Month: January 2020

California Landed Gentry

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January 26, 2020

by Steve Stofka

What is a fair share of taxes? As I noted last week, different households pay a varying share of sales tax to the city but consume the same amount of public services. Income taxes and property taxes vary as well. In California’s booming real estate market, younger homeowners are furious that they must shoulder an inequitable share of a community’s property tax.

In the 1970s, the population of California swelled and created a large increase in demand for housing. The higher demand and runaway inflation during the period led to rapidly escalating home prices. Proposition 13, an amendment to the California constitution, was sold as a remedy for older homeowners on fixed incomes who could no longer afford the property taxes on the homes they had owned for years. Commercial properties were included in the amendment as a way to protect small businesses and the stability they brought to communities.

In 1978, California voters passed Prop 13, as it was called. Annual increases in residential and commercial property taxes were limited to 2% for existing property owners. These were years of high inflation. In 1979, the inflation rate was 14%, far higher than the current 2% rate (BLS, n.d.). In the two years following passage of the amendment, property tax collections collapsed by 50%. The resulting loss of revenue and high inflation caused a financial crisis in cities and counties throughout the state (BOE, 2018). Because taxes are based on acquisition cost, not current appraised value, the law has created large disparities in tax liability between neighbors in similar housing. In addition, the law has created inequalities between homeowners of different ages. The purchase of a home would normally step up the appraised value of the property to a current value but new homeowners over 55 were exempted. Older homeowners could also transfer their house to their children without triggering a step up in appraised value. Many homes are never sold. The homeowners and their heirs rent out the homes at current rental prices and pocket the profits. The law has created a class of landed gentry in the state (Dillon, Poston, 2018).

In 1992, the Supreme Court ruled that the law did not violate the 14th Amendment (Nordlinger v. Hahn, n.d.). In the past forty years, the law has severely reduced funding for California schools and helped to create notorious budget shortfalls. In the 1970s, California ranked in the top ten states in the quality of public education. This past year, Wallet Hub ranked the state #38 (McCann, 2019).

The fixing of one problem often creates a much larger inequity in the end and that requires an endless stream of fixes to the solutions to the problem. It’s good business for lawmakers. Adam Smith, the father of economics, documented the process in his book Wealth of Nations (Smith, 1776). Labor guilds and business interests often proposed regulations which gave them an advantage in a market. The public good was often compromised by laws that favored these interest groups. Smith proposed a free market approach as the only way to protect the public from the corruption and favoritism that inevitably marks a political state. California is a living example of the same problems that Smith described in 18th century England. Human nature has changed little in the past 200 years.

In 2020, California voters may have a chance to undo that part of the law that applies equally to commercial property, but homeowners will continue to enjoy incremental changes to their property taxes (Levin, 2018). The dream of homeownership will elude many families in the state. Taxes are inherently unfair but Californians have created their own brand of unfair taxes.

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Notes:

Bureau of Labor Statistics. (n.d.). Inflation Calculator. [Web page]. Retrieved from https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1&year1=197901&year2=198001.

California State Board of Equalization (BOE). (2018, December). California Property Tax: An Overview. [PDF]. Retrieved from https://www.boe.ca.gov/proptaxes/pdf/pub29.pdf#page=5

Dillon, L., Poston, B. (2018, August 17). Must Reads: California homeowners get to pass low property taxes to their kids. It’s proved highly profitable to an elite group. Los Angeles Times. [Web page]. Retrieved from https://www.latimes.com/politics/la-pol-ca-california-property-taxes-elites-201808-htmlstory.html

Levin, M. (2018, August 4). Prop. 13 could be partly undone in 2020—here’s what you should know. [Web page]. Retrieved from https://calmatters.org/economy/2018/08/prop-13-could-be-party-undone-in-2020-heres-what-you-should-know/

McCann, A. (2019, July 29). States with the Best & Worst School Systems. Wallet Hub. [Web page]. Retrieved from https://wallethub.com/edu/e/states-with-the-best-schools/5335/

Nordlinger v. Hahn. (n.d.). Oyez. [Web page]. Retrieved from https://www.oyez.org/cases/1991/90-1912

Photo by The Joy of Film on Unsplash

Smith, Adam. (1776). The Wealth of Nations (Kindle Edition). Digireads.com Publishing (2019). Available at https://www.amazon.com/Wealth-Nations-Adam-Smith-ebook-dp-B000FC1CVE/dp/B000FC1CVE/ref=mt_kindle?_encoding=UTF8&me=&qid=

Our Fair Share

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January 19, 2020

by Steve Stofka

The holidays are over. This week our city picked up Christmas trees set by the curb. The sun set after 5 PM, the first time since the time change in the first week of November. The sun is returning to the Northern Hemisphere. Despite the variations in the amount of sunshine throughout the year, we all get the same amount of sunshine over the course of a year. Not so with our tax bills.

