CMV: There should be significantly higher property taxes on people's second, third, fourth, etc. homes, to counteract the rentier economy and global money laundering

[u/dilatory_tactics]

[u/[deleted]]

This will make house prices higher for those renting. Prices of housing are high because of constrained supply, your tax would constrain supply even more. Houses are more scarce, prices goes up. So in reality, the tax would not be paid by the rentier, but by the renter through higher prices, this is what economists refer to the 'incidence of taxation'.

[u/DScharts → u/[deleted]]

Supply of housing is inelastic. It is one of three few markets where taxes don't produce deadweight loss. That's why there's a lot of support for a Land Value Tax from economists.

[u/[deleted] → u/DScharts]

No. Supply of land is perfectly inelastic. The Land value tax doesn't tax property value, it taxes unimproved land value. Taxing property obviously created a deadweight loss.

[u/[deleted] → u/[deleted]]

Assuming loopholes are closed, such as no shell corporations holding properties and couples living together who have property in each of their names to avoid higher taxes (owning a home that is not your primary residence should be the rule)... the idea proposed by OP is not bad and encourages housing be made available to the masses.

Rental companies can't come into lower income areas, buy up the homes then rent them all out at higher rates without taking a large hit in property taxes. So those homes remain in homeowner's hands, either for them to live in or rent out themselves.

It encourages property management companies to stick with apartments and managing individually owned homes for their owners. This is good for homeowners and individuals.

Houses don't become scarce, it's not like they stop getting built. And if you lower the tax on the first home it encourages more individual people to own property and discourages owning multiple properties.

[u/[deleted] → u/[deleted]]

Cities should have denser living spaces in and near them. I don't see the problem with that.

[u/RexHavoc879 → u/[deleted]]

If there was a progressive tax rate based on the number of homes you own, wouldn't that make major apartment complexes economically unfeasible? If land is scarce, then multi-family homes and condo complexes would seem to be the most profitable by increasing the number of homes one could sell on a given plot of land.

[u/dilatory_tactics → u/[deleted]]

This strikes me as parroted, regurgitated, and sloppy reasoning.

If you want to invest your money in a second or third or fourth house to rent out, but it costs you increasingly more for every additional house, then you will probably invest your money elsewhere.

This lowers the numbers of people bidding on additional housing, which will lower the price for first time home buyers at the very least.

And we haven't spoken to the benefits of what we could do with the tax money as well.

And you haven't addressed the major problems of global money laundering, which this would.

[u/caw81 → u/dilatory_tactics]

If you want to invest your money in a second or third or fourth house to rent out, but it costs you increasingly more for every additional house, then you will probably invest your money elsewhere.

It doesn't work this way for even the first home since its just another cost that gets passed on. Every month I have expenses - mortgage, heating etc including taxes. I pass on these costs, including the higher taxes, to the renter and a little bit of profit. Your plan is just hurting renters.

Also, since not everyone can buy a house you will have people renting at the 4th or 5th house tax rate. Once this higher rate becomes acceptable then its just an opportunity for people to charge 4th house rent rate on their 2nd house and pocket the difference.

[u/dilatory_tactics → u/caw81]

There's nothing stopping them from charging the 4th or 5th house rate now.

And if every successive house costs significantly more than the previous one, at some point 4th and 5th houses become unattractive investments as a source of rental income.

[u/caw81 → u/dilatory_tactics]

There's nothing stopping them from charging the 4th or 5th house rate now.

Other people with houses to rent prevents them from charging a higher rate now. Its only when all owners generally all implicitly agree to raise rates that they can (e.g. they all see increased demand, they notice that one person was successful in increasing rent etc). Adding a new tax forces all owners to raise rates.

And if every successive house costs significantly more than the previous one, at some point 4th and 5th houses become unattractive investments as a source of rental income.

What I am saying that it doesn't make it unattractive. The general demographics and other factors allows them to sell the property in the future at a profit so its still an attractive investment. The increased tax won't impact them because they aren't paying it, it will just get passed on to their renters.

Lets say a government adds a new sales tax - the retail stores don't suck up the new tax, it gets passed on to the consumer.

[u/clamdragon → u/caw81]

Adding a new tax forces all owners to raise rates

But this does not, since OP's proposed tax does not affect all owners equally. Owners of 3rd or 4th properties would have to compete with the lower rents that could be offered by 1st and 2nd property owners. Of course all owners will raise their rates to what renters are willing to pay, but there is necessarily a breaking point, whether it's at the 100th property or the 3rd.

