The big news in New York City is that the Chrysler Building is for sale:
New York City’s iconic Chrysler Building has appeared in dozens of movies and remained an Art Deco jewel of the Manhattan skyline for decades. Now, the 89-year-old skyscraper can be yours. Located on 42nd Street just east of Grand Central Terminal, sale price estimates for the famed Chrysler Building vary, but its majority owners, the Abu Dhabi Investment Council, hope to recoup the $800 million it paid for their stake of the building back in 2008.
They hope but some think the building might go for as little as $650 million and that does not cover the value of the land:
the land beneath the building is owned by New York’s Cooper Union School and the lease last year came to $32.5 million.
If we assume a 5% discount rate, the present value of annual lease payments like these might be another $650 million if one wants to know the value of the land and the building. But is it reasonable to assume a 5% discount rate? Let’s return to this after noting some grumpiness from John Cochrane towards something Paul Krugman wrote:
I try very hard not to get in to the business of rebutting Paul Krugman’s various outrages. The article “The Economics of Soaking the Rich” merits an exception. I will ignore the snark, the… distoritions, the … untruths, the attack by inventing evil motive, the demonization of anything starting with the letter R, and focus on the central economic points … Diamond and Saez made a big splash precisely because their estimates were so novel and so much higher than the prevailing consensus. For example, Greg Mankiw, also a previous CEA chair, and not a fraud, writing the excellent “Optimal Taxation in Theory and Practice” in the Journal of Economic Perspectives … Krugman and company are proposing a 70% top federal rate on top of all the others, which is … a bit deceptive relative to the 70% total marginal tax rate even in his cherry-picked sources.
OK – I cherry picked much of this rant so read the entire long winded thing for yourself. Optimal taxation is indeed a controversial topic and I applaud the notion that we should go beyond Federal taxation. Can someone tell Mankiw that before his next oped on how progressive the Federal tax system is? Cochrane followed this by some claim that we should include property taxes in the calculus of calculating the marginal tax on income:
How much is the property tax? In Calfornia, we pay 1% per year. That doesn’t seem bad, except that property values are very high. You can’t get a tear-down in Palo Alto for under $2 million. If you buy a house that costs 5 times your income — say someone earning $200,000 per year buying a $1 million house — then that is equivalent to 5 percentage points additional income tax. On top of 42% federal, 13.2% state, 9% sales, and other taxes, it’s part of my view that we’re past 70% top marginal rate now.
Maybe it is because so many of us in New York City choose to pay rents but adding the tax on property to the tax on income strikes me as odd. I’ll leave to others to weigh on this debate but I would be amiss if I did not note Peter Dorman’s latest post:
In the world of urban politics, there is probably no more potent populist rallying cry than the demand to halt gentrification. Activists have fought it on multiple fronts: zoning, development subsidies, permitting, rent control—every lever housing policies afford. But what if they’re mistaking cause for effect, hacking away at the visible manifestations of the problem while leaving the problem itself intact? Pivot to an important article in today’s New York Times, reporting on recent research David Autor of MIT presented at the economics meetings in Atlanta earlier this month.
Cochrane had an odd calculation of the present value of property taxes:
A 1% property tax at a 1% interest rate is equivalent to a 100% tax on houses. That $1,000,000 house is really going to cost you $2,000,000!
Wait, wait – I’m assuming a 5% discount rate and he assumes a 1% discount rate? OK, he continues:
What is the right rate? We can have a lot of fun with that one. The current 30 year TIPS (inflation indexed) rate is 1.19%. The 30 year nominal Treasury rate is 2.97%. In California, under Proposition 13, you pay 1% of the actual purchase price per year, but that quantity never increases. (This fact results in the paradox of extremely high property taxes on new purchasers, older people staying in huge old houses, and low property tax revenues.) So you might say that the nominal rate applies.
You might say? If the nominal cash flow is not indexed, then you should use the nominal risk-free rate as your starting point. So I started with a 3% rate and then added 2% more. Why the extra 2% you ask? Well I have read the seminal paper on leasing by Merton Miller and Charles Upton that note we should add a premium for bearing the risk of obsolescence. A lot of research would put that premium at 2% but I guess Cochrane wants to pretend owners of property should discount cash flows at the risk-free rate, which reminds me of that book by James Glassman and Kevin Hassett entitled DOW 36000. Never mind having fun with the appropriate discount rate – who did Cochrane rely on when teaching his students finance – Glassman & Hassett or Merton Miller?
How are property valuations done in New York?
Where I live, property value for the purpose of property taxes is largely fictitious. What you paid or the current market price are basically irrelevant. The properties are valued in relation to one another (presumably there is actually a formula, but I don’t know what it is).
Further, the assessed value may not have much relation to the effective tax you pay because of circuit breakers and residential exemptions.
I see high property taxes for the rich as part and parcel of recapturing the half of the top 1% incomes that has taken their overall share for 10% to 20% in two generations. Krugman’s AOC column shows how to tax back about half of that. The other half will have to come from newly organized labor increasing its share of the profits with capital. Can’t get back billionaires-take-all mountains of money by raising the price of hamburger.
https://www.nytimes.com/2019/01/05/opinion/alexandria-ocasio-cortez-tax-policy-dance.html
My total income share revolution starts out with:
If McDonald’s (really McDonald’s customers) can pay $15/hr with 33% labor costs, then, Target and Walgreen’s can pay $20/hr with 10-15% labor costs, and, Walmart should be able to pay $25/hr with 7% labor costs.
