Should Bare-Land Values
Be Taxed More Heavily?
Harry Gunnison Brown
[Reprinted from the Journal of Land & Public
Utility Economics,
Vol. 4, No. 4 (November, 1928), pp. 375-392]
Subjective versus Objective Approach The old saying that "possession
is nine points of the law" might well be applied to our economic
practices and institutions. It is exemplified in our attitude towards
taxation, for whatever method of taxation happens to hold the field at
any given time is difficult to dislodge. Doctrines of alleged fairness
cluster about it and habituation lulls discontent. A similar
psychology causes people to question the new and un- familiar. So even
a tax system as far re- moved from our present practice as the "single
tax on land values" would probably have among its supporters many
of those who are now most definitely opposed to it, if only they had
been accustomed to it from youth, had been surrounded by others
equally accustomed to it, and had learned the arguments best fitted to
defend it instead of those used to defend the tax system we now have.
In the case of any controversy between adherents of substantially our
present taxation system and adherents of site-value taxation, the only
really objective basis of comparison is one that has reference to the
effects, whether observed or indicated, of these divergent tax
policies. On the reasonable assumption that the nature and
consequences of the existing system are the more familiar, I shall be
mainly interested here to show what consequences, be they good or bad,
might be expected from the substitution of the system of site-value
taxation.
Incidence of Land-Value Tax
At the outset it is important to make clear two facts. One is the
fact that a tax on the rental value of land cannot be shifted. The
other is that the value of land is not to be arrived at in exactly the
same way as the value of produced capital.
That a tax on the rental value of land cannot be shifted either in
higher rents to tenants or in higher prices for goods, economists
generally insist. Such qualifications as may be made to this statement
(however interesting they may be to the theorist) are of little
practical importance and need not here be discussed.[1] As a general
proposition there can be no question that a tax on the rental value of
land, applied equally whether the land is used or not and regardless
of how used, is not shiftable and, indeed, may even, by forcing
speculatively-held land upon the market, cause land rents to fall.
It is unnecessary to go at length into the argument that a tax on
land values cannot increase rents. Suffice it to say that if such a
tax did raise rent, people would economize in the use of land just as
they economize in other things when they must pay higher prices for
them. Thus, more land would be left unused than if the rents had not
been raised, and the owners of such unused land, rather than lose all
income from it while yet having to pay the new tax, would quickly
reduce rents to the former level.
Valuing Capital versus Valuing Land The value of capital as
distinguished from land depends on its cost of production -- or of
reproduction. The value of land depends solely on its expected future
income and the current interest rate at which this income is
capitalized. This is a basis for the contention that a tax on land has
different effects -- be they better or worse-than a tax on capital.
Extreme statements usually need qualification and it is not at all my
intention to assert that the value of capital is causally influenced
only by the cost of producing or of replacing it. The value of any
piece of capital, e. g., a steamship, is undoubtedly related to its
expected future yield. If it chance to be unseaworthy, its having cost
a million dollars to build will not make it worth a million. Likewise,
if built for use in a river or lake from which it cannot be moved but
where no sufficient demand for its services develops, a vessel will
not be worth as much as it cost to build.
Of course, the estimated value of the future services of a ship (as
of any piece of capital) is an essential element in determining its
present capital value. But this is not the only element. Cost of
production (contemporary cost, i.e., cost of reproduction) is a no
less essential element. No matter how valuable the expected future
services of a steamship, if another just like it can be built now for
a million dollars the one already built can hardly be sold for five
million dollars or for two million or even for a million and a half.
