How Colonies Can Liberate Themselves by Taxing Real Estate

By Polly Cleveland

Greece, Haiti, and Puerto Rico have something important in common: they are colonies. Puerto Rico started out as a Spanish colony and was then acquired by the United States as a “gift with purchase” of the Philippines in 1898. Greece and Haiti (itself a former colony of France) have become debt colonies of the multinational banks and their supporting governments. In all three, wealth is highly unequal. Most of the land, and all the best land, is owned or controlled by absentee natives or by outside organizations—foreign corporations, banks or governments. Local government is corrupt, incompetent, and obligated to outsiders if not actually controlled by them. There’s a two-fold net effect. On the one hand, there’s a continuing drain of working capital and labor to the outside, as rents, interest, profits flow out and young adults emigrate. On the other hand, the extraction process cripples the economy, by cutting off working capital and killing labor incentives. The local government, cannot or will not provide adequate services, due to corruption and lack of tax money. Metaphorically, these colonies are being bled dry.

Suppose a reform government were to come to power in these places and suppose it could stave off foreign threats. How could it stop the bleeding?

New settlers in the 19th-century United States faced a similar problem. Large chunks of good land were held vacant by absentees, often railroad companies. The resulting scatter made it hard to build public works like dams and canals for irrigation. Meanwhile, the railroads charged exorbitant monopoly rates to ship the settlers’ grain to market. The solution: tax the value of property in the district. Because the absentees were not using their land, the tax helped force them to sell to incoming settlers. Until the middle of the 20th century, property taxes were the dominant means of state and local finance, so using them to bring in revenues for local development while nudging out absentees made perfect sense.

The same strategy can work for modern colonies. A reform government can heavily tax the value of real estate, possibly with exemptions for small resident property owners. Better yet, and much easier to implement, tax only the land component of real estate. Such a tax would force absentee owners to send euros or dollars back to the colonies. The government could then begin to provide services and repair infrastructure. But why tax real estate? Why not tax income or imports? Because absentees and foreign based corporations can easily avoid income taxes by funny accounting. Taxes on most imports are regressive and a drain on the economy. The real money is in real estate.

All but the most primitive governments keep some sort of registry of property, crude and out of date in Greece, Haiti, and Puerto Rico. A reform government can easily create new cadastral maps—that’s what George Washington did as he surveyed Native American land. In the age of GPS it’s even easier. The government can then place the existing claims on the map. The recorded “owner” may be a shell corporation based in the Bahamas, but no matter. Just tax it. Where claims overlap, they can be taxed twice—forcing owners to resolve the boundaries. The government can claim any blank spots—forcing hidden informal owners to declare themselves or lose the property.

How should a reform government estimate the value of property in order to tax it? This may appear a daunting problem when the property market is not very active—large absentees mostly do nothing—and many transactions are informal. But an experienced appraiser can in fact put a reasonable assessed valuation on property by walking around and observing activity. A great advantage to taxing land only is that value depends entirely on location and tends to vary smoothly from one spot to another. Property owners then can, and will, challenge their valuations—but they will have to show that the valuation is out of line with that of neighboring properties.

Another strategy for getting initial property values is to ask owners to declare the values themselves, with the government having the right to purchase the properties at the declared value. The government right to purchase, if enforced, takes away owners’ incentive to understate the value.

Once the government imposes taxes, some owners—absentees especially—will decide to sell in order to pay the tax. These sales will provide government assessors with more information, enabling them to make more accurate assessments. Meanwhile the purchasers of the property will put it to use, generating production and jobs.

When Fidel Castro’s revolutionary government took power in the American colony of Cuba, they nationalized most foreign-owned property. In accordance with international law, they offered compensation, which all but the Americans accepted. I have to wonder, if they had tried taxation instead of nationalization, could they have pulled off a smoother transition, while giving the U.S. less excuse for military intervention?

4 thoughts on “How Colonies Can Liberate Themselves by Taxing Real Estate”

  1. Nations should also tax financial assets, not just real estate assets. The current total of all U.S. private household net worth now stands at $98.7 trillion in March, 2008, and only a 30% of it is taxed, the real estate portion. That tax goes to state and local governments. “State and local governments collected a combined $488 billion in revenue from property taxes, or 17 percent of general revenue in 2015.” states the Tax Policy Center. A commensurate tax on financial assets would yield $1.1 trillion. This $1.1 trillion could erase the income tax for all taxpayers with income less than $1 million. (I take this from the Joint Committee on Taxation, Overview, page 28, and the net worth figures from Fed’s Flow of Funds report, pages 2 and 138) In 2018 the Federal budget will spend $4.1 trillion, about $1 trillion is for Social Security, the rest is called “on budget outlays”. I believe the richest should pay more, given that their incomes have tripled over the past 30 years, and since 2009 the total net worth has doubled, from $48 trillion to now $98 trillion. I know I’m not commenting on this article, which is a great idea. But my comment expands on the idea of taxing property of the wealthy, most of which is a wasted paper resource that does nothing but pump up an asset bubble. It serves no one, it is a wasted resource, for the most part. $100 trillion in savings, about $7 trillion in government spending each year (all sectors of government). We should make use of the resources.