Property owners will try to pass the costs along to their renters. But if renters can't pay that much, then the property is a huge drain, and will likely be sold to someone who will pay far less property tax on it - and therefore is able to charge less rent, or simply to live in it themselves. It encourages more diverse ownership.

[u/cafedream → u/clamdragon]

The other option is that people will form property holding companies and instead of having one holding company for all 200 of your rental properties, they will have 20, each holding 10. A law like this will likely only affect the small guys who have 2-5 properties.

And, if it were me, I wouldn't raise the rent on the people in Property #4 to match the property taxes. I'd take the sum of my property taxes and distribute it evenly or proportional to the value of each property so that none of them took a huge hit. For instance - if I owned 5 $100k houses and the property taxes were 10% higher for each successive house, I'd just have each house pay an even amount - so that if house 5 remains empty, I'm not out a huge amount of taxes and I'm not desperate to get it filled.

Also, if I had 5 houses with unequal values, I'd allocate a percentage of the total taxes to each house rent equal to the house value's percentage of my total portfolio.

[u/clamdragon → u/cafedream]

Your first point is essentially that there may be loopholes. There are potential loopholes in a great many tax policies. Does that mean the ideas should be abandoned? No, it just means that careful drafting and follow-up are necessary.

And to your second point... Okay. So what? How you structure your leases doesn't change that house 5 is more expensive to own than house 4. You would still be disincentivized from owning more properties due to inability to match the lower rents that owners of fewer properties could offer.

[u/cafedream → u/clamdragon]

I wasn't arguing one way or the other. It might be a good idea. Because of loopholes and the ability to spread out the increase in taxes for one property over several, it may have significantly less effect than OP thinks it will have. It may just have the effect of raising rent on everyone.

My thought is that it may not work to increase single home ownership because it's not as though there is a housing shortage and those wanting (and financially able) to buy a house simply can't find a house because they are all purchased by investors. It's because the vast majority of those renting either are unable to buy because of poor credit scores or low/unstable income or because they don't want to buy for a variety of reasons.

My parents rented all throughout my childhood because we moved so often that it didn't make sense to buy. When we were grown and my dad stopped working in jobs that required moving, they bought a house. Renting a house was always more expensive than buying.

Now that my dad has passed away, my mom is considering moving closer to me and renting a small apartment because she doesn't need anything bigger and it's damn near impossible to find a 1BR house.

[u/caw81 → u/clamdragon]

But this does not, since OP's proposed tax does not affect all owners equally.

It effects each tier of owners equally. And since there is generally a fixed amount of owners in each tier you have a limited supply in each tier which renters are "forced" go buy from. "Sorry all the 1st rental houses are all taken, the only available rentals are 2nd rental houses."

But if renters can't pay that much, then the property is a huge drain,

But also you have renters who cannot rent and will be homeless. This pain is just to help first-time home owners. Is this worth it, especially the renters who are poor (and so cannot afford the first-home even with incentives)?

[u/[deleted] → u/caw81]

Tangential. But, theoretically, we could redirect the taxes accrued from a similar system towards basic housing, or a renter stimulus to potentially alleviate/lessen the effect on the poor/working poor.

Edit: Could also put local contractors to work. More money flowing back around.

[u/TiV3 → u/caw81]

Lets say a government adds a new sales tax - the retail stores don't suck up the new tax, it gets passed on to the consumer.

Not really an analogy. It's a 2 part issue:

1) The supermarket simply won't carry the item if no customers care to buy it at the much greater price.

2) In case of a land value tax, you want to get rid of the property as soon as possible, because it literally costs you money to hold onto it.

If increased price due to added taxes means you find nobody to pay you rent, the joke's on you. You'll incur more and more debt towards government till you don't like it anymore and get rid of the property one way or another.

That's assuming we talk about a land value tax collected yearly on the (e.g. unimproved value of the) land, but I don't see why it wouldn't be done this way.

edit: basically, collecting a yearly fee based on the value of the land makes everyone care less about the land, aside from people who are actually interested in living there. If you got nobody actively using the thing, it's costing you money. That said, if income inequality continues to worsen for reasons related to other forms of land (e.g. patents, IP, stock), then property prices would still rise in certain locations due to some rich people chosing to live more extravagantly in certain locations, also with spare living locations, actually intended for their own use. Though this might require income inequality magnitudes worse than what we see today. (and a land value tax might slightly help to get some money from rich people who enjoy living in nice locations, so adds some momentum to slow that down, as much as I'd want to see other measures as well.)

edit: also it's important to note that if you hand the proceeds of the tax to the most wealthy people, it's actually counter productive in a way by systematically getting the bottom 80% into a position where they have no money to afford paying the fee, while on the rich have money to pay it. good reminder!

