In my previous post, I discussed the fact that regulation was slowing the redevelopment of land in California. A recent paper by Leander Heldring, James A. Robinson, and Sebastian Vollmer (HRV) entitled “The Long-Run Impact of the Dissolution of the English Monasteries” examines a related issue. They find that in areas where religious monasteries were broken up and sold to entrepreneurs, economic growth accelerated. They argued that the new owners implemented productivity improving changes, such as more efficient farming techniques.
There’s a risk of becoming smug about how far we’ve advanced from the feudal era, but Matt Yglesias provides a wake-up call in a post that examines the implications of the HRV research for modern America. After discussing the obvious link to zoning regulations, Yglesias points to some other ways that land use is misallocated by government policies:
But it’s notable that not only has the United States re-invented all kinds of feudal-style local control and community control measures, we very specifically have policies in place designed to prevent this sort of transfer of ownership to the parties that get the most value out of it. After all, consider a scenario in which the value of a homeowner’s property rises a lot, which leads their property tax bill to rise. Such a person might be “forced” to sell, securing a large profit for herself, and putting the property in the hands of someone who thinks that both the high price and the high property tax bill are worth paying. Elected officials across the country largely regard this as a bad outcome and have put various policies in place to prevent it from happening. California’s Proposition 13 property tax rules are probably the most extreme and notorious version of this. But most jurisdictions have various rules designed to “protect” owner-occupants from rapid increases in property taxes while affording no such protection to investor-owners.
Our policies that encourage owner-occupied housing also lead to a misallocation of ownership:
Whenever someone does a version of the “homeownership is bad, actually” take, you end up with a discourse that blends two different questions:
Is it prudent for the typical middle-aged middle-class American person to become an owner-occupant of their home?
Is it prudent for the United States of America to have tons and tons of policies in place designed to specifically encourage and subsidize the former?
I think the answer to (1) is “clearly yes,” but that’s precisely because there is so much subsidization happening, not just in obvious ways like the mortgage interest tax deduction but in subtler ways like the “homestead deduction” I get on my property taxes and the fact that profits from the sale of owner-occupied housing are exempt from capital gains taxes.
Max Weber is famous for his theory of “The Protestant Ethic and the Spirit of Capitalism.” But the Heldring, Robinson and Vollmer paper provides an alternative mechanism to explain why economic growth might be linked to the rise of the Protestant religion, a link that has little to do with religious dogma.
READER COMMENTS
MarkW
Jan 24 2023 at 8:53am
To me, the most outrageously feudal aspect of Prop 13 is that the massive tax breaks can be handed down through the generations. We have something similar here in Michigan, but at least the low tax rates cannot be passed from parent to child.
One of the bad effects of these tax breaks I see both in California and my own city is that incumbents with sweetheart tax valuations are very ready to vote for property tax increases since most of the pain falls on other people (e.g. newcomers). It’s similar to the way that it voters were more willing to support high state and local taxes because the federal government was covering a big chunk of taxes via SALT deductibility.
Richard W Fulmer
Jan 24 2023 at 10:12am
I have mixed feelings on Proposition 13. For one thing, the federal government has been steadily reducing the value of the dollar ever since the Federal Reserve was instituted. That results in, among other things, asset inflation. So, as Yglesias admits, a family could be forced out of their home by rising property taxes. He dismisses the impact, however, by claiming that the family would make a profit on the sale of their home. However, (1) the “profit” may be only nominal given the devaluation of the dollar, (2) the family has to find another place to live, (3) their new home will also have an inflated price, (4) it will likely be a smaller or lower quality home in a less desirable area, and (5) they will have to pay inflated property taxes on their new, less desirable, home.
Andrew_FL
Jan 24 2023 at 10:31am
Why is “forced” in quotation marks-if someone must sell because they can’t afford the taxes, that is coercion. I guess that’s “neo” liberalism, to favor forceful rather than voluntary transfer of property to “higher valued uses”-valued higher by whom? Not the property owners.
We don’t need an alternative explanation if the correlation doesn’t exist to begin with.
JFA
Jan 25 2023 at 10:03am
I think your point on on taxes coercing someone out of their home is underappreciated.
Your second point is less supported though. There is a vast literature on the Weberian hypothesis that is mixed but slightly tilted in favor of the hypothesis (but note, the economic effects are usually small and sensitive to controls) as of the last meta-analysis I read. The main mechanism is generally found to be through increased literacy (this is a remarkably consistent finding, even when there are no effects are found on economic behavior (like savings rates)), though there have also been studies showing differences in psychology as well among Protestants vs. Catholics. It could also be the case that there is another omitted factor influencing both individual behavior and whether places were more likely to adopt Protestantism.
Warren Platts
Jan 24 2023 at 11:08am
Interesting article, but isn’t a system that encourages owner-occupants kind of the opposite of feudalism, whereas a system where most people pay rents to land-“lords” virtually the definition of feudalism?“A political and economic system of Europe from the 9th to about the 15th century, based on the holding of all land in fief or fee and the resulting relation of lord to vassal …”
Scott Sumner
Jan 24 2023 at 12:58pm
What the two systems have in common is preventing property from being owned by those who can use it most productively.
Warren Platts
Jan 25 2023 at 4:05pm
All right, I’ll bite. Who exactly gets to decide what property can be owned more productively by whom?