Except as influenced by some necessity of immediate use or by some
other special and unusual circumstance, a buyer will not pay for any
instrument of capital substantially more than its current cost of
reproduction. Nor in any case, could sellers, for long, charge more,
for a higher price than this would make the business of supplying such
capital more profitable than other lines of business and would tempt
new competition, so lowering the price. On the other hand, a lower
price than this would cause construction of such capital to cease. As
a long-run proposition, then, the value of capital is, of necessity,
not much above or below its current cost of production (cost of
duplication.)[2]
But in the case of land, there is no cost of production or
duplication. No individual and no group of individuals can duplicate
Wall Street or the loop area of Chicago. I am not attempting to argue
here that no group of individuals is ever in a position strategic
enough to start a city. Still less am I contending that never can any
individual or group purposely and effectively bring about a change in
the value of a specific small piece of land. I have discussed
elsewhere[3] the contention that these things may sometimes and in
some degree be accomplished and have, I hope, made the requisite
allowances. But, after all, the topography, land and water, of the
earth is not essentially a matter of human causation, and the
establishment of the advantages of specific sites or pieces of land is
in only slight degree a matter subject to the conscious and purposeful
control of individuals or business groups. I think the reader will see
that I am not insisting on any extreme and unqualified view, even
though the limits of space make it desirable that I do not now develop
the possible qualifications, as I have elsewhere. But, with or without
qualifications, the general nature of the difference between capital
and land which I am here trying to make clear, will be admitted by
most sensible persons once they understand the terms in which it is
stated.
To illustrate, Smith contemplates purchasing a lot and a building for
the purpose of starting a retail store. Jones offers him exactly the
lot and building that he desires, asking a price for the two of
$5o,ooo. An equally satisfactory lot, adjacent to the first, is
obtainable for $20,000. Smith realizes, therefore, that the extra
$30,000 is really a payment for the building. Suppose, however, that
an equally good building for his purpose, perhaps an exact duplicate
of the one Jones has, can be constructed for $20,000. He will then,
clearly, refuse to pay $5o,ooo for Jones' lot and building and will
consent to pay only about $40,000. The possibility of constructing
another building limits the price Smith will pay for this one. But no
such possibility limits the price he will pay for the lot since, in
the case of the lot, no such possibility exists. If Smith is not
satisfied to pay $30,000 for this specific building he may, indeed,
look for another building (which, however, someone had to construct,
so that cost of construction will affect supply and, therefore,
value), as, if not satisfied with the price of the lot, he may look
for another lot. But he can also construct an additional building,
duplicating the one desired, and he can not construct a new lot. There
is, in short, one more alternative open to him with regard to the
building than with regard to the lot.
If development of the tributary territory or increased population of
the city in question brings it about that this site (and, also, the
adjacent unimproved lot) promises to the user a much larger annual
return than before, competition will compel Smith, if he would possess
the lot, to pay a much higher price. Neither Smith nor any one of his
possible rivals for the site will be dissuaded from purchasing it at a
markedly higher price than the $20,000 it was worth under the
circumstances first assumed, on account of any idea that he can make
or construct such a site at lower cost. Nor will the fear of any such
preposterous eventuality cause the owner of the lot, or of any similar
lot, to charge any lower price than seems now to be justified by its
probable future yield.
Let us, then, put the valuation of lots in terms of arithmetic.
Suppose a lot to have, because of its situation, an expected net yield
of $1,000 a year in excess of a reasonable return on the capital
invested or to be invested in improvements. And suppose the general
rate of return yielded by capital in excess of allowance for
depreciation to be 5%. Then the lot in question should sell at
$20,000. If the owner confidently expects it to yield him $1,000 a
year and knows that $20,000 available to invest in capital
construction or otherwise would probably yield no more, he will hardly
want to sell for less than $20,000. If the prospective purchaser
believes he can make $1,000 on an investment of $20,000 in capital or
by lending it to some one for the construction of capital, he will
hardly want to pay more than $20,000 for the lot.[4]
Different Consequences from Taxing Capital and from Taxing Land
Now we are prepared to inquire whether a tax on land values, taking
any given proportion up to 100% of the rent (actual or, in the case of
speculatively- held land, potential) will have the same or different
consequences from a tax on produced capital, e. g., on improvements.
