Re: Latvia Advised to Tax Land Values


"Mark Monson" <mmonson@xxxxxxxxx> wrote in message
news:iN5Ce.84710$Tt.36940@xxxxxxxxxxxxxxxxxxxxxxxxx
> Can Soaring Land Values Serve as Riga's tax base?
> Prof. Michael Hudson and Prof. Jeff Sommers
>
> For the past five years, the city of Riga has been
experiencing a real
> estate boom that has multiplied prices for many apartments
as much as
> ten-fold and more. While this is somewhat faster than has
occurred in
> cities such as London and New York (where prices have only
doubled or
> tripled in the past five years), the basic principle is
similar. Yet,
> the forces behind this asset inflation are not widely
understood,
> although the dynamic is quite simple and well known by many
mortgage
> banks who are fueling the property-price inflation.
>
> Most cities and states throughout history have financed
their public
> spending by a property tax. This tax typically has been
levied on the
> land's economic surplus - its rental value. Ever since the
Physiocrats
> and Adam Smith, economists have recognized that this land
value is
> provided by nature, or in other words as said in the real
estate
> business, it's location, location, location! It is
geography, not the
> creation of value by people, that give this land its value.
>
> Increasingly, banking systems throughout the world have
focused on
> lending money against hard collateral - and the largest
asset category
> in every country is still the land, even in today's
industrialized
> world. In America and Britain, some 70 percent of bank loans
take the
> form of mortgage loans. This means that as bank credit
expands, most of
> it is channeled into the real estate market, thus inflating
prices.
>
> The hope of making a price gain - or simply for families to
buy before
> prices rise even further - leads buyers to vie with one
another to buy
> property. The natural limit is reached when absentee
speculators agree
> to pledge all the property's rental income to the bank as
interest. In
> the U.S. real estate market the motto of investors is that
"rent is for
> paying interest." Their hope is to resell the property later
at a
> capital gain. The banker gets the current rental value and
the property
> owner gets a chance to come out with a capital gain. In
Latvia the
> situation is far more extreme, and thus financially more
precarious than
> in America and Britain. In Riga, rental income from most
apartments
> provides only a fraction of the interest payments on any
mortgage taken
> to purchase an apartment. Indeed, many apartments are not
rented at
> all, but instead held in order to sell dear. People take
credit to
> purchase apartments, whose real value is in their location
more than the
> building itself, in the hopes of realizing a quick return on
resale. To
> be sure, while Riga real estate was undervalued just a few
years back,
> the current situation resembles the 1998 ruble crash, in
which investors
> put ever more money into Russian bonds expecting fast
returns only to
> see the bubble burst when the ever upward increasing amount
of money
> required to fund the high returns finally ran out.
>
> The important variable in this is the local property tax
rate. As home
> and apartment prices rise, they feel squeezed by having to
pay as much
> as 40 percent of their income to service their mortgages and
pay
> property taxes. In Riga the figure on mortgage payments can
be even
> higher. The response to this in the US and Britain,
realizing that they
> will be in danger of forfeiting their property if they miss
an interest
> payment to the banks, is for many homeowners to campaign for
lower
> property taxes. But, banks for their part know that
whatever the tax
> collector gives up will be available to be paid out as
interest. So they
> back "populist" political agitation for lower property
taxes, claiming
> to support the "little man," especially small homeowners who
find
> themselves strapped by the heavy mortgages they have taken
on. But when
> the dust settles after taxes are cut, more rental value is
left free and
> clear to be pledged to the banks as mortgage interest on yet
higher
> mortgage loans for yet higher property prices.
>
> This process already is squeezing many in Riga.
Fortunately, there is a
> simple way to bring property prices back in line with
affordability. All
> that Riga and other cities need to do is to tax about half
of the rental
> value of land - not the buildings, because that would
discourage
> construction, but only the value of land itself. A small 3
percent tax
> on assessed property values would mobilize the value created
by Latvian
> prosperity to be used by the government to build the kind of
economic
> infrastructure that the country needs to develop and become
more
> prosperous. Moreover, Latvia has among the highest income
and wealth
> inequalities in Europe. This measure would help address
this issue and
> facilitate the country's further development while creating
political
