Olivia Chow is right to raise property taxes
And there's more to it even than addressing a municipal revenue crisis
Of all the cheap propaganda tricks in Canadian media, the cheapest has to be using unflattering photographic angles of politicians you’re trying to discredit. CBC’s recent one of Olivia Chow is incredibly cheap.
Just wanted you to know, CBC, we see you. We know the trick. We know you had better photos where Olivia Chow was, say, looking at the camera, or smiling, or looking relaxed. But you picked this one. Cheap, CBC!
But that’s not what I’m doing here today. This is another political economy post and I should just face facts that this mailing list is going to have a lot of economic analysis. There’s probably no anti-empire project without economic analysis, so let’s start.
Western politicians campaign on austerity. They promise to keep taxes low and therefore, implicitly, to keep public services on the edge of collapse. This formula goes across political parties and could be a durable feature of Western democracies. Where politicians do talk about expanding public health or education or anything else that’s good, they take pains to explain how they can do this magically without any tax increases or any sacrifice by anyone who’s been accumulating wealth over the decades. So, when Olivia Chow campaigned for mayor of Toronto on a small property tax increase, I knew it would make her media enemies and earn her a full-fledged Canadian freakout. Which is unrolling as predictably as a forest fire after a sustained dry weather spell. So, in this post, I’ll tell you something surprising about property taxes, and why they are important.
It isn’t just the “culture of cheapness” that has led, e.g., to the city’s animal services taking up to 5 days to collect a dead animal or the transit commission more or less proudly announcing simultaneous fare hikes and service cuts.
It is also that low property taxes do not lead to lower housing costs, but to much higher ones.
There’s a bit of data to confirm this: If low property taxes led to the city being an affordable place to live, Toronto, which has low taxes, wouldn’t be one of the least affordable in North America.
To understand this, as often occurs, we need Michael Hudson.
The one city that beats Toronto, the least affordable in North America, is Vancouver, and some years ago Michael Hudson gave a lecture in that city to talk about the real estate crisis. In that lecture, Hudson outlined an argument for raising the land tax. As property values increase, most of the property value increase is taken by the government to pay for services, rather than by those who get that property value increase now. Can you guess who that is? It isn’t even the landlords. It’s the banks.
In Hudson’s analysis, the value of property is set by how much a bank is willing to lend against that property. From the bank’s perspective, the ideal value of a property is one where the bank gets the maximum monthly payment from the mortgage-holder. And the ideal value of all real estate across a city is the one where everyone is paying everything they earn above subsistence to the bank - whether there is an intermediary landlord who is collecting rent, or an intermediary homeowner who is paying a mortgage, most of the money should be captured by the bank in the end. Maximizing the total amount the bank gets in mortgage payments will leave many people unhoused, it’s true, or having to commute from far to work or go to school in the city. Those social costs can be borne by society though - perhaps by the city, with its ever-declining revenue (and its ever-rising police budgets). Hudson’s claim was shocking to the audience, who asked several questions.
Won’t higher property taxes just be passed on to tenants though, as higher rents? When asked this, Hudson argued that the tax law could be written to make that impossible (there are already controls on how much a landlord can raise rents).
What about those who are betting their future on increasing home values? This one is tougher, but Hudson’s brutal answer is that that is a bad bet: betting on increasing home values is betting on increasing debt loads. It’s unsustainable. As Cory Doctorow wrote in a post about this topic, “But asset accumulation isn’t — and can’t be — a path to widespread prosperity. A middle-class that relies on increasing property values as a means to fund their kids’ university tuition, their own retirements, and the next generation’s down-payments sows the seeds of its own destruction.” Doctorow’s point — which I agree with — is that there is more meaningful security in unions and social democracy - “employment-based security” than there is in “asset-based security.”
If Michael Hudson is right, higher property taxes would reduce property values. Banks, realizing that some of what they’re now collecting as mortgage would be taken in taxes, would be willing to lend less against those properties. Is that such a disaster? “Lower property values” sounds bad, while “more people being able to afford living in the city where they work” sounds good — but they’re the same thing.
There is one other thing going on with mortgages that it would be remiss not to mention: that is that interest rates are being hiked and Canadian banks will be collecting a lot more in interest than they’ve been collecting. This, too, will lower the value of real estate as there will be fewer people able to afford these higher payments — lower effective demand. Unlike taxes though, these increases won’t be opposed by the media and they won’t make things more affordable, they’ll just price people out of housing by higher interest payments on lowered property values rather than pricing them out through lower interest payments on higher property values. They’ll also drive the economy into a recession, increase unemployment and misery. When that happens, you can be sure that the Canadian media won’t blame the banks and their games with interest rates and asset inflation: they’ll blame progressive politicians like Olivia Chow and modest property tax increases. Don’t be fooled.