Nightcap

  1. Arnold Kling likes Larry Summers! askblog
  2. A stake in the heart of capitalism Douglas J. Den Uyl, Law & Liberty
  3. Friendship in pre-war East Asia: Lu Xun and Uchiyama Kanzō Joshua Fogel, JHIBlog
  4. The irony of modern Catholic history James Chappel, Commonweal

One weird old tax could slash wealth inequality (NIMBYs, don’t click!)

yesnoimputedrent

What dominates the millennial economic experience? Impossibly high house prices in areas where jobs are available. I agree with the Yes In My Back Yard (YIMBY) movement that locally popular, long-term harmful restrictions on new buildings are the key cause of this crisis. So I enjoyed learning some nuances of the issue from a new Governance Podcast with Samuel DeCanio interviewing John Myers of London YIMBY and YIMBY Alliance.

Myers highlights the close link between housing shortages and income and wealth inequality. He describes the way that constraints on building in places like London and the South East of England have an immediate effect of driving rents and house prices up beyond what people relying on ordinary wages can afford. In addition, this has various knock-on effects in the labour market. Scarcity of housing in London drives up wages in areas of high worker demand in order to tempt people to travel in despite long commutes, while causing an excess of workers to bid wages down in deprived areas.

One of the aims of planning restrictions in the UK is to ‘rebalance’ the economy in favour of cities outside of London but the perverse result is to make the economic paths of different regions and generations diverge much more than they would do otherwise. Myers cites a compelling study by Matt Rognlie that argues that most increased wealth famously identified by Thomas Piketty is likely due to planning restrictions and not a more abstract law of capitalism.

Rognlie also inspires my friendly critique of Thomas Piketty and some philosophers agitating in his wake just published online in Critical Review of International Social and Political Philosophy: ‘The mirage of mark-to-market: distributive justice and alternatives to capital taxation’.

My co-author Charles Delmotte and I argue that for both practical and conceptual reasons, radical attempts to uproot capitalism by having governments take an annual bite out of everyone’s capital holdings are apt to fail because, among other reasons, the rich tend to be much better than everyone else at contesting tax assessments. Importantly, such an approach is not effectively targeting underlying causes of wealth inequality, as well as the lived inequalities of capability that housing restrictions generate. The more common metric of realized income is a fairer and more feasible measure of tax liabilities.

Instead, we propose that authorities should focus on taxing income based on generally applicable rules. Borrowing an idea from Philip Booth, we propose authorities start including imputed rent in their calculations of income tax liabilities. We explain as follows:

A better understanding of the realization approach can also facilitate the broadening of the tax base. One frequently overlooked form of realization is the imputed rent that homeowners derive from living in their own house. While no exchange takes place here, the homeowner realizes a stream of benefits that renters would have to pay for. Such rent differs from mark-to-market conceptions by conceptualizing only the service that a durable good yields to an individual who is both the owner of the asset and its consumer or user in a given year. It is backward-looking: it measures the value that someone derives from the choice to use a property for themselves rather than rent or lease it over a specific time-horizon. It applies only to the final consumer of the asset who happens also to be the owner.

Although calculating imputed rent is not without some difficulties, it has the advantage of not pretending to estimate the whole value of the asset indefinitely into the future. While not identical and fungible, as with bonds and shares, there are often enough real comparable contracts to rent or lease similar property in a given area so as to credibly estimate what the cost would have been to the homeowner if required to rent it on the open market. The key advantage of treating imputed rent as part of annual income is that, unlike other property taxes, it can be more easily included as income tax liabilities. This means that the usual progressivity of income taxes can be applied to the realized benefit that people generally draw from their single largest capital asset. For example, owners of a single-family home but on an otherwise low income will pay a small sum at a small marginal rate (or in some cases may be exempted entirely under ordinary tax allowances). By contrast, high earners, living in large or luxury properties that they also own, will pay a proportionately higher sum at a higher marginal rate on their imputed rent as it is added to their labor income. Compared to other taxes on real estate, imputed rent is more systematically progressive and has significant support among economists especially in the United Kingdom (where imputed rent used to be part of the income tax framework).

This approach to tax reform is particularly apt because a range of international evidence suggests that the majority of contemporary observed increases in wealth inequality in developed economies, at least between the upper middle class and the new precariat, can be explained by changes in real estate asset values. Under this proposal, homeowners will feel the cost of rent rises in a way that to some extent parallels actual renters.

For social democrats, what I hope will be immediately attractive about this proposal is that it directly takes aim at a major source of the new wealth inequality in a way that is more feasible than chasing mirages of capital around the world’s financial system. For me, however, the broader hope is the dynamic effects. It will align homeowners’ natural desire to reduce their tax liability with YIMBY policies that lower local rents (as that it is what part of their income tax will be assessed against). If a tax on imputed rent were combined with more effective fiscal federalism, then homeowners could become keener to bring newcomers into their communities because they will share in financing public services.

Nightcap

  1. Poetic justice with Donald Trump Irfan Khawaja, Policy of Truth
  2. Love it or leave it: exceptionalism for dummies Ross Douthat, New York Times
  3. How not to be an arrogant prat Chris Dillow, Stumbling & Mumbling
  4. Rent-seeking during the slave trade Jose Corpuz, The Long Run

Nightcap

  1. That time Russians explored the world via flotilla Yelena Furman, Los Angeles Review of Books
  2. The origins of globalisation can be found in the deep past Daniel Lord Smail, History Today
  3. What it’s like to be a lawyer for the New York Times Preet Bharara, New York Times
  4. Capitalists, not socialists, pose the greatest threat to capitalism Randall Holcombe, the Hill

Nightcap

  1. The costs of hospital protectionism Chris Pope, National Affairs
  2. Parasitic SETI and parasitic space science Nick Nielsen, Grand Strategy Annex
  3. Between two empires (Armenia) Peter Brown, New York Review of Books
  4. The transition from socialism to capitalism Branko Milanovic, globalinequality

RCH: Five facts about Emancipation Proclamation

That’s the subject of my weekend column over at RealClearHistory. An excerpt:

4. The Confederacy was, for all intents and purposes, an independent country. When Lincoln issued the Emancipation Proclamation, the Confederacy had long since declared independence from the United States and set up a federal government of its own. Montgomery, Ala. acted as its capital city until 1861, when the Confederacy’s government moved to Richmond, Va. Lincoln viewed Richmond’s diplomacy with the British and French as the most dangerous element of the Confederacy’s secession. If Richmond could somehow manage to get a world power on its side, the consequences for the future of the republic would be dire. For London and Paris, the calculations were a bit different. If either one joined the side of the Confederacy, the other would officially join the north and a global war could ensue. The Confederacy lobbied especially hard for the British to fight on their side, but there was one issue London’s hawks, the factions that wanted a war with Washington, couldn’t get past.

Please, read the rest.

My son is being born right about now (I scheduled this post). I hope everything goes well (it’s a c-section). Wish me luck!

Nightcap

  1. Political capitalism Peter Boettke, Coordination Problem
  2. Even Utah has gone soft on pot Jacob Sullum, Reason
  3. The art of war Peter Miller, Views
  4. NAFTA – The “worst” trade deal ever Livio Di Matteo, Worthwhile Canadian Initiative