The association of progress with poverty is the great enigma of our times. ~ Henry George
Georgism? What’s that? Does it
have anything to do with a dearly-departed former Beatle or a cult affiliated with our first
president? Nope. Until recently, only students who took a course in the history
of economic thought, like I did eons ago, ever came across the mention of Henry
George. He was a 19th century journalist and political economist born in
Philadelphia just like me, who became famous for advocating a single, solitary tax
on private land to support a government’s expenditures for public benefit.
His groundbreaking book Progress and Poverty, published in 1879, argued that a tax on land’s value should be the sole basis for determining public tax revenues, rather than taxing income or sales. Several million people bought his book, which helped stimulate this nation’s Progressive Era. His land-based fiscal philosophy became known as Georgism. In 1886, Henry George ran on the United Labor party ticket to be the mayor of New York City. He lost, as did the Republican ticket’s Theodore Roosevelt.
George deemed the value of land
depends on its permanence and immobility, as well as the economic activities
that are pursued on top of it. He thought land’s unique and enduring
characteristics would eliminate the need for all other types of taxes. George
fervently believed in a tax based on the value of land but not on the
improvements on it. George’s promotion of a single Land Value Tax (LTVs)
influenced tax policies in the US as well as other nations. Denmark’s “ground
duty” land tax, implemented almost a century ago, remains a key component of
its federal tax system. Other nations that have used LVTs in various ways
include Australia, Germany, Lithuania, Mexico, Singapore and Taiwan.
After the turn of the 20th
century, Georgism mostly slumbered in the US. However, once again discussions
have surfaced about Georgism as a result of two events.
The first event. A Kansas
City trial jury’s decision last month determined the National Association of
Realtors (NAR) and major real estate brokerages have conspired to keep their commission
fees artificially high. The jury apparently believed this cooperative behavior
was tantamount to price-fixing, and thus not consistent with anti-trust law. Consequently,
the jury awarded $1.8 billion to a half-million Missouri home sellers. Georgism
is not directly related to this case, but it hovered around it. Anyone who’s
ever purchased or sold a dwelling knows the standard 5%-6% commission has been
inviolable that realtors on each side of the transaction jointly agree between
themselves how to split their fees before the sale. This is ever so slowly
changing. Realtors’ commissions have been dwindling especially in states like
California where housing prices remain stratospheric. The average 2022 California realtor commission
was 4.91%.
This court decision already has
sent tremors through the real estate and financial industries. Zillow’s
publicly-traded stock dropped about 7% after the verdict was announced. Realtors
fear that it will transform their century-old cooperative fee system. Without
such fee cooperation, buyer agents’ fees are likely to be more exposed because
they would have to compete on the worth of their services. Separating the
buyers’ and sellers’ agent commissions could also result in lower home prices announced
through the highly-used Multiple Listing Services (MLS) that realtors own.
Some real estate specialists
believe there is a surfeit of realtors among the 1.6 million active agents,
including many part-timers. One industry authority characterizes the US real
estate market as “a congested, part-time industry where the part-timers are
draining income from the full-timers. This glut of agents is killing the
industry.” This sense is reflected by realtors’ 2022 median annual salary of $52,000.
Other experts are predicting that
buyers agents could veer to an explicit multi-level fee system, where the
amount of service that agents provide their clients will depend on the agreed-upon
fee level. A higher fee, say 3%, might result in more personally-provided
services by the realtor like personal showings of newly-listed homes that are
consistent with the potential buyer’s stated preferences. A buyer who has
agreed to a lower 1% commission fee might receive email announcements of newly-listed
MLS homes for sale that are consistent with the prospective buyer’s desires.
Predictably, the NAR is appealing
the court’s ruling. If the federal trial decision is upheld, the $100 billion
that US consumers pay in real estate commissions will likely plummet, conceivably
as much as 30%. That would be a significant victory for lots of property buyers
and sellers way beyond Kansas City and a potentially significant loss for the
NAR’s realtors.
The second event.
Detroit’s three-term mayor Mike Duggan asserts his city’s come-from-way-behind
efforts to revitalize itself would be much more fruitful if it wasn’t being
stifled by real estate speculation. Absentee owners who inexpensively purchased
plenty of Detroit properties after the Great Recession have done next to nothing
in the way of beneficial improvements. In June 2020 Detroit’s property vacancy
rate was over 20%; it has dropped only a bit since then. The mayor believes
these shadowy investors are taking advantage of the city. They’re speculators, passively
waiting for their land’s value to increase without undertaking any direct investment
to improve their properties.
Mayor Duggen is not at all happy
about this. As he puts it, “Blight is rewarded, building is punished.” The
mayor’s proposed salve is a relative of George’s Land Value Tax, although he
apparently has never heard of Mr. George. The mayor wants to raise
property tax rates on unimproved Detroit land, and lower them for land
that has existing structures which are occupied. Perhaps Henry is smiling from
his grave. If the mayor is successful, Georgism may be renewed as it captures
Detroit territory.
Like most municipalities, it's no
simple matter to modify property taxes in Detroit. Mr. Duggen first needs
approval by the State of Michigan. So far, lawmakers in Lansing have not been
moved into action and are dubious of the merits of the mayor’s proposed new property
tax. If and when the legislature approves it, Detroit voters also would have to
vote their support of the new tax.
Does it take just 2 steps to
tango back to a revitalized Georgism in the 21st century? Maybe, but
breath-holding isn’t recommended. Nevertheless, lowering land taxes on
improved, inhabited properties is likely to be an appealing idea for many.
