Today’s world has indeed freed economies from the burden of hereditary ground rent. Almost two-thirds of American families own their own homes (although the rate of homeownership has been falling steadily since the Great Obama Evictions that were a byproduct of the junk-mortgage crisis and Obama Bank Bailouts of 2009-16, which lowered homeowner rates from over 68% to 62%). In Europe, home ownership rates have reached 80% in Scandinavia, and high rates characterize the entire continent. Home ownership – and also the opportunity to purchase commercial real estate – has indeed become democratized.
But it has been democratized on credit. That is the only way for wage-earners to obtain housing, because otherwise they would have to spend their entire working life saving enough to buy a home. After World War II ended in 1945, banks provided the credit to purchase homes (and for speculators to buy commercial properties), by providing mortgage credit to be paid off over the course of 30 years, the likely working life of the young home buyer.
Real estate is by far the banking sector’s largest market. Mortgage lending accounts for about 80 percent of U.S. and British bank credit. It played only a minor role back in 1815, when banks focused on financing commerce and international trade. Today we can speak of the Finance, Insurance and Real Estate (FIRE) sector as the economy’s dominant rentier sector. This alliance of banking with real estate has led banks to become the major lobbyists protecting real estate owners by opposing the land tax that seemed to be the wave of the future in 1848 in the face of rising advocacy to tax away the land’s entire price gains and rent, to make land the tax base as Adam Smith had urged, instead of taxing labor and consumers or profits. Indeed, when the U.S. income tax began to be levied in 1914, it fell only on the wealthiest One Percent of Americans, whose taxable income consisted almost entirely of property and financial claims.
The past century has reversed that tax philosophy. On a national level, real estate has paid almost zero income tax since World War II, thanks to two giveaways. The first is “fictitious depreciation,” sometimes called over-depreciation. Landlords can pretend that their buildings are losing value by claiming that they are wearing out at fictitiously high rates. (That is why Donald Trump has said that he loves depreciation.) But by far the largest giveaway is that interest payments are tax deductible. Real estate is taxed locally, to be sure, but typically at only 1% of assessed valuation, which is less than 7 to 10 percent of the actual land rent.
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The basic reason why banks support tax favoritism for landlords is that whatever the tax collector relinquishes is available to be paid as interest. Mortgage bankers end up with the vast majority of land rent in the United States. When a property is put up for sale and homeowners bid against each other to buy it, the equilibrium point is where the winner is willing to pay the full rental value to the banker to obtain a mortgage. Commercial investors also are willing to pay the entire rental income to obtain a mortgage, because they are after the “capital” gain – that is, the rise in the land’s price.
The policy position of the so-called Ricardian socialists in Britain and their counterparts in France (Proudhon, et al.) was for the state to collect the land’s economic rent as its major source of revenue. But today’s “capital” gains occur primarily in real estate and finance, and are virtually tax-free for landlords. Owners pay no capital-gains tax as real estate prices rise, or even upon sale if they use their gains to buy another property. And when landlords die, all tax liability is wiped out.
The oil and mining industries likewise are notoriously exempt from income taxation on their natural-resource rents. For a long time the depletion allowance allowed them tax credit for the oil that was sold off, enabling them to buy new oil-producing properties (or whatever they wanted) with their supposed asset loss, defined as the value to recover whatever they had emptied out. There was no real loss, of course. Oil and minerals are provided by nature.
These sectors also make themselves tax exempt on their foreign profits and rents by using “flags of convenience” registered in offshore banking centers. This ploy enables them to claim to make all their profits in Panama, Liberia or other countries that do not charge an income tax or even have a currency of their own, but use the U.S. dollar so as to save American companies from any foreign-exchange risk.
In oil and mining, as with real estate, the banking system has become symbiotic with rent recipients, including companies extracting monopoly rent. Already in the late 19thcentury the banking and insurance sector was recognized as “the mother of trusts,” financing their creation to extract monopoly rents over and above normal profit rates.
These changes have made rent extraction much more remunerative than industrial profit-seeking – just the opposite of what classical economists urged and expected to be the most likely trajectory of capitalism. Marx expected the logic of industrial capitalism to free society from its rentier legacy and to create public infrastructure investment to lower the economy-wide cost of production. By minimizing labor’s expenses that employers had to cover, this public investment would put in place the organizational network that in due course (sometimes needing a revolution, to be sure) would become a socialist economy.
Although banking developed ostensibly to serve foreign trade by the industrial nations, it became a force-in-itself undermining industrial capitalism. In Marxist terms, instead of financing the M-C-M’ circulation (money invested in capital to produce a profit and hence yet more money), high finance has abbreviated the process to M-M’, making money purely from money and credit, without tangible capital investment.
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