Is it the technocrat who driving through miles and miles of low-rise buildings and concludes the place seems rather depressed? Or is it the voter who owns his own little low-rise house, who has a little car and little TV, who makes sure his little front lawn is always mowed, and who entertains his friends with little barbeques in his little backyard, while reaping huge imputed rents? Imputed rents that could be made explicit if only they were paid to a real land-“lord”?
This is the stuff that drives populism..
Scott Sumner
Jan 26 2023 at 2:49pm
“Who exactly gets to decide what property can be owned more productively by whom?”
The property owner, in a free market.
R R Schoettker
Jan 24 2023 at 1:49pm
“….but isn’t a system that encourages owner-occupants kind of the opposite of feudalism, whereas a system where most people pay rents to land-“lords” virtually the definition of feudalism?”
I would suggest that this entire argument as stated is specious because a system of merely apparent ‘ownership’ (sic) is what exists in this country with fee simple deeds for real estate. Unless the property occupant holds an allodial title assigning real freehold ownership, then they are just modern examples of tenants in socage living on a feudal landlord’s property at their master’s suffrage for only as long as they pay the fees for the privilege. It is this same attitude that bases the decision about what is the ‘most productive” use of the property to the choice of the feudal master/owner and dismisses that of the mere ’occupant’.
Warren Platts
Jan 25 2023 at 5:39am
I have heard that in certain places in rural Texas, you can buy out the government. That is, they somehow calculate the present value of future property taxes; then if you pay that, you never have to pay property taxes again.
R R Schoettker
Jan 26 2023 at 10:14am
From bad to worse! So if you pay the future lifetime of property taxes all NOW you are spared the stamps you would have used to mail them in periodically. This is a ‘deal’ only a State functionary (i.e. feudal lord) could have ever dreamed up.
Warren Platts
Jan 26 2023 at 2:47pm
Hey, at least you’d be able to say you truly owned your land instead of renting it from the County Sherriff!
Johnson85
Jan 24 2023 at 4:44pm
How is the mortgage interest deduction subsidizing homeownership? We have rental property and we get to deduct the interest. We have a home and we get to deduct the interest (if you assume the interest is “after” the $10k of property taxes and $15k of charitable donations).
The homestead deduction and lower rates on owner occupied homes I would agree are subsidies and not sure they should exist, but the mortgage interest deduction just seems like equal treatment. I guess you could say not allowing a mortgage interest deduction would somewhat offset the fact that owners get implicit rent and if they were renting, that would be revenue that counted towards taxes for the landowner.
Scott Sumner
Jan 24 2023 at 11:15pm
Your final sentence answers your question.
Warren Platts
Jan 25 2023 at 5:14am
Probably the biggest tax break of all is the fact that in USA you don’t have to pay taxes on imputed rent if you own your own home, even though for GDP purposes, that counts as income.
robc
Jan 25 2023 at 12:23am
The mortgage interest deduction is a misnomer. The original 1913 income tax form allowed deduction for ALL interest paid, as the interest was taxed as income on the recipient’s tax form.
So really, mortgage interest hasnt changed, instead we have double taxation on other interest. I am sure the credit card companies would love a return to the original policy.
Majid Hosseini
Jan 25 2023 at 2:29am
Fwiw, I think the only way to convince people in California to get rid of prop 13 is to completely eliminate property taxes and fund local governments through use taxes for all residents, including renters
MarkW
Jan 25 2023 at 6:55am
It could be eliminated over time: 1. Establish a phase-out schedule for commercial buildings. 2. Eliminate the ability to keep the tax break when the property is willed to a child. 3. Eliminate Prop 13 limitations for all new sales. 4. Have a schedule for gradually raising the 1% limit. Or do 1-3 but not 4 (keep the 1% limit).
Majid Hosseini
Jan 25 2023 at 10:55am
There was a ballot initiative to eliminate prop 13 for businesses. It didn’t pass. In my opinion, there’s no path to reforming prop 13. The only solution is to eliminate property taxes altogether and switch to use tax. I’ve talked to a few people about it and at least anecdotally, people find use taxes more fair
Warren Platts
Jan 25 2023 at 1:02pm
Why a “use tax” instead of something like a VAT? USA is rather unusual in that we don’t have a VAT. I suspect the surplus countries of the world would be rather upset if we imposed one.
Majid Hosseini
Jan 25 2023 at 11:06pm
I’m sure one can come up with many roundabout ways of doing things, but use taxes seem to me directly address the core question: how does one fund the services that local governments provide. It seems reasonable to expect that a household with 4 cars should contribute more to the maintenance of local roads than a household with 1 car. Even for school funding, it’s reasonable to expect that a family with 5 school age kids contribute more than a family 2 school age kids. People I’ve talked to seem very comfortable with this scheme and consider it fair (a very important requirement for taxes in my opinion)
MarkW
Jan 26 2023 at 6:56am
I’d say the chance of ultimately reforming Prop 13 is vastly greater than of eliminating property taxes entirely.
T Boyle
Jan 27 2023 at 2:58pm
Interesting article, but what a dreadful example to use!
Property taxes are rent on property someone ostensibly owns. Property tax increases are rent increases. When you can get priced out of a home you ostensibly owned, it becomes apparent that you never owned it in the first place.
The market price of the property provides sufficient, and economically correct incentives for the owner to sell it to someone who values it more highly.
Property taxes distort that market, to the disadvantage of people who are cash-poor (if asset-rich), causing them to sell when they would have preferred not to (even with the incentive from high property prices).
Huge error, there.
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