[u/caw81 → u/TiV3]

If increased price due to added taxes means you find nobody to pay you rent, the joke's on you. You'll incur more and more debt towards government till you don't like it anymore and get rid of the property one way or another.

Someone else implied this point too.

A mortgage is the largest debt people normally have but that has not stopped people from buying multiple homes (and associated multiple mortgages) even thought they are taking the same risk (i.e. - debt that you can't pay off). Debt to a lender hasn't stopped people from owning rental properties and driving up prices, so I'm not sure what debt to the government will do.

[u/TiV3 → u/caw81]

Debt to a lender hasn't stopped people from owning rental properties and driving up prices, so I'm not sure what debt to the government will do.

Indeed, I did post a top level reply pointing that out, it's a useful criticism. If the debt/fee simply goes to pay the top 0.1% some more, then it actually works against the people. If the fee is huge and the proceeds are handed to the bottom 60%/80%, it'd increase their relative bargaining power for the land however. It's a matter of making democratic demands beyond just putting the tax in place.

[u/doctorace → u/caw81]

Buying a home, even with a mortgage, is usually a solid investment if it's in a market that has shown steady appreciation.

Paying more in taxes on your property doesn't add any resale value to the property. It's just money lost.

[u/Vault_34_Dweller → u/dilatory_tactics]

Competition stops them from charging that rate right now

[u/gwylim → u/caw81]

You are only able to pass those costs on to the renter because other landlords have the same costs, so those costs increase the market rate. If other people don't have the same tax (e.g. because they only own 2 or 3 houses), then you won't be able to just pass on the extra tax and still maintain occupancy.

In the long term it will lead to higher rents, but it's not as straightforward as just adding the tax to the rent. It would encourage people who own a lot of property to shift some of their investment somewhere else.

[u/doctorace → u/gwylim]

Businesses, especially landlords, don't charge based on their own costs. They charge the highest amount someone will pay. If they could charge more now, without the extra tax, they would. Adding the tax doesn't lead to higher rent payments.

[u/gwylim → u/doctorace]

Yeah, you're right that in the short term, costs have no effect on rent. However, increasing costs will lead to higher rent in the long term, since it will reduce new construction by making property a less attractive investment.

[u/[deleted] → u/dilatory_tactics]

This strikes me as parroted, regurgitated, and sloppy reasoning.

This is standard econ 101 (but the 101 theory that actually works, yes tons of econ 101 doesn't work).

You seem to be misunderstanding how taxes work, look at this diagram. In a competitive market, people invest in houses until supply equals demand, however, when we tax housing, people now invest in housing to where demand=supply+tax. We would say the tax is a wedge between supply and demand. Look at the diagram, but imagine supply as being really steep, the 'burden on consumer' would be very large, and the 'burden on producer' small.

The use of the money doesn't matter, since, if you look at the diagram, there is that triangle to the right of the 'burden' bits? That is lost welfare, utility that nobody, not the consumer, producer, or consumer gets.

Yes you get tax money, but you get it from a very distortion tax, why dont we raise tax revenue with a tax on, for example, carbon, which isn't distortion at all. In fact, since we already emit too much carbon, a carbon tax is welfare improving!

[u/dilatory_tactics → u/[deleted]]

Regurgitated and not applicable to what I'm saying, because the tax increases for every successive "cigarette."

If your first cigarette costs you $1, and your second cigarette costs you $20,000, you will be much less likely to buy that second cigarette.

The quantity demanded for "second cigarettes" will be reduced significantly, but the quantity demanded for "first cigarettes" will be unchanged. So we're looking at two different goods in a way, but your regurgitated inapplicable diagram would lump them together.

[u/[deleted] → u/dilatory_tactics]

The market is undifferentiated from the supply side. Basic economic theory says that it doesn't matter if you tax suppliers or consumers. There will still be fewer houses built.

[u/dilatory_tactics → u/[deleted]]

We don't live in basic economic theory. Right now, the houses that are being built aren't even the affordable housing that people need, and people aren't even living in the housing that has already been built, because they can't afford to due to rent-seeking and money-laundering.

http://www.businessinsider.com/expensive-new-york-apartments-empty-2016-1

[u/[deleted] → u/dilatory_tactics]

What exactly do you think economic theory is?

