Chapter VIII: Methods of Reforming Our Land System (2)

According to Professor King's computations, the total rent of land in the United States in 1910 was $2,673,900,000, while the total expenditures of national, state, county and city governments were $2,591,800,000.[100] In his opinion (p. 162) "the rent would have been barely sufficient to pay off the various governmental budgets as at present constituted, and with the growing concentration of activities in the hands of the government, it appears that rent will soon be a quantity far too small to meet the required changes. With increasing pressure on our natural resources, however, it is probable that the percentage of the total income paid for rent will gradually increase and, since this is true, the lag behind the growing governmental expenses will be considerably less than would otherwise be the case."

A change in our fiscal system providing for the immediate derivation of all revenues from land taxes would, therefore, involve the confiscation of all rent, and the destruction of all private land values. Land would be worth nothing to the owners when its entire annual return was taken by the State in the guise of taxes. Even if the process of imposing the new taxes on land were extended over a long term of years the same result would be reached in the end; for whatever increase had taken place in the economic value of land during the process would in all probability have been neutralised by the increase in governmental expenditures. It is evident, therefore, that the proposal to put _all_ taxes on land must be rejected on grounds of both morals and expediency.

Let us suppose that all national revenues continued, as now, to be raised from other sources than land, and that all state, county, and city revenues remained as they are, except those derived from the general property tax. This would mean that all the following taxes would be unchanged: all federal taxes, the taxes on licenses of all kinds, all taxes on business, incomes, and inheritances, and all special property taxes. If, then, the whole of the general property tax were concentrated on land; that is, if all the taxes on improvements and on all forms of personal property were legally shifted to land,--the entire revenue to be raised from land would in 1912 have amounted to $1,349,841,038.[101] This is slightly more than one-half of Professor King's estimate of the total rent for 1910, which was $2,673,900,000. But this figure equals four per cent. of the land values of the country; hence the concentration of the general property tax on land would mean a tax rate of two per cent. on the full value of the land.

How much would this change increase the present rate of land taxes, and decrease existing land values? While no accurate and definite answer can be given to either of these questions, certain approximations can be attempted which should be of considerable service.

In 1912 the average tax rate on the assessed valuation of all goods subject to the general property tax was .0194, or $19.40 per thousand dollars.[102] The assessed valuation of taxed real property and improvements (land, buildings, and other improvements) was nearly fifty-two billion dollars, while the true value of the same property was nearly ninety-eight and one-half billions.[103] Consequently, the actual tax rate of .0194 on the assessed valuation was exactly one per cent. on the true value of real estate. On the assumption that both land and improvements were undervalued to the same extent, the land tax was one per cent. of the full value of the land. If now we take Thomas G. Shearman's estimate, that land values form sixty per cent. of the total value of real estate, we find that the taxes derived from land constituted only forty-four per cent. of the total revenues raised by the general property tax. To concentrate the whole of the general property tax on land, by transferring thereto the taxes on improvements and on personal property, would, accordingly, cause the land tax to be somewhat more than doubled. It would be slightly above two per cent. on the full value of the land. This is the same estimate that we obtained above by a different process; that is, by comparing Professor King's estimate of land value and rent with the total revenues derived from the general property tax.

However, it is not improbable that sixty per cent. is too low an estimate of the ratio of land values to entire real estate values. In 1900, farm land and improvements, exclusive of buildings, formed 78.6 per cent. of the value of real estate, i.e., land, improvements, and buildings. In 1910, the per cent. was a little less than 82. Now it is quite unlikely that the value of non-building improvements on farms amounted to the difference between sixty per cent. and seventy-eight per cent. in 1900, or between sixty per cent. and eighty-two per cent. in 1910. Hence the value of farm land is something more than sixty per cent. of farm real estate. On the other hand, the value of factory land in 1900 formed only 41.5 per cent. of the total value of factory land and buildings, while the value of city and town lots in five rural states varied from 34 to 62 per cent. of this species of real estate.[104] In Greater New York land constitutes 61 per cent. of real estate values.[105] Owing to the lack of data, the average ratio for all kinds of real estate for the whole country is impossible of determination. If the estimate of seventy per cent. be adopted, which is probably the upper limit of the average proportion between land values and real estate values throughout the country, the portion of the general property tax now paid by land amounts to about fifty-two per cent. Consequently the imposition of the whole general property tax on land would not quite double the present rate on land. To the first of the two questions raised above the answer can be given with a fair amount of confidence that the transfer of improvement and personal property taxes to land would cause land taxes to be about twice what they are at present.

