The German Imperial Tax
on the Unearned Increment
Robert C. Brooks
[Reprinted from The Quarterly Journal of
Economics, Vol. XXV No. 4 (Aug. 1911)]
In an earlier issue of the Quarterly and elsewhere[1] may be
found a discussion of the principles upon which the new German
unearned-increment taxes are based, together with some account of the
forms these taxes have assumed in a few of the larger municipalities
of that country. A brief statement regarding the subsequent
development of the movement, culminating in the passage of an imperial
law on the subject, February 14, 1911,[2] may be of interest at this
time.
A tax of this sort was introduced by the Naval Department of the
German Imperial Government in Kiao Chau as early as 1898. First
adopted at home by Cologne in 1905, the new tax promptly started upon
a triumphal progress through the German municipalities. Before the end
of 1907 it had been introduced by eleven cities, among which, besides
Cologne, the more considerable were Dortmund, Essen, and
Frankfurt-am-Main. Since that date the accessions have continued with
increasing rapidity until by April 1, 1910, no fewer than 457 German
cities and towns had adopted the unearned-increment tax.[3] In Prussia
alone 159 cities (Stadte) and thirteen rural counties (Landkreise)
had introduced it prior to 1910. As the new form of taxation found
most favor in rapidly growing places of large or considerable
population the true significance of the foregoing is greater than the
bare figures might indicate. Of the Prussian cities and towns which
had introduced the tax prior to April 1, 1910, twenty-seven had more
than 100,000 inhabitants, seventy-two between 20,000 and 100,000, and
sixty-four between 5000 and 20,000. Berlin (2,018,279 pop.), after
rejecting the new principle in 1907, finally accepted it in March,
1910. Nearly all the hustling suburbs of the metropolis had
anticipated it in this action. Among other large cities not already
mentioned which have introduced the unearned-increment tax are Hamburg
(874,878 pop.), Leipsic (503,672), Breslau (470,904), Kiel (163,772),
and Wiesbaden (100,953). Altogether it is estimated that by April 1,
1910, the tax had been introduced into German cities and towns with an
aggregate population of 15,000,000.
In 1909 the Reichstag devoted a great deal of attention to the reform
of imperial finances. The possibility of employing the
unearned-increment tax as one of the means to this end was first
seriously considered by the Imperial Diet in that year. Every party
faction in the Reichstag expressed itself favorably upon the general
principle involved, - a remarkable tribute to the impression made by
the municipal experiments and also to the thoroughness of the
propaganda of the land reformers and economists on the subject.
However, the Bundesrat postponed action on the ground that a thorough
study of various kinds of real estate, and also of the interests of
the municipalities which had already introduced the tax, should be
made before a law on the subject could be properly drafted.
Temporarily the place in the imperial budget to be occupied finally by
an unearned increment tax was filled by a stamp tax (of 2/3 of 1 per
cent) on the selling price in real-estate transactions, and the
government was given until April 1, 1911, to bring in the proposed
unearned increment tax.
Almost a year before the latter date, however, the imperial
chancellor presented a bill on the subject to the Reichstag. The
reason assigned for this prompt action was that it had become
necessary to put an end to the uncertainty prevailing in the
real-estate market and among the municipalities of the country. After
thorough consideration and numerous amendments the bill finally passed
the Reichstag on February 1,[4] and received the imperial signature on
February 14 of the present year. Formally the law went into effect on
April 1, but it contains retroactive features that will be discussed
later.
As compared with the earlier municipal legislation on the subject the
new imperial law is distinguished by its greater length and
thoroughness. Hence any discussion of its text, even one so general as
that attempted in the present article, must of necessity be somewhat
detailed and mercilessly dry. Even so it must be understood that many
of the following statements are subject to further qualification and
definition. Those interested in the minutiae of the new law are
referred to the accompanying translation of its text.
A small number of exemptions from the tax are allowed. The Empire
itself, princes of the German states, the states themselves, and
municipalities are on the free list. Associations for colonizing
purposes, for the housing of the working classes, and similar
semi-philanthropic purposes are also exempted, provided they limit
themselves strictly to 4 per cent interest annually upon their
investments. A number of carefully defined transactions connected with
inheritances, marriage settlements, and the redrawing of boundary
lines among scattered strips of real estate are freed from the tax.
Sales of whole parcels of real estate nor to exceed 20,000 marks in
value, or of unimproved real estate not to exceed 5000 marks, are
exempt, provided that the income of the seller and his wife in the
preceding year did not exceed 2000 marks, and provided further that
neither of them is engaged in the real estate business.
Unearned-increment taxes which amount to less than 20 marks are not
collected.
The method of computing unearned increment is, of course, fundamental
in all legislation of this sort. Three main items are involved. Stated
in the simplest forms they are (a) the price paid for the property at
the last purchase, (b) the cost of permanent improvements since made
upon it, and (c) the selling price. Roughly speaking, the unearned
increment is the difference between the selling price and the other
two items.