The fact is that the former tax will reduce the selling value of land,
while the latter will not, as a long run proposition, reduce the value
of capital, for capital is constantly wearing out and requiring
replacement and, unless it is worth what it costs, men will not
reproduce it. A very heavy tax on capital may, indeed, discourage its
construction. It may, possibly, by reducing the reward of saving, make
thrift seem less worth while. It may thus leave the community with
less adequate equipment for the forwarding of industry and may so,
conceivably, bring about widespread poverty. But in so far as capital
is saved and constructed, despite the possible discouragement of the
tax upon it, such capital must, in general, be worth as much as it
costs to construct. Since the value of land, on the other hand, is
determined solely by capitalizing at the current rate of interest the
net rent which its owner can expect to receive from it, a tax which
decreases what the owner can receive will necessarily make the title
to the land less valuable.
The owner of a specific piece of land will not necessarily have his
total income reduced by such a tax, if it takes the place of a tax
previously levied on all property. Indeed, in case his land is highly
improved, his net income will very likely be larger than before, since
to remove the tax from his valuable improvements will probably save
him more than the increased tax on his less valuable land will cost
him. But the total salable value of his property will be less, since
the improvements cannot be worth more than their cost of duplication
and since the value of the land must be lower than if it were not
taxed.
It does not follow that the property owner is any worse off.
Although, if desiring to sell, he would have to dispose of his
property at a lower price because of the effect of the tax on the
salable value of the land, he could for the same reason buy another
piece of land at an equally reduced price.
Regardless of whether or not important objections to increased
land-value taxation exist, I cannot avoid the suspicion that at least
a considerable part of the opposition to it among real estate men
arises from a failure to distinguish clearly between taxation of
bare-land values and taxation of real estate. I am not here trying to
say that the so-called "single tax" would be a lighter
burden on real estate in general than real estate now bears. I am
rather emphasizing the general principle upon which the single- tax
propaganda is based, viz., that the rental value of land, as a
community- produced value, is peculiarly fitted to be a source of
public revenue. This principle is quite consistent with a lower tax on
a great deal of real estate than the tax now levied upon it. Also it
would be consistent with such a lower tax even if all the rental value
of land were taken by the public. If no more was taken- and a tax on
rent can of itself hardly take more than all the rent there is --
nothing whatsoever would be taken from the earnings on the
improvements, however extensive or however large their earnings. If
such a tax on bare-land rent, even at 100%, could not provide all the
revenue needed by government, the remaining revenue required might be
raised in various other ways, such as through inheritance, income and
consumption taxes, and need not involve any further tax on real estate
as such.
An Arithmetical Contrast between Two Tax Systems
In order to make as clear as possible the distinction between
bare-land-value taxation and taxation of property in general, let us
suppose part of the United States to have one system and part the
other. Then we can, at least mentally, compare the two systems
advantageously, with a view to determining how each would affect the
economic welfare and the industrial development of the territory where
it is assumed to be in operation. Let us suppose the new system, viz.,
land-value taxation, to be in effect in the Coast states, both
Atlantic and Pacific, and the old system to be still in effect in the
Mississippi Valley states.
We shall consider the problem first in terms of arithmetic, in order
to avoid as far as possible any lurking prejudice or sentiment. Then,
perhaps, we can all agree as to what are the differences in the
effects likely to be produced, however cordially we may later disagree
regarding our desire or lack of desire that either set of effects be
sought.
It will make the argument clearer if we assume, at the outset, a
definite figure for the return to capital. We shall suppose this to
average 7% throughout the United States. But in the central area,
where all property is taxed, the tax takes about 2%, leaving a net
return on all improvements made and all other capital of 5%. Since
lenders can get about 5% and since owners of real estate can make 5%
on their improvements, no one can afford to buy land (or, having some,
to buy more) at a price so high that the future net rent (after tax
subtractions) is less than 5% of the price he pays. No owner of land
will wish to sell at a price so low that the interest he can earn,
after investing the sale price in capital, amounts to less annually
than the net rent he would get from the land.
Now we are ready to make our illustration more precisely
arithmetical. Suppose a certain person has improvements on his land in
the form of one or more buildings worth $6,ooo and which could be
duplicated for $6,ooo. The yield, at the current rate here assumed for
the Mississippi Valley states, is 7%, or $420 in excess of allowance
for depreciation. But of this $420, the sum of $I20, or 2% on the
capital, is taken in taxation. Thus a net return of $300 or 5%
remains.
