It’s Time to Start Taxing Housing Wealth -- Like Now!

In the spring of 2015, when Generation Squeeze was busy helping to organize what would be the largest affordable housing rally in the province’s history, Matthew Rognlie, a 26 year old grad student at the Massachusetts Institute of Technology (MIT) was busy writing what The Economist says “several reputable economists regard as the most serious and substantive critique that Thomas Piketty’s book, Capital in the 21st Century, has yet faced.”

What does that have to do with Canada’s housing affordability crisis? A lot, if you believe rising housing prices have anything to do with wealth inequality. And a lot more if you believe good policy solutions depend upon a true understanding of what feeds inequality (especially, generational inequality).

You don’t have to be a finance nerd to have heard of Thomas Piketty. His book, Capital in the 21st Century was published in 2013, in the wake of the 2008 financial crisis brought about by the American housing market crash, when more than just geeky economists were becoming wise to problems brought on by the spread of global inequality.

Essentially, Piketty explained what he believed to be the causes of rising economic inequality and its looming threat to our global social and economic stability. Anger began to rise and was directed mostly at “the 1%”, those rich CEOs and hedge-fund managers on Wall Street.

Hundreds of thousands joined the “Occupy Wall Street” movement to protest an economic system that was no longer working. It was no surprise that the vast majority of “occupiers” were in their 20s and 30s, those especially burdened by low wages, lack of stable jobs, increasing tuition costs and skyrocketing housing prices.

One of Piketty’s proposals to address the growing wealth gap and the shrinking middle class was to implement a global tax on individual wealth of up to 10% a year. The idea was largely left unchallenged until Matthew Rognlie’s 2015 paper, Deciphering the fall and rise in the net capital share, which challenges us to ask what the economic drivers of wealth inequality really look like.

Is rising inequality caused by ridiculously high salaries and undeserved bonuses or do we need to look deeper? What if wealth itself isn’t the problem, but a more specific type of wealth? It’s not that Piketty got it wrong. Rognlie argues that maybe he just didn’t get it totally right.  

The Economist magazine outlines Rognlie’s main criticism of Piketty’s book “Inequality may not grow in the way Piketty predicts… the growing share of national income deriving from capital income has not been distributed equally across all sectors... The return on non-housing wealth, in fact, has been remarkably stable since 1970 (see chart). Instead, surging house prices are almost entirely responsible for growing returns on capital.”

This observation that it is homeowners in particular who are grabbing the largest share of the pie has enormous implications for public policy. “Housing’s central role in the long-term behavior of the aggregate net capital share has… not been emphasized elsewhere… Observers concerned about the distribution of income should keep an eye on housing costs,” Rognlie writes.

The young MIT graduate student doesn’t, of course, offer any recommendations for policy reform in a Canadian context, but that’s where Generation Squeeze comes in. Matt Kieltyka, a senior reporter for Metro Vancouver spoke to Dr. Paul Kershaw, founder of Generation Squeeze, on this topic, in the fall of 2016.

“One of the recommendations proposed by Generation Squeeze to address generational inequality in the housing market is a radical rethink of Canada’s tax system. Paul Kershaw explains that taxing housing wealth, especially off the back of the massive returns made by homeowners in the past decade, may be more fair than taxing people’s income.”

Paul explains, “Say we have two people who make $45,000. One is a renter, one owns outright a $800,000 home and has added wealth at a rate of 10 per cent over the years. They’re not the same but we still tax them largely the same.”

“We need to increasingly factor in the reality that in the new world where economies don’t grow like they did in the 50s and 60s, real estate and other kinds of capital are larger these days than the increase in wages. And now we have to adapt our approach to taxation. We need ways of raising revenues and housing is at the center of that.”

This type of shift in tax policy is undoubtedly controversial but has been gaining popularity, especially in the wake of what many are calling Vancouver’s less-than-successful foreign buyers and empty home taxes. It’s obvious more government-initiated policy adaptations are badly needed to effectively address Canada’s growing housing affordability crisis. If you’re not a fan of a simple capital gains tax, there are plenty of other options. The Vancouver Sun’s Douglas Todd has already described four of them: A smarter tax would ease Vancouver's housing crisis.

The bottom line is we can’t just keep hoping for a magic solution. It’s time to start imagining some sort of tax on housing wealth, not only as a way to close the gap between the haves and the have-nots, but as a much needed revenue source for the large amounts of funds needed for ambitious and costly federal initiatives like universal childcare, tuition support and housing subsidies -- all projects that would help ease the financial squeeze that is disproportionately burdening young Canadians.