To the second question, concerning the extent to which land values would fall in consequence of the heavier taxes, the answer must be somewhat less definite. The added land taxes would be about one-half the present general property taxes, or $675,000,000. This is about one per cent. the total land values of the country. One per cent. of land values capitalised at five per cent. represents a depreciation of twenty per cent. in the value of land; capitalised at four per cent., it represents a depreciation of twenty-five per cent. For example; if land worth one hundred dollars an acre returns to its owner a net income of five dollars annually, the appropriation of one dollar by a new tax will leave a net revenue of only four dollars; capitalised at the current rate of five per cent., this represents only eighty dollars of land value, or a depreciation of twenty per cent. If the land has the same value of one hundred dollars, and still yields only four dollars revenue, a deduction of one dollar in new taxes will leave only three dollars net; capitalised at the current rate of four per cent., this represents only seventy-five dollars of land value, or a depreciation of twenty-five per cent. Using the other method of calculation, which estimated the present tax rate on the full value of land at one per cent., we get exactly the same results; namely, the new tax is one per cent., which is equivalent to a depreciation of twenty per cent. or of twenty-five per cent., according as we assume an interest rate of five per cent. or of four per cent. Suppose, however, that the assessors do not undervalue land to the extent that we have been assuming; suppose that the present rate of .0194 on assessed valuation is equivalent to, not merely one per cent., but one and one-half per cent. of the full value of land. In that hypothesis the additional tax would likewise be one and one-half per cent., which capitalised at five per cent, would represent a depreciation of thirty per cent., and at four per cent. a depreciation of thirty-seven and one-half per cent. Combining in one generalisation the various suppositions made in this paragraph, we estimate the depreciation of land values resulting from the proposed tax transfer as somewhere between twenty and forty per cent.

We have considered two hypothetical transfers of taxes to land. The first we found to be out of the question because it would appropriate the whole of the rent and destroy all private land values. The second would apparently amount to two per cent. of the value of land, and cause land values to depreciate from twenty to forty per cent. It is unnecessary to consider the probable effects of any plan that would involve heavier land taxes than the second; that is, the scheme of imposing all the general property tax on land; for it represents the extreme feasible and fair limit of the movement within, at any rate, the next fifteen or twenty years.

Even this degree of tax transference would be unjust to the landowners if it were brought about at once. No social or other considerations exist that would justify a depreciation in land values of from twenty to forty per cent. If, however, the process were extended over a period of, say, twenty years, the decline would be only one or two per cent. annually, which is considerably less than the rate at which farm lands and the land in large cities have risen in value during recent years. Under such an arrangement the great majority of owners would probably find that the depreciation caused by the heavier land taxes, had been more than offset by the upward tendency resulting from the increased demand for land.

Nevertheless, there would still be positive losses of the three kinds described a few pages back; namely, to owners who sold land below the price that they had paid for it; to owners who sold vacant land at a price insufficient to cover accumulated interest on the investment; and to owners whose aggregate tax burdens were increased. Some degree of each of these sorts of losses would be due specifically to the new land taxes. As noted above, public compensation in all such cases would be impracticable. Consequently the justification of a law that inflicts such losses must be found, if it exists, in social considerations.

_The Social Benefits of the Plan_

These may be summed up under three heads: making land easier to acquire; cheapening the products and rent of land; and reducing the burdens of taxation borne by the poorer and middle classes. An increase in the tax on land would reduce its value and price, or at least cause the price to be lower than it would have been in the absence of the tax. This does not mean that land would be more profitable to the purchaser, since he is enabled to buy it at a lower price only because it yields him less net revenue, or because it is less likely to increase in value. The value of land is always determined by its revenue-producing power, and by its probabilities of price-appreciation. Consequently, what the purchasers would gain by the lower price resulting from the new tax, they would lose when they came to pay the tax itself, and when they found the chances of value increases diminished. If a piece of land which brings a return of five dollars a year costs one hundred dollars before the new tax of one per cent. is imposed, and can be bought for eighty dollars afterward, the net interest on the purchase price has not changed. It is still five per cent. Hence the only advantage to the prospective purchaser of land in getting it cheaper consists in the fact that he can obtain it with a smaller outlay of capital. For persons in moderate circumstances this is a very important consideration.

In the second place, higher taxes would cause many existing owners either to improve their land, in order to have the means of meeting the added fiscal charges, or to sell it to persons who would be willing to make improvements. And the desire to erect buildings and other forms of improvements would be reinforced by the reduction or abolition of taxes on those kinds of personal property which consist of building materials. An increase in the rapidity of improvements on land would mean an increase in the rate at which land was brought into use, and therefore an unusual increase in the volume of products. This virtual increase in the supply of land, and actual increase in the supply of products, would cause a fall in three kinds of prices: the price of products, the rent of land, and the price of land. The last named reduction would be distinct from the reduction of land value caused in the first instance by the imposition of the tax.