    “Nonfinancial assets” were valued at $34 trillion, and “Financial assets” were valued at $80.4 trillion. Liabilities were at $15.6 trillion for a household net worth of $98.7 trillion. 70% of the nation’s assets go untaxed. A commensurate tax on financial assets would yield $1.1 trillion, equal to 39% of all federal budget “on-budget” revenue.

  2. Ben –

    The problem is, we want to encourage the creation of assets, broadly speaking. Assets like stocks mean money for factories and offices and the like. Assets like houses and storefronts also build the economy. The reason for the focus on *land* is that it is inelastic – the quantity does not depend on price. So, while taxing other assets will naturally reduce their quantity and be a drag on the economy, taxing land will do no such thing (indeed, by funneling money towards capital it should actually grow the economy).

    Now, taxing financial assets may make more sense than taxing income (I’d agree with that), but unlike taxing land it is not an unalloyed good.

  3. I take the view that assets are unused surplus or unused profits — savings or wealth. A storage of reserve value for future use, often convertible into various other asset classes, measured in units of currency. Also convertible into national currency when sold or traded. Assets are like a parallel or dual currency. Value is reduced to currency unit, or “capital”. Capital is the goal of capitalism. Growing capital (assets) is like the blue jay burying acorns. They bury far more acorns than they ever dig up later for use. They are compulsive acorn buriers. Economies on the other hand should serve human needs, not store future potential value reserved for a minority and never dig it up for use. William Lazonick, often published at INET.org, states that 91% of the profits of the 500 largest U.S. corporations over a recent 10 year period were distributed to share-holders (owners) either through dividends or stock buybacks. R and D were cut, wage hikes were cut, the owners received most the surplus “assets”. They are never used, they are wasted in storage, they might just as well be dumped into the Marianna Trench. The doubling of household net worth over a 9 year period indicates that there is a bubble. Rana Faroohar in her book Makers and Takers says that evidence shows that 85% of economic surplus never enters into the daily economy. She says that only 15% “of all financial flows now go into projects in the real economy. The rest [85%] simply stays inside the financial system, enriching financiers, corporate titans, and the wealthiest fraction of the population . . .” The goal of most CFOs is to augment value of company stock, increase capital, even if it never is used productively. Capitalism is insane, you might say. Like that blue jay. Probably there is a ratio of annual production to surplus savings that is ideal or appropriate, but that would also include an appropriate distribution of the surplus. We don’t have correct distribution (wealth or income) or a good ratio between annual GDP and surplus. There’s my PhD. thesis in a nut shell. I write a blog: Economics Without Greed, http://benL8.blogspot.com. I have yet to receive my PhD, and Marx didn’t receive his either. That quote I added is from an essay of October 2017.

  4. Dear Ben,

    Capital is not the goal of capitalism; capitalism, more accurately described as the system of natural liberty (using Adam Smith’s term, rather than Karl Marx’s) is a system in which different people pursue different goals. Some of them certainly seek to accumulate capital, and if they do so honestly, very well. If it were not for the accumulation of capital, we’d still be chipping flint spearheads, except that, come to think of it, those are capital too.

    I favor land value taxation, but do not favor taxing “assets” without regard to what kind of assets they are, how they were acquired. There is both a fundamental moral reason, and at least one pragmatic moral reason for this. First, I believe that it is wrong to tax honestly acquired property. Secondly, if all assets are taxed, the supply of capital for productive use will shrink, as people will try to hide or expatriate their wealth, rather than leave it vulnerable to heavy taxes. They may also go in for consumption rather than saving and investment. If capital is available at all, it will likely be lent only at high rates, to reflect the tax cost of having it. Businessmen with their own capital will charge high prices and pay low wages, and since their competitors will have to pay tax on their assets as well, competition won’t drive prices down. Pay attention to my logic, or pay attention to Venezuela.

    Since a country with high taxes on all assets will not be prosperous, land there will not be highly valued, and therefore land value taxation will not yield much revenue. The bad tax on assets which should be in private hands will sabotage the good tax on assets which should be shared.

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