Estimated taxes were due this week. The self-employed, retired people and others who earn income with no taxes withheld must pay estimated taxes every quarter. This past year the IRS audited less than ½% of returns, a lifetime low. That sounds great because none of us wants to endure an audit. The very word strikes fear in the hearts of many taxpayers, but most of us have a small chance of being audited regardless. We don’t pay enough in taxes for the IRS to do much more than a paper audit, a request for supporting documentation.

The IRS is not a popular agency and became less popular when the agency discriminated against Tea Party and progressive groups during the 2010 election (Farhi, 2017). House Republicans repeatedly cut the agency’s budget, but that retribution has had serious budget consequences. The National Bureau of Economic Research estimated that the government could raise an additional $1 trillion in tax revenue – that’s about 20% of total revenue – with stricter enforcement of existing law (Heeb, 2019). In 2019, the Federal deficit, or budget shortfall, was $1.1 trillion (BPC, 2020). Stricter enforcement would have effectively erased that deficit.

The race for the Democratic Party’s nomination for President promises to center around several themes. The first is the horse race against President Trump, whose incumbency gives him a distinct advantage when running for re-election. The press often seems more concerned with the contest than the underlying issues of a campaign. Taxation is a recurring discussion in each election. More or less? What is a fair share? More, more, more social programs, taxation and regulation, or less, less, less social programs and taxation and more defense spending and power for large corporations?

What is fair? As children we have a keen sense of fairness – our “monkey brain.” We are social creatures who feel scorned at what we perceive as unequal treatment. Equal and fair are not the same thing. A fair share is not the same as an equal share. If I can afford to buy $50,000 worth of goods in a year, why should I have to pay more sales tax than someone who only buys $30,000? We make equal use of a city’s public services. Why should we be treated unequally? Well, we have become accustomed to paying an equal percentage of what we buy in the stores as a sales tax.

Why don’t we follow that same approach for income taxes? States like Colorado do charge the same rate of state income tax regardless of income. Is that fair? Some cities like Denver charge a head tax, a flat fee income tax for anyone who works within the district. Should we follow the same approach throughout the nation? Warren Buffett and I would pay the same amount in income taxes. Is that fair?

Should prices for public utilities be adjusted based on income? If my neighbor makes twice what I do, should they pay twice for the same amount of water? Currently, we are charged the same rate. The income and property taxes of those over 65 are often given a discount. In some districts, a person who reaches 65 finds that they can lower their property tax by 50%. Is that fair?

Elizabeth Warren, a candidate for the Democratic Party’s presidential nomination, proposed that all student debt be eliminated. Should students who went to more expensive private schools be rewarded more than students who borrowed less because they went to a state college? Should students who borrowed less because they worked part time while going to school be penalized? Is that fair?

In Matthew 20:1–16, Jesus tells a parable of the workers in the vineyard. Workers who came to work in the morning agreed to an amount of money for a day’s work. Workers who came to work later in the day were also promised the same amount of money for working the rest of the day. Jesus was making a point that each person will be rewarded equally in the kingdom of heaven no matter when in their lifetime they come to God’s love. No matter what your religious orientation, is that fair?

Each election we get to vote on what’s fair. Some people don’t vote because they say that their opinion doesn’t matter. It certainly doesn’t if they don’t vote so they have proved their case. If I vote and my neighbor doesn’t, my vote effectively counts double. In a few weeks, the Democratic primaries will start. The first two are in Iowa and New Hampshire, states with small populations and an even smaller number of people who participate in the caucus system. The votes of a few thousand people can make or break a candidate’s campaign. In a democratic nation of 320 million people, is that fair?