In the third place, the reduction, and finally the abolition, of taxes on improvements and personal property would be especially beneficial to the poorer and middle classes because they now pay a disproportionate share of these charges. Lower taxes on dwellings would mean lower rents for all persons who did not own their homes, and lower taxes for all owners whose residence values were unusually large relatively to their land values. And the tendency to lower rents on dwellings would be reinforced by the lower cost of building materials resulting, as noted above, from the increased supply and the lower tax on this form of personal property. Lower taxes on that species of personal property which consists of consumers' goods, such as household furniture and wearing apparel, would lessen the present inequity of taxation because this class of goods is reached to a much greater extent in the case of the poor than in the case of the rich. It is not easy to conceal or to undervalue a relatively small number of simple and standard articles; but diamonds, costly furniture, and luxurious wardrobes can be either hidden, or certified to the assessor at a low valuation. As for those forms of personal property which are of the nature of capital and other profit producing goods, such as machinery and tools of all kinds, productive animals, money, mortgages, securities, the stocks of goods held by manufacturers and merchants, and likewise buildings which are used for productive purposes,--the taxes on all these kinds of property are for the most part shifted to the consumer. The latter ultimately pays the tax in the form of higher prices for food, clothing, shelter, and the other necessaries and comforts of life.[106] Now a tax on consumption is notoriously unfair to the poorer and middle classes because it affects a greater portion of their total expenditures, and takes a larger per cent. of their income than in the case of the rich. Hence the removal of the taxes specified in this paragraph would be at once the abolition of a fiscal injustice, and a considerable assistance to the less fortunate classes.

All those landowners who occupied rented dwellings would benefit by the reduction in house rent, and all landowners without exception would reap some advantage from the reduction or abolition of the taxes on consumers' goods and on the various forms of producers' goods. It is not improbable that a considerable proportion of them would gain as much in these respects as they would lose in the capacity of landowners.

Would the social benefits summarily described in the foregoing paragraphs be sufficient to justify the increased land taxes in the face of the losses that would be undergone by some landowners in the three ways already specified? In view of our ignorance concerning the probable amount of benefits on the one hand and losses on the other, it is impossible to give a dogmatic answer. However, when we reflect on the manifold social evils that are threatened by a rapid and continuous increase in land values, and the resulting decrease in the proportion of the population that can hope to participate in the ownership of land, we are forced to conclude that some means of checking both tendencies is urgently necessary for the sake of social justice and social peace. The project that we have been considering; namely, the transfer of taxes on improvements and on personal property to land by a process extending over twenty years, seems to involve a sufficiently large amount of advantage and a sufficiently small amount of disadvantage to justify systematic and careful experiment.

_A Supertax on Large Holdings_

Every estate containing more than a maximum number of acres, say, ten thousand, whether composed of a single tract or of several tracts, could be compelled to pay a special tax in addition to the ordinary tax levied on land of the same value. The rate of this supertax should increase with the size of the estate above the fixed maximum. Through this device large holdings could be broken up, and divided among many owners and occupiers. For several years it has been successfully applied for this purpose in New Zealand and Australia.[107] Inasmuch as this tax exemplifies the principle of progression, it is in accord with the principles of justice; for relative ability to pay is closely connected with relative sacrifice. Other things being equal, the less the sacrifice involved, the greater is the ability of the individual to pay the tax. Thus, the man with an income of ten thousand dollars a year makes a smaller sacrifice in giving up two per cent. of it than the man whose income is only one thousand dollars; for the latter case the twenty dollars surrendered represent a privation of the necessaries or the elementary comforts of life, while the two hundred dollars taken from the rich man would have been expended for luxuries or converted into capital. While the incomes of both are reduced in the same proportion, their satisfactions are not diminished to the same degree. The wants that are deprived of satisfaction are much less important in the case of the richer than in that of the poorer man. Hence the only way to bring about anything like equality of sacrifice between them is to increase the proportion of income taken from the former. This means that the rate of taxation would be progressive.[108]

It is in order to object that the principle of progression should not be applied to the taxation of great landed estates, since a considerable part of them is unproductive, and consequently does not directly affect sacrifice. But the same objection can be urged against any taxation of unoccupied land. The obvious reply is that the equal taxation of unproductive with productive land is justified by social reasons, chiefly, the unwisdom of permitting land to be held out of use. The same social reasons apply to the question of levying an exceptionally high tax on large estates, even though they may at present produce no revenue.