So far we have made no allowance for rent of the lot. Because of its
situation an excess return of $280 is secured above the ordinary
interest on capital and this is properly to be regarded as rent (land
rent or site rent or economic rent). If the surplus $280 were received
for efficiency in managing a business, it would not be rent. But as it
is $280 in excess of interest on the value of the improvements and can
be secured by the owner without productive work on his part, being
paid to him by some one else desirous of using the lot, it is properly
to be placed in the rent category.
If taxes on rent take 2/7 of the entire rent, as we assumed to be the
case with the $420 return from the improvements, then $80 of the $280
will be taken in taxation, leaving $200 as net rent. Since the current
net interest rate is 5%, a lot which is expected to yield $200 a year
net should normally be worth that sum of which $200 is 5%, namely
$4,000. Then we can say that the land and improvements together are
worth $4000+ $6000 or a total of $10,000, that the yield is 7% of this
or $700, that the tax is 2% on the salable value (2/7 of the income)
or $200 and that the net yield is $500 or 5%. The owner, in practice,
may not distinguish his land from his capital and may consider simply
that he has a net return of $500, or 5% on a $10,000 investment. Yet,
however unconscious of it he may be, the fact is that the value of the
capital depends largely upon and cannot appreciably exceed its current
cost of production, while the value of the land can be arrived at only
by capitalizing its expected future rent at the current interest rate.
Now compare one of the sections where a tax on the rental value of
land was assumed to have replaced the general property tax. To make
the comparison clear we shall suppose in this territory a case similar
in the value of the improvements and in the location advantages of the
land. Then we shall have the improvements worth $6,ooo with a yield
above depreciation of $420 or 7%. And there will be an additional
return, due to advantageous situation, of $280.
According to our assumption no tax in this territory was levied on
real estate improvements, whether buildings, orchards or drainage
systems, or on any other capital. Whatever tax would have been levied
on these items rests on the rental value of land. Instead of taxing
the improvements $120 and the land $80 (2/7 of the actual or potential
annual income in each case), the tax rate is made high enough on the
bare- land value to secure the same total of revenue. This means, if
the proportionate returns from land are 2/3 what they are from
improvements, as in this case, a tax rate on the land of not less than
6/7 of the rental yield. Thus, the tax on this particular piece of
land would be 200, leaving a net rent of 80. (If this tax, resting
equally on valuable unused land, forced such land into use and so
somewhat reduced rents, the remaining net rent from such a piece of
land might be between $75 and $70 instead of $80.)
The net return on improvements, since these are not taxed, will be
$420 or 7% instead of $300 (or 5%), and the net rent on the lot, after
the tax is subtracted, will not exceed $80. What is the bearing of
these two facts on the salable value of the lot? Since investment in
improvements will net 7% instead of 5% and since borrowers who wish to
make improvements can afford to pay about 7% interest and, because of
competition for funds, would have to pay substantially that,"
land would tend to be valued by capitalizing its rent on a 7% basis.
The lot in question should therefore be worth that sum of which $80 is
7%, or about $1143 ($1142.93-), instead of $4000 as in the territory
where all property is taxed alike.
To purchase a piece of land and construct on it $6000 worth of
improvements, in order to get a net yield on both after taxes of $500
($300 on improvements and $200 rent on land), would require, where
property in general is taxed, an initial accumulation of $10,000.
Where the entire tax in question is on bare-land values, the amount
necessary to save in order to secure an equal income (in this case
$420 on improvements and $80 on land) is only $7143. The requisite
investment is almost $3000 less for the same income. In other words,
the person who works and saves for the purpose of making improvements
in or on land or of starting a business can secure a net return of 7%
as easily as he could secure 5% if capital were taxed.
