer from Chinese consumers to Chinese producers, the very business-friendly move that invites the hostility that drives opposition to the GST/HST in Canada and provides popular support for the USA's sky-high corporate tax rates in combination with low or no value-added taxes.

Fortunately, many Americans are alive to the fiscal reality that their government is in. A Deficit Commission has been proposed and designed to be as politically unaccountable as politically possible, since otherwise its recommendations would be watered down if not outright ignored. Republican Senate leader Mitch McConnell (left) was an outspoken proponent of the Conrad-Gregg deficit commission ("We must address the issue of entitlement spending now before it is too late. As I have said many times before, the best way to address the crisis is the Conrad-Gregg proposal...")... until it came time to actually vote on it. McConnell's excuse? "Our problems are not a result of taxing too little, but of spending too much." As Fred Hiatt noted at the time, McConnell "was happy to claim fiscal responsibility while beating up Obama for fiscal recklessness. But when Obama endorsed the idea... and when the commission actually, against all odds, had the wisp of a chance of winning the needed 60 Senate votes - McConnell bailed." The incident is but an example of how efforts to avert the public's gaze from the marshmallow by moving a policy decision a step back from the immediacy of electoral review are typically denounced most loudly and ferociously by populist self-identified conservatives.

Earlier this week the Tea Party was celebrating in Delaware, as Congressman and former Governor Mike Castle lost the Republican Senate nomination to Christine O'Donnell. Charles Krauthammer called Sarah Palin's endorsement of O'Donnell "reckless and irresponsible," while Delaware GOP chairman Tom Ross observed, "I could buy a parrot and train it to say, ‘tax cuts,’ but at the end of the day, it’s still a parrot, not a conservative." EJ Dionne at the Washington Post dubbed Ross' remark his "favorite line of this election season" and I agree: at issue here is a hijacking of the conservative label to reduce it to self-indulgent tax cuts. Back in 2002 and 2003, when a group of influential self-styled conservatives advanced the argument that invading Iraq would usher in an age of peace and harmony to the Middle East, most observers at least recognized this sort of thinking as so far from the traditional "conservative epistemology" - i.e. skepticism about grand claims that state action will bring about a better, more liberal world - that they at least assigned the prefix "neo-" to these "conservatives." Today, a person wanting to buy a Ferrari, and wanting it now, can stand up and demand a tax break on his indulgence (it's invariably a call for a personal tax break as opposed to a break for business in general) and somehow get unqualified trademark rights to "conservative." North American society as whole has flunked the marshmallow test and, in the wake of a fiscal crisis precipitated by debt-financed over-consumption, has responded by looking around for an authority figure to blame, as if the consumer debt friendly policies that exacerbated the problem were not the result of office-holders being over-responsive to the demands of the electorate.

It was not that long ago that Jane Austen's books were back in vogue, as North Americans alienated by the culture of consumption were stirred to feelings of, dare I say it, conservative nostalgia. As Mr Knightley advised, "There is one thing, Emma, which a man can always do, if he chooses, and that is, his duty; not by maneuvering and finessing, but by vigour and resolution." The concept of duty, to entities above and beyond oneself, like the next generation, was once a fundamentally conservative value. It could be again.
Men are free when they are obeying some deep, inward voice of religious belief. Obeying from within. Men are free when they belong to a living, organic, believing community, active in fulfilling some unfulfilled, perhaps unrealised purpose. Not when they are escaping to some wild west. The most unfree souls go west, and shout of freedom. Men are freest when they are most unconscious of freedom. The shout is a rattling of chains, always was.
- DH Lawrence

Sunday, September 12, 2010

media management

In my last post, I called attention to BC Finance Minister Colin Hansen's statement, "the most important piece of information ... was a chart that shows the marginal effective tax rate on investment province by province..."

What's interesting about corporate tax policy is that even the left wing is often supportive if they are informed and independent (the writers over at are generally quite informed but most appear to be on a union payroll such that they have to frequently resort to an appeal to the "class struggle" to plug the gaps). For example, Ezra Klein allowed his blog to be used by a guest writer who observed that
The U.S. corporate income tax rate -- at 39 percent, it's the second highest in the developed world after Japan's, and Japan's may be about to drop -- is counterproductively high. It's probably the only tax in the U.S. these days that's conceivably on the wrong side of the Laffer curve; if we lowered the rate, we might take in more money.

But introducing the business-friendly HST to BC has been a public relations disaster for the BC government, which has led me to wonder what role the media played.

In Alberta during in the last few weeks complaints from the Wildrose party about how the Speaker of the provincial legislature (a member of the government caucus) was treating them appeared in the news. If the comment threads are any guide, a lot of people were (initially) of the opinion that Wildrose should just follow the rules. But a day or two later, after the media had talked to former Speakers and a political science teacher and reported their views, public opinion (amongst the segment aware of the reports) shifted to a clearly unfavourable view of the current Speaker's actions. The "trick", of course, was to be onside with informed opinion, such that when the media took up its obligation to inform by going out to collect informed opinions to relay, the desired result was achieved.

But what if the media doesn't do anything? Can a media outlet be biased through inaction?