While the tax is sound in principle, it is probably not much needed in America in connection with agricultural or urban land. Its main sphere of usefulness would seem to be certain great holdings of mineral, timber, and water power lands. "There are many great combinations in other industries whose formation is complete. In the lumber industry, on the other hand, the Bureau now finds in the making a combination caused, fundamentally, by a long standing public policy. The concentration already existing is sufficiently impressive. Still more impressive are the possibilities for the future. In the last forty years concentration has so proceeded that 195 holders, many interrelated, now have practically one-half of the privately owned timber in the investigation area (which contains eighty per cent. of the whole). This formidable process of concentration, in timber and in land, clearly involves grave future possibilities of impregnable monopolistic conditions, whose far reaching consequences to society it is now difficult to anticipate fully or to overestimate."[109] In January, 1916, the Secretary of Agriculture called the attention of Congress to the fact that a small number of corporations closely associated in a policy of community of interest were threatening to secure and exercise a monopoly over the developed water power of the country. Ninety per cent. of the anthracite coal lands of Pennsylvania are owned or controlled by some nine railroads acting as a unit in all important matters. For situations of this kind a supertax on large estates would seem to hold the promise of a large measure of relief.

To sum up the main conclusions of this very long chapter: Exceptionally valuable lands, as those containing timber, minerals, oil, gas, phosphate, and water power, which are still under public ownership should remain there. Through a judicious system of loans, deserving and efficient persons should be assisted to get possession of some land. Municipalities should lease rather than sell their lands, and should strive to increase their holdings. To take all the future increases in the value of land would be morally lawful, provided that compensation were given to owners who thereby suffered positive losses of interest or principal. To take a small part of the increase, and to transfer very gradually the taxes on improvements and on personal property to land, would probably be just, owing to the beneficial effects upon public welfare. A supertax on large holdings of exceptionally valuable and scarce land would likewise be beneficial and legitimate.[110]

REFERENCES ON SECTION I

ASHLEY: The Origin of Property in Land. London; 1892.

LAVELEYE: Primitive Property. London; 1878.

WHITTAKER: The Taxation, Tenure, and Ownership of Land.
London; 1914.

PREUSS: The Fundamental Fallacy of Socialism. St. Louis;
1908.

GEORGE: Progress and Poverty; and A Perplexed Philosopher.

MARSH: Land Value Taxation in American Cities. N. Y.; 1911.

FILLEBROWN: A Single Tax Handbook for 1913. Boston; 1912.

YOUNG: The Single Tax Movement in the United States.
Princeton; 1916.

SHEARMAN: Natural Taxation. N. Y.; 1898.

MATHEWS: Taxation and the Distribution of Wealth. N. Y.;
1914.

CATHREIN: Das Privatgrundeigenthum und seine Gegner.
Freiburg; 1909.

FALLON: Les Plus-Values et l'Impot. Paris; 1914.

NEARING: Anthracite. Philadelphia; 1916.

HAIG: Final Report of the Committee on Taxation of the City
of New York; 1916.

The exemption of Improvements from Taxation in Canada and U.
S.; 1915.

Some Probable Effects of Exemption in City of New York; 1915.

KELLEHER: Private Ownership. Dublin; 1911.

Proceedings of the 1913 Meeting of the American Economic
Association.

U. S. COMMISSIONER OF CORPORATIONS: Reports on the Lumber,
Petroleum, Steel, and Water Power of the United States.

SELIGMAN: Essays in Taxation; Shifting and Incidence of
Taxation; and Progressive Taxation in Theory and Practice.

Also the works of Taussig, Devas, Carver, Pesch, King,
Vermeersch, Willoughby, and the Commission on Industrial
Relations, all of which are cited at the end of the
introductory chapter.

FOOTNOTES:

[84] "Summary of Report of the Commissioner of Corporations on the Timber Industry in the United States," p. 3.

[85] "Report of the Commissioner of Corporations on Water Power Development in the United States," pp. 193-195.

[86] Idem, pp. 4, 5.

[87] "Abstract of the Thirteenth Census," p. 552.

[88] Cf. Marsh, "Land Value Taxation in American Cities," p. 95.

[89] Municipal purchase and ownership of land have been advocated by such a conservative authority as the Rev. Heinrich Pesch, S.J. "Lehrbuch der Nationaloekonomie," I, 203.

[90] As we shall see in a later chapter, the confiscation and injustice would be smaller if the State should simultaneously abolish interest. In any case, the decline in land value resulting from complete confiscation of rent should be made up to the private owner by public compensation.

[91] "Principles of Political Economy," book V, ch. 2, sect. v.

[92] "Progressive Taxation in Theory and Practice," 1908, p. 130.