One of the hardest fights made in the Reichstag over the bill turned
upon the point as to whether in calculating unearned increment the
cost of permanent improvements should be subtracted from the selling
price or added to the purchase price. In other words, using the
notation indicated above, should increment be figured as c - (a + b),
or as (c - b) - a ? Of course the gross amount of the result would be
the same by either method. But, as will be shown later, the rate of
tax is determined by the percentage of the unearned increment to the
cost price plus such additions to it as the law allows. If,
now, the value of permanent improvements made since the last purchase
be added to the cost, the percentage of increment will be materially
reduced, and consequently the tax rate.
Omitting everything except the three elements immediately concerned,
the following illustration may serve to bring out the point clearly. A
real-estate operator buys a piece of unimproved property for (a) 5000
marks, erects upon it a building worth (b) 80,000 marks, and sells the
property for (c) 110,000 marks. Deducting the cost of permanent
improvements from the selling price (110,000 marks minus 80,000
marks), the result is 30,000 marks, and further subtracting from this
the original cost of the land (30,000 marks minus 5000 marks), the
gross amount of the unearned increment is 25,000 marks. If, on the
other hand, the cost of permanent improvements be added to the
original cost of the land (80,000 marks plus 5000 marks), and the sum,
or 85,000 marks, be subtracted from the selling price of 110,000
marks, we obtain the same result, or 25,000 marks, as the gross amount
of the unearned increment. In the former case, however, the
percentage of unearned increment is determined by the ratio of
increment to cost price of the land alone, i.e., of 25,000 marks to
5000 marks, or 500 per cent. In the latter case the percentage is
determined by the ratio of increment to the cost price of the land
plus permanent improvements, i.e., of 25,000 marks to 85,000 marks,
and the result is a percentage of increment of only 29.4 per cent. Now
a 500 per cent of increment would be taxed at the maximum rate, 30 per
cent, (see table, below) - yielding under the illustration 7500 marks
to the public treasury. An increment of 29.4 per cent, on the other
hand, would be taxed at a rate of only 11 per cent, yielding in the
present instance only 2750 marks.
Naturally the land-owning interest favored the latter method of
computation. As originally drafted, however, the bill provided that
the value of permanent improvements should be subtracted from the
selling price instead of being added to the purchase price. A very
large number of the more recent municipal ordinances had already
introduced this method of computation. Tax reformers supported it on
the ground that increments of value shown by real-estate transactions
are due in the great majority of cases to the increase of pure land
value, not to improvements. They pointed out, further, that the bill
provided for the full, even generous, reckoning of the value of all
permanent improvements at their first cost. It is one of the peculiar
omissions of German unearned-increment-tax legislation that
depreciation in the value of buildings and other improvements is not
taken into account. As a consequence, improvements made early in a
long period of ownership may be allowed to go to rack and ruin, and
thus greatly depreciate its selling price. This, of course, might
greatly reduce or even wipe out a considerable increment in the value
of the naked land, with the consequence that the seller would escape
the tax in part or altogether. To allow the land-owner thus to profit
by depreciation while at the same time he added the full original
value of improvements to the purchase price of his property was
energetically protested against by the friends of the new tax. After a
bitter fight, however, the land-owning interests succeeded in having
the bill amended exactly as they wished, the most important by far of
a long series of concessions which they obtained from the Reichstag.
Under the imperial law, therefore, cost of permanent improvements is
added to, or rather merged with, the purchase price in calculating the
percentage of unearned increment. As a consequence such percentages
will be greatly reduced, and with them the tax rates. By this one
change the annual revenue from the new tax will be reduced by many
millions of marks.
To return to the three fundamental elements of unearned increment
taxation, namely, (a) the price paid for the property at the last
purchase, (b) the cost of permanent improvements since made, and (c)
the selling price. Additions allowed to the first two of these items,
and deductions made from the third, will, of course, reduce the amount
of unearned increment. This much is obvious, but unless it is
constantly kept in mind the bearing of the numerous and intricate
qualifications which must now be dealt with will be utterly lost.
(a) The Last Price paid for the Property. In determining this
item the price at which the property was purchased at its last
transfer serves as a basis. Four per cent of this amount is added to
cover the original costs of acquisition, including fees connected
therewith. If it can be shown that the costs of acquiring the property
were really higher, the larger amount will be added to the purchase
price instead of the regular allowance of 4 per cent.
The new imperial is frankly retroactive - indeed it is retroactive in
three distinct ways. First, it reaches back to December 31, 1910,[5]
three months prior to the date the law went into effect, to cover
sales of real estate during this period. This was done of course, to
get hold of fictitious real-estate transactions undertaken with the
purpose of evasion. As it had been certain for a long time previous
that the Empire intended to impose a tax of this character, and as
many cities were considering similar action, it is believed that sales
of this sort running into millions of marks have occurred throughout
the country.