I think the answer is clearly yes. But one of the ironies, if you will, is that the more even-handed and "responsible" the media is, the more likely it is to be ignored by the general public. “I’m not a journalist,” Glenn Beck (right) said in a June 2009 interview with GQ, “If I wanted to be a journalist, I would be Charlie Rose and bore the snot out of people and have fourteen people watching me." Beck knows what the customers of newsmedia want. His ratings almost doubled in 2009 alone. MSNBC, whose primetime lineup is the left wing answer to FOX, has also done relatively well such that last year CNN fell behind MSNBC with the 25-to-54-year old demographic in prime time. Fox News, for its part, overtook CNN in early 2002 and has long since left CNN in the ratings dust, since as of May 2010 the conservo-populist channel had three times the an average daily prime time audience of CNN. By August of this year, CNN's monthly primetime audience had slipped to a 10 year low, with 5 of its 10 lowest months for the previous ten years having come during 2010 despite just 8 months of the year having passed.

The reality is that media has learned that adding more ideological talk show hosts to prime time and shedding dissenting voices is the ticket to greater audience. "Fair and balanced" may sell as a marketing line, but not as a matter of substance.

Wednesday, September 1, 2010

HST in the news again

According to the BC Hansard, last November 23 Finance Minister Colin Hansen (right) said that "...the most important piece of information that I saw in the middle of May was a chart that shows the marginal effective tax rate on investment province by province..."

What I find interesting about this is that that chart was generated by Finance Canada as opposed to Hansen's own department. I have included such a chart in my own blogposts before, and I took it directly from the federal department's website. Indeed, in response to a question about the chart's origin from NDP finance critic Bruce Ralston, Hansen stated that "the table .... was prepared by the federal Department of Finance." This was a federal initiative that the province happened to find convincing.

Of current interest to most British Columbians, however, are portions of the rest of the exchange that November afternoon between Hansen and NDP finance critic Bruce Ralston:
Hansen: ... we were [not] in discussion with the federal government with regard to harmonized sales tax [at the end of March 2009 when Ontario announced its 2009 budget].

Ralston: ... from ... January 2009, until after the election ... there was no discussion either by the minister or his officials of the implementation of an HST. Is that the minister's position then?

Hansen: That is correct.... The very first indication that anyone in the federal government would have had that British Columbia was reconsidering its previous opposition to the HST was ... at the end of May. It was only subsequent to that that there were discussions that commenced at the officials level.

This week, emails between BC Ministry of Finance officials and Finance Canada were revealed which some media sources are saying "show that talks between staff in Ottawa and Victoria began on March 26, 2009."

In fact that emails don't show that. On the afternoon of March 26 the acting ADM of Finance Canada's Tax Policy Branch, Louise Levonian, emailed all four provinces that had not indicated an intention to harmonize (BC, Sask, Manitoba, and PEI) saying "I am available to discuss." The BC Finance official who received the email, Glen Armstrong, had earlier advised other BC officials that Levonian had indicated that she was available for a meeting the next day "if we think we need a meeting." There is no indication that any such meeting occurred. Levonian emailed Armstrong again on May 11, the day before the BC election, and Armstrong responded with a substantive question, but even if that minimal exchange constitutes "discussion", this occurred in mid-May, contrary to the media claim that "talks ... began on March 26." Furthermore, Armstrong's response to Levonian's email is hardly evidence that "British Columbia was reconsidering its previous opposition to the HST" coming as it did from an official whose job it is to keep on top of his files as opposed to a politically responsible minister.

With respect to discussion internal to the BC government, I'd first note that internal discussion does not contradict Hansen's remarks, above. It is true that on March 27 Armstrong sent an email to another provincial official saying that the minister should be given an updated brief on harmonization issues in light of the Ontario experience. There is, however, no evidence (in these emails) that the minister solicited this. The memo, or an update to it, may be seen as part of the ministry's general responsibility to keep its minister briefed on the developing issues the ministry identifies.

This isn't to say that there isn't a real issue when a political party makes a major policy move shortly after forming government that it had not campaigned on. It is rather to say no significant evidence has yet been revealed that indicates that the BC Liberals were planning to implement the HST and just hid those plans during the campaign. Minister Hansen's contention is that after the election it was then time to think about long term policy and a consequence of that think was the HST. I see no reason to doubt that aside from the natural cynicism that one may reasonably have about politicians and politics in general. If I am not inclined to indulge that cynicism it is because I have worked on the inside of a finance ministry and seen the extent to which the general public is inclined to a conspiratorial mindset that distorts perceptions of how policy is developed.

I do think the BC Liberals hurt the cause of investment friendly (and therefore consumption "unfriendly") tax reform by not at least musing about the possibility of harmonization during a political campaign. They could have done what Ted Morton has done in Alberta and mentioned it as something that warranted further study and that should not be ruled out. But the BC Liberals are not to blame for the FUD spread by Bill Vander Zalm and his NDP allies. Hansen made it clear that his government was getting about $5 billion in revenue with the old PST and will collect about $5 billion under the new HST regime such that it is a tax reform, not a tax hike.

There was a time when it was the political left that had little time for abstraction, laying charges like "that's racist" or what have you based on an immediacy of perception such that appeals to sophisticated argument at all removed from subjective, unfalsifiable "feeling" were summarily dismissed. Today it is the ascendant political right that has no time for concepts that cannot be reduced to a slogan. Self-styled "conservatives" have hijacked and even destroyed essential conservatism by upending its traditional emphasis on responsibility in favour of a self-indulgent demand for tax cuts. Spending cuts are an afterthought, and on the rare occasion when meaningful attention is paid, the typically "conservative" conclusion seems to be that it is spending that affects others, like the young, that should be put on the chopping block. The locus of reference remains circumscribed to me, myself, and I, which I could sympathize with as someone who salts his communitarianism with respect for the individual were it not for the fact that the reference point is not only metaphysically constrained but chronologically constrained: what's good is good for me AND good for me NOW. Saving for tomorrow? That's so yesterday.