Factories, stores, office buildings and houses cannot well be moved
from the territory where they are taxed to the territories where they
are not taxed, but future construction resulting from new
accumulations or savings will be undertaken by preference in the
territories where they are not penalized.[6] After all, the average
investor does prefer a 7% untaxed return to a return of only 5% (7%
minus a tax of 2%). Indeed, we may safely guess that a very large
portion of the more conservative business men in the Mississippi
Valley states, of those most bitterly opposed to any substitution of
land-value taxation for other taxes, would be the quickest to send
their own savings into the Atlantic Coast and Pacific Coast states
where such savings would yield the higher net returns. This might be
most unfortunate and an evidence of lack of loyalty to their professed
principles on the part of the conservative persons in question, but
there is little doubt that they would be definitely so influenced.[7]
What then? If more and more funds flow into the Atlantic and Pacific
Coast states for investment, the amount and quality of land
improvements, buildings and equipment in these sections will increase.
This will doubtless tend to lower the net return on capital towards
that of the Mississippi Valley states, while raising it in the
last-named section through a progressive scarcity of capital. The
greater amount of capital in the Atlantic and Pacific Coast states
should facilitate improvement in methods of production, add to the
efficiency of labor, make the productivity of labor, therefore, high,
and tend towards high wages and large returns to enterprise.
There is, furthermore, another possible influence which we ought not
entirely to overlook, the influence of heavier bare-land-value
taxation on the speculative holding of land out of use. Without now
discussing this problem fully or inquiring whether or not any good
purpose is' ever served by such speculation, we may surely say that in
so far as good land is held out of use by speculators, land is for the
time being made artificially somewhat scarcer than it otherwise would
be, rents and sale prices of land are made higher and wages are made
lower. Forcing good land into use has at least three results: more
remote and otherwise poorer land need not for the present be used;
industry is thus more productive; and the active factors in industry
as a whole are better paid.
We have seen that new capital will tend to flow to the Atlantic and
Pacific Coast territories where capital is not taxed; that new
ventures will prefer to start there, assuming other conditions equally
good; and that land for the establishment of these ventures can be
obtained there more cheaply. But how about the ordinary wage earner?
Is he in any measure a gainer? Will he too prefer the land-value-tax
territories to the general-property-tax region?
It is, indeed, very hard to conclude otherwise. Suppose that we
consider seriatim the advantages to him of the land-value-tax system.
He finds that the territories which apply it are -- or soon
become-better supplied with capital. This makes his labor more
effective and, therefore, more in demand, and so tends towards high
wages. The resulting gain is somewhat accentuated by the fact that the
best land is available for use-since speculative holding does not pay.
With more available space city congestion is somewhat relieved and
rents tend to be lower. If the wage earner saves something from his
wages, he can lend or invest it with hope of a higher return because
it is untaxed. At any rate he can secure such a higher return unless
or until the inflow of capital and possibly new accumulations
encouraged by the higher net interest reduce the return to the level
realizable in the less favored territory. In case he desires to own
his home, the greater cheapness of land will be frequently a net
advantage to him of hundreds of dollars. With his larger income he can
the sooner save a given amount for a home and with the lower price of
land he need not save so much.
Professional economists sometimes fail to comprehend that any
advantage is secured to the thrifty poor man anxious to earn enough to
secure land for a farm, home or business, by the greater cheapness of
land induced by the tax. What such economists say is that the lower
salable value of the land induced by the tax is offset by the higher
tax on it so that whatever the buyer gains on the one hand he loses on
the other. So common is this objection among trained economists that
it is hard for one to realize its utter superficiality. Even if the
lower price of land is entirely offset by the higher tax on the land,
we must not forget that this higher tax on the land displaces a tax on
improvements. Not to have the tax on the improvements is, then, an
absolute net gain to the buyer and improver of land whether he wants
it for a home or for some other purpose. No one can deny it who admits
that land value is determined by the capitalization of net rent and
who follows his arithmetic. He may feel this result of a land- value
tax to be lamentable but he can scarcely deny that it is a result.