A second retroactive provision in the law is designed to get hold of
other methods of evasion practised in the recent past and to prevent
their employment in the future. All over Germany, whenever it has
seemed likely that a city was about to enact an unearned-increment
tax, large owners of real estate have hastened to create corporations
and have then transferred their property to these corporations at
prices sufficiently high to anticipate any increase in its value for
years to come. By this ingenious device they hoped not only to avoid
any immediate imposition of the tax, but also to escape it
permanently, since they could thereafter virtually transfer ownership
by selling corporate stock instead of selling the property outright.
During the first five months of 1907, when Berlin was considering an
unearned increment-tax ordinance, one hundred and seventy-four limited
liability companies of this character were organized in that city.
Rings were also formed in old-established real-estate corporations to
buy up and then sell to the corporation desirable tracts which, it was
thought, were thus brought under legal shelter from the impending tax.
The imperial law reaches back six years, that is, to March 31, 1905,
to cover such transactions. Instead of accepting the price at which
the land was turned into the corporation it provides for an
independent appraisal of its real value. The unearned increment is to
be calculated from the value so determined, provided this value is 25
per cent less than the price paid by the corporation and the
circumstances show that an evasion of part of the tax was intended.
Another section of the law places stock transactions of real-estate
corporations on the same basis with reference to the tax as direct
transactions in real estate. By these provisions of the new law
millions of marks of real estate values which owners had thought
safely concealed will be brought under contribution.
Thirdly, and most important of its retroactive features, the new law
reaches back for its basis in computing unearned increment to the last
sale of the property (with exceptions to be stated later) even if that
sale occurred before the enactment of the present law. Moreover, it
reaches much further back than most of the municipal ordinances
already in existence. Cologne, for example, leaves all unearned
increment which accrued prior to the passage of its ordinance entirely
free; Magdeburg taxes increment accruing since April 1, 1904;
Duisburg, since January 1, 1900; Berlin and Breslau, since January 1,
1895; and Hannover, since April 1, 1885. Dortmund goes back to the
last exchange, but if this occurred prior to January 1, 1860, a fixed
tariff of land values is assumed instead. Hamburg goes back to the
last sale without limit of time.
The corresponding retroactive feature of the imperial law is not so
severe as in some of the municipal ordinances, but still it is fairly
stringent. In computing unearned increment the price paid at the last
sale shall be taken as the cost basis or purchase price, if this sale
occurred since January 1, 1885. If it occurred prior to this date, an
appraised valuation of the property as it stood on January 1, 1885, is
assumed in calculating unearned increment, unless the present seller
can show that he or his predecessors actually paid more for property,
in which case the latter sum is taken as cost basis instead of the
appraised valuation. The first of January, 1885, will remain basic in
this way until 1925, when the tax gatherer will be reaching back a
full forty years in computing increment on properties which are
changing hands for the first time since 1885. After 1925, when
properties are sold that have not changed hands for more than forty
years, an appraised valuation of the property as it stood forty years
before the date of sale will be taken as the cost basis in computing
unearned increment, unless the seller can show that he or his
predecessors actually paid more than the appraised valuation, in which
case the higher actual purchase price will be used as a basis.
Various criticisms have been made against this complicated
arrangement. Even for the present it will not be easy to fix a factory
estimate of the values of many pieces of property as they stood in
1885. Between taxpayers and tax officials frequent differences of
opinion are sure to occur and be taken to the courts. To reach back a
full forty years in making such estimates will be an even more
ticklish and contentious matter. After 1925, moreover, the tax
officials will no longer be looking back to a single fixed date but to
a series of dates forty years earlier than each transaction involving
this application of the rule and advancing constantly as time goes on.
From the point of view of tax technique, therefore, this provision of
the law is likely to prove troublesome.
Gratified as they were at the determination of the imperial
authorities to make the law strongly retroactive, many tax reformers
nevertheless objected to the cumbrous form given this part of the
measure. Some of them boldly proposed to fix the basic date
permanently at January 1, 1871. The Empire was founded about that time
and special records of land values which could be referred to were
made then. Moreover, even in the cities real-estate values had not
then begun to make the mighty strides which have so increased rents,
and in the end called forth the whole movement for the taxation of
unearned increment. Between 1871 and 1885, on the other hand,
Germany's economic development was very rapid, there was much wild
speculation, and in the larger cities, at least, real-estate values
advanced considerably. By limiting the retroactive effect of the law
to the year 1885 much of this increment will escape taxation. On the
other hand, the real-estate interests in the Reichstag of course
bitterly fought both the temporary limit to 1885 and the later
permanent limit of forty years. While the dates were finally fixed as
stated, important concessions, to be noted later, were secured by the
land-owning interests in other parts of the law.
(b) Cost of Permanent Improvements. It will be recalled that
under the imperial law the cost of permanent improvements is to be
added to, or rather merged in, the purchase price in computing
unearned increment. What, then, are to be included under permanent
improvements?
