How Taxes Were Shifted off the Donald Trumps of the World and onto Homeowners
Economist Michael Hudson, author of ‘J is For Junk Economics, explains how the rising prices of homes came at a great cost to the middle and work classes
SHARMINI PERIES, TRNN: It’s the Real News Network. I’m Sharmini Peries coming to you from Baltimore.
And we’re unpacking some economic mythologies here with Michael Hudson who joins us in our Baltimore studio. Thank you so much for joining us Michael.
MICHAEL HUDSON: Good to be here.
PERIES: Michael has a new book out, J Is for Junk Economics: A Survivor’s Guide to Economic Vocabulary in an Age of Deception. Michael, so let’s continue our discussion about the various myths that are out there that we need to be aware of in order to understand the economy. Part of the problem is ordinary people, partly some because of this terminologies that you described so well in your book is led to feel that the economy is so abstract, it’s removed from them. They’re not engaged in it. It’s all about the stock market or the housing market or what the big banks are doing. But we are very active agents in the economy everyday. So in that sense, the real estate market is the only thing that seems to be somewhat real for people because people do buy and sell their house and sometimes its foreclosed on them and they have to move out. They have to then rent somebody else’s house that’s owned by somebody else. So, let’s talk about the real estate market and how it’s mythologies for us.
HUDSON: Well people have the idea that when house prices go up, somehow everybody’s getting richer. And it’s true that most middle class people, the entry to the middle class for the last hundred years has been to be able to own your own home and form about 1945 to mid-1980, families were able to just ride a whole wave of rising house prices and they thought well gee we’re all getting richer. Then prices went even higher up between about 2001 to 2008 when Allan Greenspan flooded the economy with money. So, people had the idea well just like our parents got rich off of house and were able to put us through school and give us a better life, now we’re getting richer.
What they don’t realize is that the reason house prices go up isn’t simply because population grows or the nature makes it go up. There are two factors. One, the public sector pays a lot of money on infrastructure. It builds new schools and parks and roads and sewer systems. Every time it builds a new transportation system, property goes up. When they built a subway in New York on 2nd Avenue, property prices are going all up there. So, you have the public sector spending money on transportation. Tax payers have to pay but the landlords all benefit and their taxes don’t go up.
But most of all, when you think, what is a house worth? A house is worth whatever a bank is going to lend against it. Because the fact is that none of us have enough money to pay down cash for a house. All of us have to take out a mortgage and how much we can pay and whether we can outbid the next guy who’d like that house would be, who’s going to borrow the most money?
Well when I became an adult in the 1960’s there was a rule of thumb. Families could borrow up to where the mortgage would absorb 25% of their income and you’d get a 30-year mortgage that at the end of 30 years it would pay itself off and you’d owe nothing. Then when you left the job market after you’d worked for 30 years, you’d have the house as what it did.
Well by 2008 you’d had banks lending 99 and even 100% of mortgage. So you could get a house for nothing. Just sign the 100% mortgage, don’t have to pay any interests, don’t have to take any of your income, you know for 3 years. You had all of the house prices didn’t go up because property was worth more. Didn’t go up because people were earning more and population was going. It was going up because banks were making junk mortgages. It was all on credit.
So instead people thought the house price was going up and what they didn’t think was wait a minute, the debt is going up. Wait a minute, all of this increased house price is matched by the increased debt that people are taking on. Instead of paying 25% of their income on the mortgage which was the rule in 1960’s, now they’re paying up to the government today 2016, will guarantee to the federal housing authority, mortgages that absorb up to 43% of the borrower’s income. That’s a huge amount, 43%.
In Germany where I just was last month, the average rent is between 10 and 15% of your income. Very low prices there because of their historical reasons for that. So, imagine how can you expect American factory workers to compete with German factory workers when you have to pay 43% of your income for a mortgage and they have to pay only 15% of their income. No way you can compete for that. So instead of making the economy richer by housing prices going up, it’s actually made the economy less competitive, more unemployment and of course there’s one other facto that makes housing prices go up and that’s tax cuts.
It used to be the whole idea, every economy in the world before about 1800 used to depend primarily on the land tax. I mean ever since the Stone Age and the Bronze Age and classical antiquity, the land tax was what was the basis of taxation. That was the basis of citizenry in Greece and Rome. It was what everybody had to do. And governments financed themselves by taxing the land. William the Conqueror conquered England in 1066, he had a few years later, the Domesday Book written up for how much rent tax everyone had to pay on their land. Well later, all of this tax was privatized.
Well in the United States, since the Reagan administration, there’s been a steady cut in the real estate tax and all of that money that’s cut, the homeowner thinks wait a minute if my real estate taxes are cut, I’m getting richer. What they don’t realize is that when the real estate taxes are cut, there’s more rental value of the land, what other people will pay that’s available to pay the banks in interest. Basically rent is for paying interest.
So the bankers know that every time there’s a property tax cut, they can lend a larger mortgage loan against that property so instead of paying taxes you’re paying interests to the bank. Meanwhile since you’re not paying taxes on real estate, the government says wait a minute – local governments especially – we’re on a budget squeeze. We’re not getting the real estate income we ever had, especially California with its proposition 13. So, we’re going to have to tax what people buy. We’re going to have to import an income tax on labor. We won’t tax dividends, won’t tax Wall Street. But if you are a wage earner, we’re going to tax your wage withholding and we’re going to tax excise tax, sales tax, on the things you buy. Not houses, not stocks and bonds, not the things rich people buy, but the things that the middle class and the working class buy that they’re going to get taxed.
So, this whole means of pushing up house prices has been achieved by shifting the taxes off real estate, off Donald Trumps of the world, onto the homeowners of the world and the renters of the world. The people who are not millionaires. So, there’s been a whole tax shift. People don’t realize why the price, the real estate is going up and the fact that you’re not really better off if the price of your house goes up, if your debt goes up even more or if 2008 comes along and the house price plunges and the debts remain in place and all of a sudden you’re in what economists call negative equity. That’s a position that 10 million American families were in who were foreclosed upon since 2008 and now as soon as the election was held in November, the foreclosure rates have now gone up.
Now Wall Street said, okay we got the suckers to vote, now we’re going to slam and now we’re going to begin foreclosing on them like anything and that’s exactly what’s happening in New York where I live. Foreclosure rates way up. You’re really having a transfer of property from debtors to creditors.
PERIES: And Donald Trump in his interview on 60 minutes on Sunday with Lesley Stahl said the first thing he’s going to do and he has a bill waiting which is going to be cutting taxes. So what does he mean by this and what will it mean for us?
HUDSON: Nobody knows what it means because he hasn’t given a word. We don’t know whether he’s just going to say well gee I don’t know how to be president, let me turn it all over to the republican lobbyists to write the bill. The implication is that when he talks about cutting taxes being a narcissist, he means cutting taxes for himself. He doesn’t mean cutting taxes on most people. There may be a token, a small cut in the tax for other people, but a big cut in the tax for the highest wealth brackets. So, you can be sure that his constituency is going to get the biggest tax cuts. Not your constituency who watches this show.
PERIES: Here you’re talking about Wall Street getting more tax cuts?
PERIES: Alright Michael, thank you so much for joining us.
HUDSON: Good to be here.
PERIES: And thank you for joining us on the Real News Network.
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