Two further points are to be noted. We have temporarily put out of
account the possible higher, because untaxed, net interest on capital
in the territories taxing only land values, as a result of which the
salable value of land, being capitalized at a higher rate, might fall
in greater proportion than its net rent. For the moment we have also
ignored the possible effect of such a high land- value tax in
discouraging land speculation, increasing competition to get land
used, and so lowering both the net rent of land and the salable value
which depends on it. Can it possibly be claimed that the lower price
of land, which is caused by the tax subtraction from its rent, by the
further possible diminution of its rent because of discouraged land
speculation and by the capitalization of this remaining rent at a
higher interest rate and, along with all this, the removal of all
taxes on improvements, does no more for the thrifty poor man who
finally saves enough to buy a home than to balance the increased tax
on the bare land and so leave him no better off?
If the arithmetic of the above argument is correct, it would seem
that no tax on incomes, specific commodities or sales can possibly
make the conditions of life so favorable for a poor man who is
nevertheless thrifty and desirous of some day being an owner of land,
as a tax on bare-land values. Few, if any, of these other taxes would
completely avoid burdening him either directly or indirectly, and none
of them would have all of the desirable consequences for him which
land-value taxation would have.
Furthermore, the system of land-value taxation would make easier the
economic rehabilitation of those whom bankruptcy has reduced to
financial ruin or whose children, because of the business reverses
suffered by their parents, must again start at the bottom of the
business ladder.
It must be said, however, that the smaller the area in which
land-value taxation is applied, the more ephemeral are its special
benefits to the people of that area. Thus, if it should be applied in
but a single city or county, any resulting benefits to the majority of
the population (of such city or county) would too soon be largely
neutralized by the inflow of population from the less- favored places
outside and by the resulting increased competition for jobs and for
land. It would perhaps indicate undue optimism to expect that notable
apparent consequences would follow the gradual adoption of such a
land- value-tax system here and there in cities or other local
governing units.
Nevertheless, even some who are a bit doubtful of the merits of such
a tax system might without inconsistency urge its adoption in a few
places by way of experiment and in order that the growth and
development of such places under its operation might be studied. Or,
is the system demonstrably so terrible, on theoretical or a priori
grounds, that we should strenuously resist its securing even a
precarious foothold in our American life -- if it has not already done
so in the "graded tax system" of Pittsburgh and Scranton,
Pennsylvania!
The "Confiscation" or "Vested Rights"
Argument
I am not going to offend either the conservative supporter of the
status quo by asserting that the private owner's claim to economic
rent may properly be confiscated entirely or the enthusiastic single
taxer by contending that it stands on the same basis as every other
property right. After all, as a practical proposition, large political
bodies, like large physical masses, can be got under motion only
slowly, and so no general change can be brought about except by
degrees. Is it not, therefore, academic and futile to dispute at great
length the question whether, as a matter of abstract ethics, society
has a "right" suddenly to substitute for our present
taxation system, a system appropriating practically all the rental
value of land? That question may, of course, be debated. But I fear
that the debating of it here would cloud the real and practical issue
with passion and so be worse than useless. The real question is rather
whether society has a right, by gradual steps, to change its tax
policy in the indicated direction, if and when the majority is
convinced that the public welfare would be thus furthered.
While the argument that increased taxation of land values would
violate vested rights may be effective propaganda against such
taxation, it is probable that many of those who use this argument are
far from being, in other respects, consistent supporters of vested
rights. Thus, to illustrate, a local gas company is started with a
cost for plant construction of $5ooooo. A reasonable net return might
be $35,000 or 7%. But through lack of regulation, the company is
enabled for some years to charge rates making $105,000 net or 21%. On
the basis of this rather large return the stock of the company is in
great demand and sells for $300 a share or at the rate of $1,500,000
for the whole concern. If the rates are now brought down by
regulation, the salable value of stock bought in good faith by
innocent purchasers will be reduced to perhaps only 1/3 of what they
paid for it. Will those who say that no increase of land-value
taxation, however gradual, is permissible, though it greatly relieves
capital and enterprise, also agree that, if innocent parties have in
good faith purchased stock in an unregulated monopoly, then the public
is forever morally estopped from regulation and must be willing to pay
monopolistic rates for all future time? Who does not suspect, if he
does not indeed know, that many sticklers for vested rights as against
land-value taxation, are not only favorable to rate regulation in the
circumstances above described, but even favor that economically
unreasonable regulation which would make no allowance to the regulated
companies, in this day of high prices and values, for the great
depreciation of the dollar?