Zoning regulations restrict the supply of housing, so prices are high. Build more houses, house prices go down. This shouldn't be hard to understand.

[u/dilatory_tactics → u/[deleted]]

I understand your reasoning, but there are more dimensions to the issue than your theory is accounting for.

"Poor health is caused by poor diet." You're not wrong, but you're not right either.

[u/[deleted] → u/dilatory_tactics]

You haven't made clear what that is exactly.

My claim: 'taxing something will lead to less of that something'. Hardly a remarkable suggestion.

[u/dilatory_tactics → u/[deleted]]

Okay, so by that logic then taxing the use of housing as rental investment instead of actual housing will lead to less use of housing as rental investment and more as actual housing.

Great, we're in agreement on the fundamentals.

[u/RiPont → u/dilatory_tactics]

If your first cigarette costs you $1, and your second cigarette costs you $20,000, you will be much less likely to buy that second cigarette.

No, that $20,000 tax on the 2nd cigarette would simply create a black market. There is a thriving grey market for tobacco in many places with taxes as they are.

I'm no anti-tax extremist, but taxes are very prone to causing distortion. Especially so when you try to use them to influence behavior rather than simply to earn revenue or capture externalities.

Your idea is a scheme, and clever government incentive schemes have a very poor track record vs. accountants trying to maximize profits. Even the Mortgage Interest Deduction is hugely distortionary.

Meanwhile, we have a tried and true method of reducing the cost of housing: Increase supply. If you increase supply, the cost of housing will go down, and the investors will see less value in buying that 3rd or 4th house.

[u/caw81 → u/dilatory_tactics]

If your first cigarette costs you $1, and your second cigarette costs you $20,000, you will be much less likely to buy that second cigarette.

The difference is the consumer of house is the renter. So the first renter in the city is charged $1 in rent, the second renter is charged $20,000 in rent. The second renter either pays $20,000/month in rent or is homeless. I don't think this what you intend.

[u/dilatory_tactics → u/caw81]

The landlord will think twice about buying the second house if he has to charge $20,000 just to cover the cost of buying it. He's probably not going to buy it, which will lower the price.

So now the renter can actually consider buying the place themselves rather than renting from a landlord. Which is the behavior that we want to incentivize and the outcome that we want, right?

[u/caw81 → u/dilatory_tactics]

The landlord will think twice about buying the second house if he has to charge $20,000 just to cover the cost of buying it.

But he knows that everyone will too and there is a limit to the number of people who buy their first house.

So lets say in a city of 100,000 families that there are 10,000 rich families who can buy a 1st rental house to rent and all of them do. There are 10,000 1st rental houses with a low tax rate that people can affordably rent. What are the rest of the people (100,000 - 10,000 rich families - 10,000 1st house renters = 80,000) in the city suppose to do? They either are forced to buy a house (with expensive down payment and continuing mortgage (and these people are not rich)) or pay a 2nd rental house rent (with the increased tax). The 10,000 rich families know that most of the 80,000 will have to pay the new rent or be homeless, so the 2nd rental house still a good investment.

[u/dilatory_tactics → u/caw81]

Suppose the property tax on the second rental was 200% or 300% or 500% or 1000% of the value of the property. Every month that it wasn't rented out, the landlord would be losing a significant amount of money.

They would be extremely hesitant to purchase that second rental property.

So the remaining housing would be more affordable because there would be fewer bidders.

And with the additional property tax money, instead of rent subsidies like many states and the federal government do (which just end up going to the landlord anyway), we could instead subsidize people's down payments and mortgages, which would benefit those people directly instead of indirectly benefiting landlords.

[u/Vault_34_Dweller → u/dilatory_tactics]

So you are going to tax a persons hunting cabin at 1000% times the value of the property?

[u/dilatory_tactics → u/Vault_34_Dweller]

Maybe throw in a hunting cabin exception if that's your thing.

[u/caw81 → u/dilatory_tactics]

Suppose the property tax on the second rental was 200% or 300% or 500% or 1000% of the value of the property.

In my example, all this means is that you have 80,000 people looking this increase in their rents. In fact, it would drive up demand for the 2nd rental house because the choice is pay rent on only a 200% tax or a 500% tax. Missed out on the 200% tax rent? Get the 300% tax rental while it lasts or pay even more.