Theoretically expenditures for repairs and generally for the purpose
of maintaining a property in its original condition are not so
included. Depreciation, as we have seen, is not considered in any way.
But sums spent since the last purchase of the property, or since the
date at which its value was fixed under the terms of the law, for
building, rebuilding, and for other special permanent improvements,
form the basis of this item. Five per cent of the total amount so
expended is added to cover the owner's trouble in directing the making
of the improvements. If the owner is engaged in the building industry
and has himself undertaken the making of the improvements, 15 instead
of 5 per cent may be added to their actual cost on this score.
Next to be added to this general item are the costs of street
improvements, sewerage, and other similar public improvements to which
the property owner contributed, plus 4 per cent annually thereon from
the time such contributions were made until the property is sold, not,
however, to exceed a period of fifteen years.
Finally, an extremely complicated item is added, based both upon the
original purchase price and the permanent improvements just
considered. If taken together they show the property to have cost less
than 100 marks an are ($964 per acre), or three times as much in the
case of vineyard land, an amount equal to 2½ per cent per annum
from the time of purchase in the case of purchase price, and from the
time of making improvements in their case, shall be added. In the case
of land which on the same basis represents a higher value per are,
there shall be added on such excess, if unimproved, 2 per cent per
annum; if improved, 1½ per cent. If the period of ownership has
been less than five years and the land has remained unimproved, these
additions are reduced one-half.
This extremely awkward double-barrelled provision of the law is
designed to accomplish various ends. In the first place it favors
agricultural land with a high percentage, because increase in the
value of such land in Germany is frequently due largely to the
unremitting labor of peasant owners. Particularly is this true of
vineyard lands; hence the special clause bringing them under the 2½
per cent rate up to a value of 300 marks per are ($2892 per acre). The
lower additional rates allowed on the value of land and improvements
above 100 marks per are are designed to let the tax burden fall more
heavily on real estate that has ceased to be used agriculturally and
is either built upon or ripe for such uses. Last, this whole provision
is designed to meet objections urged against the strong retroactive
feature of the law. During a period ranging from twenty-six up to a
maximum of forty years the monetary standard of value can decline very
materially in purchasing power. Relative to a higher general range of
prices a large apparent increase in land values may be real only in
part or even totally deceptive. Without some safeguard, therefore,
sellers of real property who for a long time owned and occupied it ran
the risk of being heavily taxed on an alleged increment which,
considering a higher general range of prices, really did not exist.
Hence the allowance of a small, steady annual rate of interest upon
purchase price and improvement costs.
While admitting the justice of this reasoning in general, tax
reformers objected to the actual arrangement made in the law on the
ground that it unduly favored the "millionaire peasant"
type, familiar in the neighborhood of large German cities. It would be
no less favorable, they complained, to that class of land speculators
whose practice it is to acquire at little more than agricultural
prices large tracts some distance out from the edge of cities and then
to hold them for long periods until they are demanded at high prices
for building purposes. So far as account is taken in this paragraph of
changes in the purchasing power of money it would also appear that
while the state has sought to protect the property owner against the
consequences of a depreciating standard of value and higher general
prices, it has not in any way safeguarded itself against the
consequences of an appreciating standard of value and lower general
prices. During periods of the latter character unearned-increment
taxes are not likely to be very productive.
(c) The Selling Price. From the selling price the third
element of importance in computing unearned increment are to be
deducted the costs of the transaction incurred by the seller,
including fees. Further, if the seller can show that he failed to
realize an annual income of 3 per cent on the cost of the property
plus improvements, the amount by which he fell short of this income
for any period not exceeding fifteen consecutive years may be deducted
from the selling price. The enormous advantage which this provision
gives to the speculator who holds unimproved land for long periods is
apparent. In connection with the additions allowed to the purchase
price it enables him to escape taxation altogether for at least
fifteen years unless his increment grows at a rate faster than 4 per
cent or 5 per cent a year.
Having thus defined the elements upon which the determination of the
unearned increment depends, the law next fixes the rates of taxation
upon a progressive scale. The rates are based on the percentage of
unearned increment to the purchase price of the property plus the cost
of permanent improvements and the various additions allowed thereto.
Beginning at an increase of value of 10 per cent or less, the tax rate
is fixed at 10 per cent of the increment. The tax rate increases 1 per
cent for each additional 20 per cent of increment until it reaches a
rate of 19 per cent on increments of from 170 to 190 per cent. Beyond
this point the tax rate increases 1 per cent for each 10 per cent
additional of increase of value until it reaches a maximum rate of 30
per cent, which is imposed on all gains of 290 per cent and over.
