How the Tax System Creates Depressions Like the Crash of 2008 Fred E. Foldvary Dept. of Economics, Santa Clara University

The elements of the cycle Depression: the trough

The monetary-interest element The Austrian-school business cycle: if interest rates are artificially lowered due to an increase in the money supply by a monetary authority, this induces an increased investment in higher-order capital goods unwarranted by free-market demand.

Real estate the major player Real-estate construction is a major portion of higher-order capital goods. Artificially low interest rates induce a construction boom. Land values rise beyond the point at which enterprises can make a profit after paying for rent or mortgages.

House Price Appreciation Source: Office of Federal Housing Enterprise Oversight

Land value rise in NY

The US real estate cycle land value constructiondepression intervalinterval interval !18!

Government land subsidies Tax deductions for interest and property taxes. Capital gains tax exemptions. Tax-free real estate exchanges. Repeated legal-fiction depreciation

Public Works: the Mother of all Interventions Much of the value of land comes from public works and services, paid for by taxes on labor and capital goods. Adam Smith noted that "Every improvement in the circumstances of society tends either directly or indirectly to raise the real rent of land, to increase the wealth of the landlord."

Public works and civic services increase the value of land. Little of this is paid from property taxes specifically on land. So these public goods get capitalized as higher land value and more rent.

High interest rates and high prices for real estate choke off new investment

Result: the financial waterfall

The fiscal and monetary remedy for depressions The elimination of the business cycle implies the elimination of the real estate cycle. This can be accomplished by the collection of ground rent either by private communities or by government, eliminating the implicit subsidy to landowners. We also have to eliminate the financial side. The remedy for credit manipulation is free- market money and banking with competitive private bank notes.

Public Goods are effectively provided by private enterprise by tapping the generated site rent.

Fred Foldvary, 1994 Public Goods and Private Communities Market success providing public goods, in theory and in practice. Demand is revealed by rent. No free riders: users pay rent. Land trusts, condominiums, residential associations.

Taxing Rent or Land Value * The land-value tax applies to either the implicit rental value of land or on the potential site value, exclusive of the value of improvements. * LVT would apply to all owners of land, including household, commercial, and government-owned real estate. Taxing government land adds pressure to manage, maintain, and retain an efficient amount of public land. * Land values would be assessed as they are presently for property taxes, distinguishing between site and improvement value.

Tax Reform Options (adapted from Tony Quain, student of Dan Klein) Ideology: Progressives; Environmentalists (LVT efficient and equitable) Geo-libertarians (libertarians who reject homesteading) Conservatives: Buckley Implemented: Estonia Taiwan Singapore Hong Kong Sydney, Australia Arden, DE Endorsements Adam Smith John Stuart Mill Milton Friedman Thomas Paine William F. Buckley, Jr. Albert Jay Nock Sun Yat Sen Winston Churchill Frank Chodorov Henry George Harry Gunnison Brown Origins: Analyzed by American political economist Henry George in 1879 (but the 1700s Physiocrats had the idea of only taxing land.)

Public Finance & the Cycle The 18-year real estate cycle in the US and in other countries gives the enhanced Austrian cycle theory predictive power. The 2008 bust came 18 years after the 1990 downturn, right on schedule. The focus on real estate provides a more thorough and predictive explanation of booms and busts, and the remedies: Private communities or Land Value Tax.