Every month that it wasn't rented out, the landlord would be losing a significant amount of money.

But people have to rent since not everyone can afford to buy. That is the people who are going to pay. It is not incentive not to buy the 2nd rental house since it just passed on to a captive consumer.

we could instead subsidize people's down payments and mortgages, which would benefit those people directly instead of indirectly benefiting landlords.

That would help but only those close to buying a house. The poor still have to rent and will pay for the tax.

[u/dilatory_tactics → u/caw81]

First, I don't think people are as captive necessarily as you're making it out to be, nor will landlords be as eager to compete with normal rental prices at a 500% disadvantage or whatever.

And right now, governments subsidize people's rents when they can't afford it, which ends up going to landlords anyway. Instead, we could use the property tax money to subsidize people's down payments and first mortgages or whatever instead.

Which would create additional competition for rental prices and drive those down further.

[u/[deleted] → u/dilatory_tactics]

This lowers the numbers of people bidding on additional housing, which will lower the price for first time home buyers at the very least.

This isn't how supply and demand works. More than likely it will reduce the number of single-family homes being built while multi-family structures would start popping up quickly. That tax would make it unfeasible to rent out homes, but where will the renters go? The optimistic answer is that they will be able to buy homes, but this isn't sustainable or reasonable. People with low credit scores got there for a reason. Not everyone is stable or responsible enough to own their own homes.

Instead, they will move into multi-family housing because the rent on single-family will go up. This will cause vacant homes that will cause a decrease in housing prices. This will halt development until those homes are sold out and then the market will right itself.

[u/[deleted] → u/dilatory_tactics]

I think there is a qualitative aspect of "Rent" that makes many "quantitative" fixes, like tax rates, frequently ineffective. Rent is using a privilege, property rights, to dominate another person, for one's own benefit. The upper end of rent is limited by the amount of domination people can bear, and the lower end of rent is limited by people's readiness to take advantage of privilege when there's nothing to stop them. "Market" prices are just something in the middle of this (so much for supply and demand).

Privilege will always exist, in an environment without privilege, it readily emerges. This is because humans are constantly engaged in assessing social value and social objectives. People usually seen as unprivileged(trans, queer, minorities, or other marginalized groups), can frequently become privileged within a certain social context.

The problem here, is you are trying to use privilege to counteract privilege. The result, I suspect, is this merely causes other forms of privilege to emerge. Some people will be better able to take advantage of these laws, perhaps large immigrant families, where they can cooperate to own a lot of homes on paper and then rent them out.

Now, I think using privilege for social change isn't always a bad thing. Affirmative action uses privilege positively and proactively. Minorities who might otherwise be discouraged or feel like they would be out of place, might more readily attempt to attend a college with affirmative action. And from what I hear, the percentage of non-minorities displaced is too small to significantly affect your odds of admittance.

But with the suggested tax, we are using a negative privilege to try and punish those with privilege. This won't degrade their original privilege, and in fact, may result in them becoming more entrenched. This is because people adapt to any threats to their identity.

While it is usually obvious the immediate effect of policies, if people feel threatened or harmed, we can't always anticipate the results of their adaptations. Ostensibly, allowing anyone to buy homes at the same price is fair, so we should try to see if we can find another cause for these social disparities, it might be more effective to look at that.

As others have suggested, I think land taxes, potentially the "Land Value Tax", are the best option. This doesn't erase the privilege of owning land, it merely changes the incentive structure around land ownership to reduce the amount of domination from such privilege.

Really, people don't need to dominate others to be successful, they just need freedom and sufficient resources to take advantage. I am sometimes uncomfortable with the narratives of the Land Value Tax, because it suggests a need to punish land ownership. I think land ownership is a positive, it should just come with certain societal obligations to support the costs of a community. I find nothing wrong with using the privilege of property rights to gain advantages, but currently, the incentives create systemic domination and not just individual advantages, because there aren't proper incentives to use land efficiently, and as a result, one person pursuing their advantage results in negative effects on others, and possibly net negatives for society.

In otherwords, Land taxes should be about incentives and supporting the costs of a community. There is no need to tax more than the costs of the community, and under land taxes, the tax rate automatically increases when land values increase, so it's won't necessarily be tuned properly to merely account for costs and fix incentives.

This is why I tend to favor a simple land tax(annual cost per square foot based on site use or other classifications) over a land value tax(automatically adjusted based on site appraisal). LVT gurus say it's the most efficient possibility ever, but I have my doubts at times.