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Notes:

Bipartisan Policy Center (BPC). (2020, January 9). Deficit Tracker. [Web page]. Retrieved from https://bipartisanpolicy.org/report/deficit-tracker/

Farhi, P. (2017, October 5). Four years later, the IRS tea party scandal looks very different. It may not even be a scandal. Washington Post. [Web page]. https://www.washingtonpost.com/lifestyle/style/four-years-later-the-irs-tea-party-scandal-looks-very-different-it-may-not-even-be-a-scandal/2017/10/05/4e90c7ec-a9f7-11e7-850e-2bdd1236be5d_story.html

Heeb, G. (2019, November 19). The US could raise $1 trillion more in taxes through stricter IRS enforcement, according to a new study. Markets Insider. [Web page]. Retrieved from https://markets.businessinsider.com/news/stocks/us-could-raise-1-trillion-more-tighter-irs-enforcement-study-2019-11-1028700145

Photo by Maria Molinero on Unsplash

The Fuel of Fear

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by Steve Stofka

January 12, 2020

The Constitution requires that a census be taken every ten years. The first census in 1790 counted almost four million people. The Census Bureau estimates the population at 330 million now, a hundred-fold increase (Census Bureau, 2019). The Constitution was a hard-fought bargain between representatives of regional interests. Politicians in the North and South distrusted each other. Southern states estimated that they would gain the most population growth in future decades because the growing season was longer in those states, and most people depended on agriculture for their existence. Until those population trends developed, the South worried that the more populous North would dominate Federal policy (Klarman, 2016). Our lives are impacted by the fear and distrust of our founders.

Minority and isolated rural communities are at risk of being undercounted because they distrust government. Minorities may have come from a country where there is good reason to distrust government. Indian tribes have several hundred years of reasons to distrust state and federal governments. Response rates to the census questionnaire vary dramatically. In some of the 3000 counties nationwide, responses are only 20%. In some, the response rate is 80-85% (C-Span, 2020). An advocacy group testifying before the House Oversight and Reform Committee hearing this week estimated that 400,000 Latino children aged 0-4 were not counted in the 2010 census (C-Span, 2020). Pre-school programs for at-risk Latino children receive less funding when the government doesn’t know those children exist.

During the Great Depression, President Franklin Roosevelt and a Congress ruled by the Democratic Party made an abrupt shift in the role of the Federal government. Until then, the policies of state governments had a more direct impact on the lives of most Americans. Today, the Federal government is involved in every aspect of our lives. Census counts determine the distribution of hundreds of billions of Federal tax dollars each year.  Political scammers rely on the fact that minority populations are fearful, and they spread disinformation about the census to fuel that fear and help reduce the population counts of those communities. Because so many federal programs are tied to the census, people who are fully counted in one state benefit if those in a neighboring state are under counted. The counting of people has become a political sport.

Politicians are afraid of losing the jobs they worked hard to get in the first place. Their interests become aligned with companies whose campaign contributions help protect a politician’s position. Some fault the private market for overpriced drugs and high housing costs but it is the failure of policy makers to respond to the interests of the constituents who voted them into office. Politicians respond instead to the wishes of pharmaceutical, energy and real estate companies. A dominant company in an industry does not want competition. They lobby politicians to craft policies that make the market less free to protect their market domination. It is not the role of private companies to respond to a broad constituency of voters. That is the role of politicians, who blame the private market instead of their own public policy. Then they call for more public policy failures to fix private industry. Private industry increases their lobbying and campaign contributions in response.

Humans have a proclivity for fear and are more alert for negative experiences. Psychologists calls it a negativity bias (Cherry, 2019). For good and bad, fear infected our Constitution at the outset and drove the founders to craft a Constitution of compromise. Smaller states feared the majority will of the larger states. The founders feared the power of the British Parliament and the king just as minority populations fear the government today. Driven by fear for their own political survival, politicians sought the support of the few at the expense of the people who voted them into office. Then and now, we fuel our public policies with fear of the other, whoever we think that is. Our country becomes ruled by fear.