[93] Cf. Taussig, "Principles of Economics," II, 516: Seligman, "The Shifting and Incidence of Taxation," p. 223.

[94] The "discrimination" objection is put in a somewhat different form by the Rev. Sydney F. Smith, S.J., in an article in _The Month_, Sept., 1909, entitled "The Theory of Unearned Increment." His argument is in substance that if the people of a city can claim the increases in land values which their presence and activity have occasioned, the purchasers of food, clothes, books, or concert tickets are equally justified in claiming that, "having added to the value of the shops and music halls, they had acquired a co-proprietary right in the increased value of the owners' stock, and the owners' premises." While this argument is specifically directed against those who maintain that the "social production" of values confers a right thereto, it affects to some extent our thesis that there is a vast difference between value-increases in land and in other goods. Father Smith seems to confuse the origination of value with the increase of value. The presence of consumers is an obvious prerequisite to the existence of any value at all in any kind of goods, but labour and financial outlay on the part of the producers of the goods are an equally indispensable prerequisite. The reason why the value is appropriated by the latter rather than the former is that this is clearly the only rational method of distribution. What we are concerned with here, however, is not this initial or cost-of-production-value of artificial goods, but the _increases_ in value above this level which are brought about by external and social influences. Theoretically, the State could as reasonably take these as the increases in the value of land; practically, such a performance is out of the question, for the simple reason that such increases are spasmodic and exceptional. If Father Smith thinks that "food or clothes, or books, or concert tickets" regularly advance above the cost-of-production-value, he is simply mistaken. Since these and other artificial goods bring to their owners as a rule no socially occasioned increments of value, they and their owners are in quite a different situation from land and the owners of land.

[95] Cf. Seligman, "Progressive Taxation in Theory and Practice," part II, chs. ii and iii; also the classic refutation of the "benefit" theory by John Stuart Mill in "Principles of Political Economy," book V, ch. ii, sec. 2. The traditional Catholic teaching on the subject is compactly stated by Cardinal de Lugo in "De Justitia et Jure," disp. 36; cf. Devas, "Political Economy," p. 594, 2d ed.

[96] Cf. Fallon, "Les Plus-Values et l'Impot," pp. 455, sq.; Paris, 1914; Fillebrown, "A Single Tax Handbook for 1913"; Boston, 1912; Marsh, "Taxation of Land Values in American Cities," pp. 90-92; New York, 1911; "The Quarterly Journal of Economics," vols. 22, 24, 25; "The Single Tax Review," March-April, 1912; "Stimmen aus Maria-Laach," Oct., 1907.

[97] See the references in the second last paragraph.

[98] The most comprehensive and reliable account of the special land taxes in Canada is contained in the report prepared for the Committee on Taxation of the City of New York, by Robert Murray Haig, Ph.D., entitled, "The Exemption of Improvements from Taxation in Canada and the United States"; New York, 1915. See also Fallon, op. cit., pp. 452-455.

[99] Cf. Fallon, op. cit., pp. 443-452.

[100] "The Wealth and Income of the People of the United States," pp. 158, 143.

[101] "Abstract of Bulletins on Wealth, Debt, and Taxation," p. 16; U. S. Census, 1913.

[102] Idem, p. 15.

[103] Idem, p. 16; and Bulletin of the Census on "Estimated Valuation of National Wealth," p. 15.

[104] "Special Report of the Twelfth Census on Wealth, Debt, and Taxation," pp. 12, 13.

[105] Haig, "Probable Effects of Exemption of Improvements....", p. 23.

[106] Cf. Seligman, "The Shifting and Incidence of Taxation," pp. 187, 245, 272, and all of part II; N. Y., 1899; Taussig, "Principles of Economics," II, 518-549, and chs. 67-69.

[107] Cf. Fallon, op. cit., pp. 442, sq.

[108] Cf. Vermeersch, "Quaestiones de Justitia," pp. 94-126; Seligman, "Progressive Taxation in Theory and Practice," pp. 210, 211; Mill, "Principles of Political Economy," book V, ch. ii, sec. 3.

[109] "Summary of Report of the Commissioner of Corporations on the Lumber Industry in the United States," p. 8.

[110] Probably the most concrete and satisfactory discussion of the increment tax and the project to transfer improvement taxes to land, is that presented in the "Final Report of the Committee on Taxation of the City of New York"; 1916. It contains brief, though complete, statements of all phases of the subject, together with concise arguments on both sides, majority and minority recommendations, a great variety of dissenting individual opinions, and considerable testimony by experts, authorities, and other interested persons.

SECTION II

THE MORALITY OF PRIVATE CAPITAL AND INTEREST