Note: Matthew Rognlie graduated from MIT in 2016. For the 2016-2017 academic year, he is an International Economics Section fellow at the Princeton Department of Economics. Starting in July 2017, he will be an assistant professor at the Northwestern Department of Economics. Generation Squeeze thinks he’s a millennial worth watching!

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  • commented 2017-07-31 11:26:01 -0700
    Hi Leslie,

    Thank you for such a thoughtful response and for contributing to the discussion. We can definitely understand where your thinking comes from. Unfortunately, it is a stereotype and an assumption that the homeowner vs. the renter will live very different lives in terms of how they spend and save their money. Through university research led by Dr. Paul Kershaw, we’ve come to discover that things are fundamentally different now for young people wanting to break into the housing market, and that they’ve been set up at an incredible disadvantage compared to past generations.

    You can learn about that in our report: CODE RED: Rethinking Canadian Housing Policy https://d3n8a8pro7vhmx.cloudfront.net/gensqueeze/pages/107/attachments/original/1464150906/Code_Red_Rethinking_Canadian_Housing_Policy_Final_2016-05-24.pdf?1464150906

    Re: salaries increasing — they haven’t come close to keeping up with the increase in home prices. Since two earners barely bring home today what one breadwinner did in the 1970s, we’ve gone from 40 hour work weeks to closer to 80 hours. The result? Generations raising young kids are squeezed for time at home. They are squeezed for income because housing prices are nearly double, even though young people often live in condos, or trade yards for time-consuming commutes. And they are squeezed for services like child care, which are essential for parents to deal with rising costs, but are in short supply, and cost more than university.

    When housing windfalls mean entire generations are winning out on the housing lottery, while others are almost entirely shut out of it, the imbalance needs to be corrected. Otherwise we’ll end up with generational ghost towns without the workforce or cash flow to sustain them.

  • commented 2017-07-28 18:18:29 -0700
    I heard one of the people on the radio this week talking about this, taxing homeowners more to help to subsidize people looking to get into the market. I completely disagree with this for a number of reasons. Firstly you state that there may be 2 people that both make 45,000 a year, one person rents, the other person owns there home outright, and that they should be taxed differently. The person that owns their own home must pay their property taxes, utilities to the city (water, garbage pick up, etc.) The person that owns their house outright may have sacrificed (no car, no cell phone no eating meals from a restaurant) while the person that rents a home, apartment has the fancy car, the newest cell phone, eats in restaurants or take-out, and has all the latest toys and gadgets. So why should the person that owns the house have to pay more in taxes because they own their own home?

    I agree that the price of houses is out of control, but adding an extra tax to the people that do own houses is not the solution. You have seniors that bought there homes 50 years ago, they paid their mortgage and they made sacrifices over the years to ensure they continued to own their homes. Now they are on fixed incomes which haven’t gone up at all, yet taxes have gone up and they are struggling to stay in their homes as it is.

    So many things have changed over the years, firstly, 40 years ago we didn’t have cell phones, people didn’t have all the electronic devices they have now. Family vacations in the summer were camping trips, and today it is European vacations etc. Salaries have also changed over the years, therefore, what people paid out back then for down payments and mortgages compared to today percentage wise may not be that different, I haven’t looked at that at all. I do know growing up my parents bought their house when I was under a year old, and they bought a duplex to help offset the mortgage payment. Both of my parents worked full-time (and paid for childcare), they grew a large garden during the summer so that they could freeze and can vegetables to last throughout the winter, and there were times when it was tough, especially when you have unexpected expenses (the hot water tank quits, the furnace quits, etc.) I feel that the new generation want to buy homes, but they don’t want to give up any of the bells and whistles that they have in order to obtain it.

    In stating this, if people own additional homes as investments (rentals), then I consider that to be a business and they should pay additional taxes. Right now they wouldn’t receive the home owner grant, and they would have to pay capital gains when the property is sold, but there could be a way to tax them now and do away with the capital gains.

  • commented 2017-07-25 13:35:20 -0700
    Hi John :) Certainly no one is wanting to tax you out of your home. Rather, we think it’s fair to tax part of the massive windfalls gained by those who have won out on the housing lottery in the past few years.

    You have been removed from our communications stream. Thank you for taking the time to share your thoughts :)

  • commented 2017-07-24 21:45:26 -0700
    Piketty wrote an interesting book entitled Capital but it’s not really about capital. Did you or Rognlie notice? From what is reported or written here I am intrigued. I have never owned a house other than the one I currently lived in. Now I am retired and on a fixed income. When did you idiots propose to tax me out of my home? Don’t send me any more mail. John R Bell

“Yes, Canadian governments need to make younger people a priority. I want a Canada that works for all generations."

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It’s Time to Start Taxing Housing Wealth, Like Now!
It’s Time to Start Taxing Housing Wealth -- Like Now!
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