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Financial avoidance of public taxes and duties

From feudal barons keeping the land’s rent for themselves to modern corporate profits paid to bondholders, creditors have broken free of tax liability. Banks now receive most of the rental value of land as mortgage interest, mobilizing a populist argument against property taxes so as to leave more rent available to pay bankers. The situation is reminiscent of Babylonian lenders obtaining the land’s crop usufruct while leaving the customary holders liable for the labor duties associated with their land tenure. wea-ebookcover-hudson

Now that land ownership has been democratized – on credit – a majority of most populations (two-thirds in the United States, and over four-fifths in Scandinavia) no longer pay rent to landlords. Instead, homeowners and commercial property investors pay the rental value to bankers as mortgage interest. In the United States, bankers obtain about two-thirds of real estate cash flow, largely by reducing property taxes. The more the financial sector can reduce the government’s tax take, the more rent is available for new buyers to pay interest to banks for loans to buy property. This explains why the financial sector backs anti-tax “Tea Party” protests.

It is much the same in industry. Financial analysts pore over corporate balance sheets to measure the cash flow over and above the direct cost of production and doing business. This measure is called ebitda: earnings before interest, taxes, depreciation and amortization. Owners and their creditors aim to make as much of this income tax exempt by counting interest as a tax-deductible cost of doing business.

Lowering taxes on finance and real estate widens government budget deficits. If bankers also block governments from creating their own money to finance these deficits, the shortfall must be met by public borrowing (unless taxes are raised on labor and industry). At the end of this road, when public debts grow too large to be paid out of shrinking tax revenue, creditors demand that governments balance their budgets by privatizing public assets and enterprises. The effect is to turn the public domain into a vast set of rent-extracting opportunities for banks to finance.

This is the kind of resource grab the IMF and World Bank imposed on Third World debtors for many decades. It is how Carlos Slim obtained Mexico’s telephone monopoly to impose exorbitant communication charges on business and the population at large. It can be seen most recently in the demands by the European Union, European Central Bank and IMF (the “troika”) to force Greece and Cyprus to pay their foreign debts by selling whatever land, oil and gas rights, ports and infrastructure remain in their public domain. What is privatized will become an opportunity to extract monopoly “tollbooth” rents.

This financialization and rent extraction is quite different from what classical economists defined as “profit” – a gain made by investing in plant and equipment and employing labor to produce goods and services. The financial sector makes its gains via interest, fees, commissions and penalties, and by its privilege of credit creation. Land rent, monopoly rent and interest charges are independent external charges on top of the cost of production.

Michael Hudson

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