Today, 40% of US workers earn less than $15/hr.
http://fortune.com/2015/04/13/who-makes-15-per-hour/
Today, bottom 40% earners take home 10% of overall income; (what I call) mid-59% take home 70% of overall income; top 1% take home 20% of overall income (up from 10% a couple of generations back).
Double the take home of the bottom half with higher (union) prices and the mid-59% loses 14% of their income (10% of overall). Cannot get back 50% from top 1% incomes by raising the price of hamburgers …
… get back to getting that back.
Be in the best interests of fast food firms for other firms to become unionized — so their employees can afford more fast food. Way it works: when (mostly) unorganized US firms (vastly unorganized — 94%!) draw higher prices from consumers doing alright already, overall income shifts downward. Down there, employees tend to purchase proportionately more from other firms down there — which explains why minimum wage raises never cost any jobs down there …
… but it may cost jobs up there — nobody ever seems to think about that.
About getting 50% of top 1% income (10% of overall income). Back when I was a kid, we had a five star general Republican president and 92% income tax rate over something comparable to a million dollars a year. Rate much reduced to insure “incentive.” But, today’s top earners are taking 20X the wages for doing the same jobs (CEO, news anchor, quarterback) when average income (output per person, whatever) has only jumped 2X. They have 10X the “incentive” to spare.
No brainer: return to confiscatory taxation. Problem: we mid-59% can understand the abstract need, but are sensibly over cautious about be restructuring the economy — the bottom 40% aren’t informed enough to know, while they are ready to support almost anything that will relieve their suffering. Got to get both together to come up with a comprehensive plan — high union density and confiscatory taxation — if they (we) are ever going to recover our lost 10% overall income share from billionaires.
Denis:
It is not 33% and furthermore you are linking direct salary plus other costs when you are talking a direct salary of $15/hour to the employee. You need to break it out. This chart is so old its ridiculous and the trend has been downward for labor plus benefits. It does help explain it.
“How are property valuations done in New York?”
J. Goodwin. To be honest, I have no idea. I’m a discounted cash flow type which gives me no real insight here. Except the rents in NYC are “too damn high” so one would expect rather high valuations. Of course if an appraiser were to use the real risk-free rate the way Cochrane did, I’m so his estimate would be incredibly inflated.
As a Californian, any attempt to relate property tax to income marginal rates is totally bogus.
The whole point of the law was that cash income available to pay property tax bore no relation to the amount of cash income needed to pay property tax on property whose value had increased exponentially faster than the income of the owner.
Run75441 – payroll costs being near 25% of sales is about right. Food costs are another 35% of sales. There are other operating expenses (e.g., advertising) that come to about 20% of sales. So if one owned the property as well as the rights to the franchise, operating profits are a staggering 20% of sales. Then again a fair return to your property is around 12% of sales and once does have to pay McDonald’s 5% of sales for the use of their name etc.
Keep this in mind when paying $5 for your “fill-up”. Capital income (return to property and return to name) is almost as high as the income of the employees doing the hard work.
PGL:
Here is my point to Denis, that 25% includes salary and bennies.
More on this McDonald’s cost breakdown from Market Realist!
https://marketrealist.com/2014/07/why-its-important-to-put-wages-under-the-magnifying-glass
PGL:
That is where the bar chart came from. The monthly budget is how McDonalds pimps their employees by saying you can still make it.
I made it through college by working for McDonald’s. Their PR claims they give fringe benefits in the form of free uniforms and a Big Mac for every 4 hours worked. The uniforms were ugly and I hate Big Macs. Some fringe benefits!
Run,
Thanks for the heads up. Now I have to dig out labor costs percentage by industry (somewhere). Won’t happen in a day. Should have done already.
Denis:
I have said this to you before. While a quarter pounder every 4 hours and a uniform are bennies, think of all the other bennies a McD employee may have and what it may cost an McD. Things like SS which is obvious, Child Labor Laws, OSHA, EPA, OT Workman’s Comp. Unemployment, etc. This is all burden to the operation and Labor. That and the actual wages paid are what make up the 25%. You can find more info at BLS. They have a code for McD and other workers like them by industry usually.
“You can find more info at BLS.”
But one has to wait until this shut down ends. It seems these government reporting agencies have temporarily shut down their websites.
Run,
You may have taken my 33% fast food away from me — but you gave me something back that could be bigger because it works across all industries. You pointed out that wages are only part of labor costs — along with “SS which is obvious, Child Labor Laws, OSHA, EPA, OT Workman’s Comp., Unemployment, etc.” — meaning that raising salaries would have even less impact on consumer prices than I would have calculated (on my cabdriver adding machine).
Denis:
When I go into a facility and asked to reduce costs, there are ways to do such. You can rearrange the place and improve flow. You can speed up the process by changing it. You can add equipment which is more efficient. In most cases I am cutting the amount of Direct Labor which amounts to less than 10% of cost. The rest is Overhead and Materials. Overhead burdens Labor. What you are looking at is Overhead to run a business. Drucker talked of this and I just applied it.
I didn’t take anything from you. I am just trying to get you to think. The 25% or 33% are still real; however, it is more than just direct labor.
Mmm; some non-wage labor costs go up with wages, like SS.