However, the taxes levied under these rates are subject to a deduction
of 1 per cent of their amount for each completed year since the last
sale of the property. If the last sale occurred prior to January 1,
1900, this reduction shall be computed at the rate of 1½ per cent
annually for the period up to January 1, 1911. In order to present a
clear picture of the tax-rate provisions of the law the table on the
opposite page has been prepared. It shows the basic tax rate for the
various percentages of unearned increment, and also the rates as they
will be reduced, under the provision just mentioned, after ten,
twenty, and thirty years of possession.
Comparing imperial rates with those fixed in municipal ordinances, it
should first be stated that the new law does not exempt low
percentages of unearned-increment taxation. In most of the local
enactments increases of value of less than 10 per cent were left free.
If full value is admitted on all permanent improvements, as is
certainly the case in the imperial law, it is hard to see why such
exemptions should be allowed. To this position the government adhered
in spite of the opposition of the landed interests.
TABLE SHOWING RATE OF TAX ACCORDING TO PERCENTAGE OF UNEARNED
INCREMENT AND LENGTH OF POSSESSION UP TO 30 YEARS
[Adapted from Justizrat
Hermann Kausen's Die Reichswertzuwachssteuer, p.98, with changes
made to conform to the final text of the act of February 14, 1911.
Actually the deduction of 1 per cent per annum is to be made from
the gross amount of tax due under the basic rate, but the results
would be exactly the same under a table such as the above.]
As regards the scale of tax rates, ranging in the imperial law from
10 to 30 per cent, the following list of the extremes in number of the
more important local ordinances may be of interest:
District |
TAX RATE |
|
|
Lowest % |
Highest % |
Hamburg |
1 |
12.5 |
Dortmund |
3 |
15 |
Essen |
3 |
15 |
Frankfurt-am-Main |
2 |
25 |
Berlin |
5 |
20 |
Breslau |
6 |
25 |
Cologne |
10 |
25 |
Under municipal tax ordinances, however, the high rate of 25 per cent
is, as a rule, imposed upon unearned increments of about 150 per cent,
whereas under the imperial law a 25 per cent rate is not reached until
the increment amounts to 240 per cent. Moreover, owing to the addition
of the value of permanent improvements to the purchase price, the
higher percentages of unearned increment will seldom be attained under
the imperial law. Finally, experience in various cities has shown that
the highest percentages of unearned increment emerge only on long-term
property holdings. The reductions of the tax by 1 per cent per annum
will save such large percentages of increment from the higher rates.
Thus a case of unearned increment amounting to 290 per cent, accruing
after thirty years' ownership, will pay at the rate of 21 per cent
instead of at the maximum rate of 30 per cent first fixed in the law.
By way of summary of the various provisions of the new law regarding
computation of unearned increment and tax rates, a typical example may
be of service.[6] Let us assume that on April 3, 1905, a piece of
unimproved property with an area of 1.63 acres was bought for 3939
marks. In 1906 a dwelling house was erected upon it, and the city made
street improvements upon which the owner had to pay an assessment. The
property was sold, February 5, 1911, for 35,000 marks. Omitting minor
details, the computation of unearned increment would be as follows:
Add to the purchase price of 3939 marks (1) 4 per cent to cover the
costs of purchase including fees, or 158 marks; (2) the cost of the
dwelling erected in 1906, which was, say, 20,000 marks; (3) 5 per cent
of the cost of this building to repay the owner for his work in
directing the making of this improvement, or 1000 marks; (4) the
assessment of 1000 marks paid by the owner for street improvements
made by the city in the same year; (5) 4 per cent thereon for the four
full years elapsing between 1906 and the date of sale, or 160 marks;
(6) the allowance of 2½. per cent on the value of the property up
to 100 marks per are for five full years, amounting to 20 marks; (7)
the allowance of 2 per cent on the value in excess of this amount per
are as long as the property remained unimproved, or one year, which
makes[7] 79 marks; (8) the allowance of 1½ per cent on this
excess plus the expenditures for the dwelling (20,000 marks) and
directing its erection (1000 marks) from the time this improvement was
made until date of sale, or four years, making 1496 marks.[8] The sum
of these various items, or 27.852 marks, is the total cost of the
properly as determined under the imperial law. Next subtract from the
selling-price of 35,000 marks the amount by which the owner fell short
of a 3 per cent income on his investment during the year the property
remained unimproved, or 123 marks,[9] and the result, 34,877 marks, is
the selling price of the property as determined under the imperial
law. Legal selling price (34,877 marks) minus legal cost (27,852
marks) gives a gross unearned increment of 7025 marks. The ratio of
this amount to legal cost (7025 to 27,852 marks) shows the percentage
of increment to be 25.2; and, accordingly, the tax rate is 11 per
cent. Eleven per cent of the 7025 marks
Next in interest to the provisions regarding the computation of
unearned increment and tax rates was the question of the division of
the income from the tax among the Empire, the states, and the cities
or other local government bodies. It will be recalled that the
municipalities of Germany began the development of this form of
taxation several years before the Empire entered the field. Strong
pressure put upon them from above forced them to this solution of
their financial difficulties.[10] Naturally, therefore, they protested
on every possible ground against any invasion of what they had come to
look upon as their own bailiwick.[11] Legally and logically, however,
the position of the cities was open to attack. Against the
unquestioned constitutional right of the Empire to enter upon taxation
of this character the cities could urge only their moral right based
upon prescription. As a matter of logic it was impossible for the
cities to deny the right of the Empire, and, for that matter, the
right of the state and other local government bodies as well, to