> stability and fairness in the process.
>
> The question is where should the money go? All to the banks
and
> property speculators, or directed to educational, economic,
health, and
> transport infrastructure needs? The answer is surely the
latter, but
> there is even reason to believe the current situation in
Riga is bad for
> the banks' long-term interests. If property values continue
escalating
> at present rates the resulting popped real estate bubble
could leave
> them holding an unsustainably large set of bad loans. This
would be bad
> for them and the country. While there are differences to be
sure, one
> must remember that it was precisely this kind of real estate
bubble that
> contributed to the Japanese and Thailand recessions in the
1990s from
> which these countries have still not recovered. Indeed, one
of the few
> countries to escape the East Asian crisis was Singapore,
which
> intervened with monetary policy to slow down the real estate
market
> before it burst.
>
> Yet, one way to continue Latvia's impressive economic growth
without
> resorting to tighter credit policies is to levy a land tax.
Indeed,
> failure to tax land value will oblige Latvia to do one of
two things,
> each of which is even more burdensome for labor and
industry. Without a
> proper real estate tax, either the country will have to keep
its onerous
> income tax on labor and industry, or retain its regressive
sales tax; or
> it would have to borrow the money, requiring higher future
taxes to pay
> interest charges on this debt.
>
> One way or another, someone in Latvia needs to pay for the
modernization
> of its transport, power, communications and other civic
improvements.
> The least burdensome way to do this is via a land tax,
because the land
> exists whether or not it is taxed, but labor and capital
investment will
> be discouraged by taxation. The more tax that can be raised
from real
> estate, the less interest the banks will be able to charge,
and thus
> slow down the increase in land prices. This will keep
housing prices
> more in line with what Latvians can afford. And to top
matters off, the
> absence of an income and sales tax on labor and industry
will help the
> nation compete more in global markets, creating a broader
distributed
> prosperity for the country and not just narrowly for
property
> speculators. Indeed, another advantage of a higher land
tax, including
> land on which apartments rest, is that it would curb some of
the
> speculative excess. Currently, there is no penalty for
buying
> apartments and keeping them off the market until prices
climb. A tax
> would impose a real cost on holding apartments through taxes
needing to
> be paid on the property whether in use or not, thus
encouraging their
> sale and use. This should moderate price growth.
>
> In today's world where countries are vying with each other
to create a
> prosperous, competitive labor force and investment climate,
keeping
> housing prices in line by minimizing the economy's debt
overhead is
> emerging as the decisive factor in comparative international
costs. Most
> countries have similar technological modes of production
today. Where
> they differ is in their property and financial overhead. The
largest
> factor explaining differences in comparative international
costs is how
> capital and real estate is "costed," that is, whether its
rental value
> serves as the national tax base (in place of taxing labor
and industry)
> or is paid to the banks as rising mortgage charges on
increasingly
> expensive homes and office buildings.
>
> Latvia has a chance to gain a lead over neighboring Baltic
and
> Scandinavian states by keeping its housing and building
prices low via a
> land tax. Many Latvians no doubt feel that they are getting
rich as
> property values rise. But a real estate bubble is not truly
a sign of
> rising prosperity; it means merely that the economy is being
distorted
> and becoming debt-ridden that will serve as a future drag on
growth.
>
> *Prof. Hudson is Distinguished Professor of Economics at the
University
> of Missouri (Kansas City), Harvard Fellow, and monthly
commentator on
> PRI's radio program "Marketplace.
>
> *Professor Jeff Sommers is the Visiting Fulbright Professor
at the
> Stockholm School of Economics in Riga.


I think the bogus plan in the US was to get most people into
inflated property then property tax them to oblivion
....because the income tax base is evaporating with baby
boomers retiring and manufacturing going overseas.

This way if a 'home owner" cant pay his 20k a year in property
taxes (as the retired move to the desert to or mexico to live
cheap)... he will have to work two jobs with the wife to pay
the net tax load... thus insuring that the police can keep
their 100K plus retirements.. and that bloated government can
keep on bloating like a rotting corpse.

thats the plan I believe.


those types of scenes never last very
long...that should be obvious.


Phil Scott


.

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