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Notes:

Cherry, K. (2019, April 11). What is the Negativity Bias? VeryWellMind. [Web page]. Retrieved from https://www.verywellmind.com/negative-bias-4589618

C-Span. (2020, January 9). Hearing on 2020 Census: Response rates. [Video, Transcript]. Retrieved from https://www.c-span.org/video/?467977-1/hearing-2020-census&start=12401

C-Span. (2020, January 9). Hearing on 2020 Census: Latino children. [Video, Transcript]. Retrieved from https://www.c-span.org/video/?467977-1/hearing-2020-census&start=13069

Klarman, M.J. (2016). The Framers’ Coup: The Making of the United States Constitution. New York: Oxford University Press. Pg. 192.

Photo by Drew Graham on Unsplash

U.S. Census Bureau. (2019, July 1). Quick Facts. [Web page]. Retrieved from https://www.census.gov/quickfacts/fact/table/US/PST045219

The Black Hole of Generational Wealth

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January 5, 2020

by Steve Stofka

As we begin this new decade, let’s look at some developing trends. In 2005, the wealth of the Boomer generation (1946-1964) finally surpassed that of their parents (Federal Reserve, 2019). This was the so-called Silent generation born in the years 1925-45. In 2005, each of those two generations owned a quarter of the nation’s wealth for a total of slightly more than half the nation’s wealth. There are about five generations that make up a human life span. Older generations have had more time to accumulate wealth, so this distribution of wealth among the two oldest generations was expected.

Turn the dial forward 14 years to 2019 and the distribution of wealth has changed significantly following the Financial Crisis. The median age of the Boomer generations is now 64 and they own 60% of the nation’s wealth. Even more remarkable is the 25% share of the country’s wealth owned by the oldest generation who are 75 years or older (Federal Reserve, 2017). The median wealth of those oldest households is greater than that of the Boomers.

What happened? Most of that wealth is in real estate. Following the financial crisis, asset prices have recovered. Housing prices have risen sharply on both coasts where most of the country’s population lives. Between the 2013 and 2016 Surveys of Consumer Finances, the median net wealth of the 75+ generation increased 32% while the oldest of the Boomer generation aged 65-74 had a 6% decline.

As these oldest Americans die, their wealth will pass to younger generations but most of it will presumably pass to their immediate heirs, the Boomers. Within five to ten years, the Boomers – less than 25% of the population – will own 70% or more of the nation’s wealth.

The Consumer Survey data shows that approximately 80% of that 70% will be owned by 10% of the Boomers (Federal Reserve, 2017, Figure B). A small percentage of old people will control a majority of the wealth in the country. Wealth buys political influence to protect that wealth. Younger generations have a greater number of votes but have not exercised that vote power in the same percentages as older people. Will the concentration of wealth prod younger people into exercising their power at the ballot box? Older and wealthier Americans have political alliances that give them more electoral power than their vote numbers. In this coming decade younger Americans will have to come out in overwhelming numbers on election days to overcome the power of those alliances. Will we see a generational revolution this decade?

The strength – and weakness – of older people is their predictability. They will counter proposals for fairer wealth distribution with familiar arguments. “These younger people want something for nothing” has been an effective counterargument for several decades. “These policy proposals are socialist and un-American” is another effective ad campaign against policy changes. “How will we pay for this? Higher taxes and less money for working people” is another strategic counterargument that attracts moderate and conservative voters.

The past decade has been historic. We ended the “aughts” or 2000s with the election of a black American for president and the worst financial crisis since the Great Depression. We ended this decade with the impeachment of President Trump. Like President Clinton who was impeached in 1998, both men enjoyed robust economic growth, historically high stock and housing market prices during their terms. Economic well being did not insulate either president from impeachment by the opposite party. Get ready for the next decade. I’m betting that economic disparity and political friction create a maelstrom that makes the past two decades look tame.

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Notes:

Federal Reserve. (2019, December 23). Distribution of Household Wealth in the U.S. since 1989: Wealth By Generation. [Web page]. Retrieved from https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/table/#quarter:120;series:Net%20worth;demographic:generation;population:all;units:levels

Federal Reserve. (2017, September). Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey of Consumer Finances: Table 2. Family median and mean net worth, by selected characteristics of families, 2013 and 2016 surveys. [Web page]. Retrieved from https://www.federalreserve.gov/publications/2017-September-changes-in-us-family-finances-from-2013-to-2016.htm#xtable2-familymedianandmeannetworthb-c9084a05

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