participate in the revenue derived from the taxation of unearned
increment. The use of the term "unearned" in this connection
is subject to qualification. Primarily, of course, it means unearned
by the landlord. We have already seen what pains were taken in the law
to assure owners the benefit of every possible contribution made by
them in the form either of investments or of labor. If anything
remained after these deductions were fully and fairly made it was
clearly not due to the exertions of the landlord, and, hence, so far
as he was concerned, deserved to be called unearned. Now the cities
declared their intention of taking by taxation a portion of such
residual amounts on the ground that they were due to a considerable
extent to the beneficent operations of municipal government. In other
words, part of the increment unearned by the landlord was clearly
earned by the city. On exactly the same grounds, however, it cannot be
denied that other parts of the increment unearned by the landlord were
due to the beneficent operations of imperial, state, and local
governments other than municipal. In the case of Berlin and the
capital cities of the various states, of military and naval stations,
of cities in which great public institutions with their administrative
forces were located, the contributions of imperial and state
governments to local land values were direct and undeniably very
great. And even in other places the work of imperial and state
governments in maintaining peace and order, furthering commerce abroad
and at home, fostering manufacturing, agriculture, and other
industries, and so on, must have contributed materially to the growth
of land values.
Nearly all the representatives of city interests conceded the general
validity of this argument. Unfortunately it furnishes no quantitative
basis for a just and universally applicable division of the revenue
arising from a general unearned-increment tax.
Indeed it is clear that the division of the increment unearned by the
landlord into quotas assumed to be earned by imperial, state, and
local governments respectively cannot justly be accomplished upon the
same basis for all localities. If, nevertheless, some uniform rule had
to be adopted, the advocates of city interests were quite certain that
it should apportion by far the larger share of the revenue to the
municipal governments. City governments, they held, were closer to the
local property owner, and the services of such governments in
providing or supervising public utilities, safeguarding public health,
furnishing facilities for public amusements, and so on, contributed in
the main much more directly and materially to the growth of land
values than the services of state or imperial governments. A division
of the revenue, giving two thirds to the cities and one third to the
Empire, was accepted as fair by some of the advocates of city
interests.[12]
Apart from the vital point as to their quota under the imperial law
the interest of the cities was identical with that of the Empire, and
opposed to that of the landowning class. In other words, as partners
in a common tax undertaking, both city and Empire desired as strong
and productive a measure as possible. One other point, however, made
by the advocates of municipal interests against the proposal of an
imperial tax is of sufficient importance to deserve notice, namely,
that owing to the wide variations of conditions in different
localities, and particularly as between city and country, no
unearned-increment-tax legislation applicable uniformly over the
Empire could be just. In proof of this assertion attention was called
to the wide and numerous differences shown by a comparison between the
various local ordinances enacted prior to 1911. It is impossible to
deny a certain validity to this argument, and future amendments to the
imperial law may have to take it into account. The differences
discoverable in the earlier ordinances, however, are said to be due
largely to the varying degrees of strength and tenacity with which the
landlord interest fought them in municipal councils.
In favor of an imperial unearned-increment law various arguments
besides the general points already noted were made. One was that local
property owners were often strong enough to cause the rejection or
emasculation of unearned-increment-tax ordinances in city councils.
Imperial legislation and administration, it was hoped, would be more
free from this influence. At one stroke unearned-increment taxation
would be introduced by an act of the Reichstag over the whole of the
German Empire. While the latter point was well taken and of
unquestioned weight, we have already seen that the landlord interest
proved itself far from lacking in influence in the Imperial Diet.
Finally the advocates of legislation by the Empire urged that the tax
rates could readily be made high enough to insure those cities which
already had ordinances of their own, incomes as large as they were
already enjoying from this source.
Let us turn from the arguments on this point to actual adjustment of
imperial with local interests made by the law of February 14, 1911.
The lion's share of the income from the new tax, 50 per cent
altogether, goes to the Empire; 10 per cent of the amounts collected
in their respective territories goes to the state governments as
reimbursement for the costs of administering the law; and the
remaining 40 per cent is left to the municipalities or other local
government corporations. Further, the state governments are given
power to deal on their own account with this last 40 per cent. The
municipalities may, therefore, find themselves forced to stand for
further reductions imposed upon them by the various state diets for
the benefit of the counties (Kreise), provinces, or of the
state itself. Some consolation may be derived by the cities from the
fact that, with the consent of the supervisory authorities of the
state, they may add local levies on their own account to the imperial
tax rates, but these supplements (Zuschlage) will not be
allowed to exceed in revenue-producing power the amount due the city
under the imperial law, i.e., 40 per cent of the total amount
collected. Further, the imperial and local rates taken together may in
no case take more than 30 per cent of the unearned increment.
With these limitations additional local rates may be variously
according to the different kinds of property involved and the length
of the period during which it has been in the possession of the
seller. Some room for local adjustment is thus allowed even under the
terms of the imperial law. Indeed one of the arguments in defence of
the low scale of tax rates provided by the imperial law was that the
rates must be so fixed in order that cities desiring it would have
room to add Zuschlage of considerable size on their own
account. It is believed, however, that real-estate interests will make
it extremely hard for city councils to proceed far in this direction.
One further concession is made to those communities which, prior to
April 1, 1909, passed an unearned-increment-tax ordinance to take
effect before January 1, 1911, or in which prior to the latter date an
ordinance had gone into operation with retroactive effect back to
April 1, 1909. In case such communities can show that their average
yearly income under their ordinances in excess of the portion allotted
to them under the imperial law, the difference is to be paid them out
of the share of the Empire until April 1, 1915. Or instead of this a
community, with the consent of the imperial chancellor, may retain its
existing ordinance for the same period, paying over to the Empire,
however, all income in excess of the average which it received from
its own tax prior to April 1, 1911. It is left to the imperial federal
council (Bundesrat), by the way, to determine what this
average has been in given cases. So far no general method of computing
such averages has been promulgated. Owing to the great diversity of
municipal ordinances on the subject it will be a matter of great
difficulty to do so, and any solution is certain to cause friction
between city and imperial officials. For the time being, therefore,
the Bundesrat has decided to avoid general rules and to deal
only with individual cases as they come up.
By these transition provisions of the new law those cities which
anticipated the Empire in unearned-increment taxation are guaranteed
against any diminution of their income from this source during a
period of four years. After 1915, however, all local legislation will
be permanently superseded by the imperial law administered uniformly
throughout the whole country. So far as the continuation of local
ordinances is concerned a recent announcement by the imperial
chancellor is of great interest.[13] For the present he has determined
to grant permission to retain existing ordinances for periods of one
year only. This will enable municipalities having their own ordinances
to study results obtained under the imperial law in other cities. If
the latter prove satisfactory, the uniformity contemplated by the law
may be attained, with the full consent of the interested cities,
earlier than 1915.
From an American point of view those aspects of the new imperial law
which we have just been considering are interesting. They show the
federal government of Germany reaching down to abrogate or rearrange
in thoroughgoing fashion a detailed part of the tax systems of many
municipalities and local governments scattered through its separate
states. Under our constitutional system such interference by
Washington in affairs of local taxation is, of course, quite out of
the question.
In accordance with the usual German practice the actual
administration of the new unearned-increment tax is turned over to the
various state governments, subject, however, to the supervision of the
imperial plenipotentiaries for customs and taxes. Ample provision is
made in the law for the hearing and decision of all complaints made by
taxpayers. Fines are provided for various offences. In the opinion of
the German Municipal Conference the administrative provisions of the
law are so unduly complicated that they will greatly increase the
amount of work and the costs necessary to collect the tax, and will
lead to much litigation.[14]
Experience has shown that no prophecies are more apt to be misleading
than those regarding the income to be yielded by an unearned-increment
tax. All the factors affecting the real estate market, including the
perturbations and evasions caused by the impending tax itself, and all
the complicated legal paraphernalia for the computation of unearned
increment, play a part in the final result. Over a very wide field,
such as that covered by the new imperial law. however, fluctuations in
the many local real-estate markets will perhaps tend to compensate
each other. As to the probable income which the new tax may be
expected to yield, all cautious prophets are silent. Only one line of
speculation may be suggested regarding this matter. In 1909 a stamp
tax was placed in the imperial budget with the understanding that the
unearned-increment-tax law should be worked out later and substituted
for it. Now to enable the government to dispense with this stamp tax
an annual income of at least 20,000,000 marks from the
unearned-increment tax would be necessary. And as the Empire was to
receive only half of the income from such a tax, a total revenue of
40,000,000 marks ($9,528,400) was to this extent indicated. Whether or
not the government's original bill would have produced so much is
highly problematical. But it is absolutely certain that the amendments
made in the Reichstag enormously reduced the revenue-producing power
of the act. That the government shares this view is proved by the
later action of the Reichstag, which, upon the urgent representations
of the imperial secretary of the treasury, postponed the substitution
of the unearned increment for the stamp tax from 1911 to 1914.
In its main outlines, therefore, the new imperial law may be
described as fairly strong in its retroactive features and weak
elsewhere. Financially its present importance is very slight. In its
extreme complexity the law is a true product of the German intellect.
As experience is obtained in its administration and as decisions are
handed down by the courts regarding its interpretation, the
difficulties arising from this course may be greatly reduced. Still it
remains a very vital question, particularly from the point of view of
more democratic countries which may wish to follow Germany's example,
as to how far the complexity of unearned-increment taxation is
inherent in the nature of the subject itself. As the law stands it is
not satisfactory to the Empire from the point of view of productivity,
nor to the cities as regards their share of the income, nor to the
real-estate interests which, of course, are fundamentally opposed to
all taxation of this sort. Between the three it is certain to be
considerably amended soon after its effects become manifest. German
land tax reformers are inclined to lament that the new law has "no
teeth in it." A fairer statement would be that it has simply cut
its milk teeth and may be expected to develop mature molars and
incisors later. Taking all thing's into consideration, however, the
new imperial law is one of the largest and most significant practical
applications of the single-tax idea that has ever been attempted.
Notes
- R. Brunhuber on "Taxation of the Unearned Increment in
Germany." in this Quarterly, Vol. XX, pp.83-106 (November.
1907); also article by the present writer on "The New
Unearned Increment Taxes in Germany," Yale Review, Vol.XVI.
pp.236-261 (November, 1907).
- The text of the law with a brief introduction is published in
convenient form under the title Zuwachssteuergesetz v.14. Februar,
1911, by Heymann, Berlin, 36 pp. A very useful commentary with the
complete text of the law has been issued by Dr. Walter Boldt,
Stadtrat in Dortmund, under the title: Das
Reichszuwachssteuergesetz v.14. Februar, 1911, mit Anmerkungen,
Erlauterungen und Beispielen fur Steuerberechnungen, also
published by Heymann, 171 pp. Finally the administrative orders
and forms (Ausfuhrungsbestimmungen) for the execution of the law,
officially issued March 27, 1911, have been reprinted by the same
publisher in a pamphlet of 80 pages. Among other texts of earlier
date which have been found useful are Justizrat Herman Kausen's
Die Reichswertzuwachssteuer, Koln, Neubner, 1910, 155 pp.; Georg
Haberland's Die Wertzuwachssteuer, Berlin, Unger, 1910, 60 pp. ;
and the Protokoll d. Hannoverschen Stadtetags, Hannover, Janecke,
1910, 69 pp., which contains the government's bill in its original
form together with the changes made at its first and second
readings.
- Of these 457 cities and towns, 301 were in Prussia, 77 in
Saxony, 22 in Hesse, and the rest scattered throughout the other
states of the German Empire. Cf. Boldt, p.8.
- On final passage the bill was carried by a vote of 199 to 93,
20 members not voting. For the bill the Conservative,
National-Liberal, Economic-Unionist, and Free Conservative parties
voted almost solidly. A majority of the Centrum and a part of the
Independent party also voted for it. The Social-Democrats and a
part of the Independent party voted against it, while the Poles
abstained from voting.
- In the first form of the bill this date was fixed at April 1,
1910, several days preceding the introduction of the bill into the
Reichstag by the chancellor. Though the date was subsequently
changed, there never was a time during the consideration of the
bill in the Reichstag when evasion by this method appeared
possible.
- Adapted from Boldt, p.156.
- From the purchase price, 3939 marks, increased by costs of
acquisition figured at 4 per cent, or 158 marks, is subtracted 163
marks, the value of 1.63 acres at 100 marks per are, leaving 3934
marks on which this allowance of 2 per cent for one year is made.
- To the 3934 marks figured in the preceding note is added the
cost of building the dwelling plus the 5 per cent allowed the
landlord for directing the making of this improvement, and the
sum, or 24,934 marks, is the basis for this allowance at the rate
of 1½ per cent for four years.
- In this case, also, to the actual purchase price of 3939 marks
is added 4 per cent, or 158 marks, to cover the costs of
acquisition including fees.
- See article by the present writer on "Berlin's Tax Problem"
in the Political Science Quarterly, Vol.XX. p.666 (Dec., 1905);
also Yale Review, Vol. XVI, p.242 (Nov., 1907).
- In addition to the general references cited in the note, p.734,
and especially the minutes of the Hannoverian Stadtetag, consult
the Mitteilungen d. Zentralstelle d. deutschen Stadtetags, Band
ii, Nos.19-20, p.489.
- See p.150 of Stadtrat Boldt's earlier work on Die
Wertzuwachsstruer, Dortmund, 1909. This suggestion assumed that
the cities were to do the work of assessing and collecting the
tax, and thus left the states out of account.
- Mitteilungen d. Zentralstelle d. deutschen Stadtetags, 10.
Juni, 1911, p.137.
- Antrag d. Vorstandes d. deutschen Stadtetags betr.
Reichszuwachssteuer v.1. Nov., 1910. Mitteilungen d. Zentralstelle
d. deutschen Stadtetags v.12. Dez., 1910, p.489.
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