But let us turn our attention to the tariff. Suppose that, during a
long period of Democratic control of Congress, the tariff is lowered
and stays low and that, in consequence of the greater cheapness of
certain raw materials a number of manufacturers build up an export
trade of considerable proportions in products made of these materials.
Then come Democratic defeat and revision of the tariff upwards. How
many Republicans, conservative supporters of vested rights, would say
that a moral obligation exists not to increase the tariff because of
the injury which might follow to a business man in the described
situation? Or, reversing our hypothesis as to parties, how many of
Democratic persuasion, who favor tariff reduction, will admit that the
long continuance of a high tariff, the fact that people have made
their investments on the supposition of its continuance and the fact
that to reduce it will lower the salable value of the property of
people who have thus in- vested-how many will regard all this as
conclusive against any tariff reduction, even a gradual one?
Whatever may be the reader's opinion about the desirability of
prohibition, all of us must admit that its establishment lowered the
salable value of the business property of some of the people. Surely
it cannot be denied that here was an infringement of "vested
rights." But the policy was adopted with fairly widespread
support and with almost no reference to the bugaboo of "confiscation."
Those who favor regulation of monopoly prices, or who believe in
tariff increases or decreases, or who were eager for prohibition,
despite the effects of any or all of these changes in reducing the
value of some people's property, and who oppose increased land-value
taxation, will say of the last named: "Oh, that's different."
And yet, is it utterly different? Do investors in all these other
ventures invest at their peril and does the purchaser of land purchase
it with the implied moral obligation on the part of society never to
move, no matter how gradually, in the direction of relatively heavier
taxes on land values? Might there be some excuse for a slightly
different view, viz., that the purchasers of land have not bought it
with any binding implied pledge on the part of society never to change
its tax system, even by degrees, to the possible disadvantage of such
purchasers, but merely with the practical certainty that no such
change will, as things work themselves out in our political life, be
made suddenly and without warning?[8]
Is Speculation in Vacant Land Desirable?
After having discussed the arithmetical aspects of land-value
taxation, let us turn to a very few of the more important specific
objections made to the proposal. I have discussed most of these at
some length elsewhere[9] and do not believe that the entire matter
need be repeated here, especially as some of the objections are so
seldom presented and others are almost pitifully untrue or beside the
point or insignificant. A few of the more important objections,
however, ought by all means to be examined carefully.
One of the points sometimes made by opponents of land-value taxation
may be termed an attack on a kind of outpost, though perhaps not an
altogether unimportant one, of the land-value-taxation philosophy. In
answer to the argument that an increased tax on land would discourage
speculative holding of land out of use, it is often said that such
speculative holding is desirable and ought not to be prevented. This
answer does not seem to me a convincing one, yet it contains a very
small admixture of truth. Holding a piece of land out of use during a
few years will sometimes save it for a later and better use, obviating
the expense of building and tearing down again a structure less suited
to the long-run potentialities of the land.
Thus, suppose a land speculator held vacant a piece of land near the
center of a rapidly growing town. Conceivably some one might otherwise
build a house on this lot and, a very few years later, the
circumstances might call for a twelve or fifteen-story office building
on the site. Meanwhile the house might not have earned enough to
justify its having been built. To tear it down in order to make room
for the skyscraper would be an expense that might have been avoided.
To leave it up until it is old and no longer serviceable would keep
the land from a use in which it would be of more service.
Yet there is clearly a loss to the community from the holding of land
out of use. More remote and poorer land has to be used instead. In a
city the speculative holding of lots forces builders sooner into the
suburbs. As a result, streets, sewers and gas mains have to be
extended farther from the center of the city; telephone and electric
light wires have to be stretched over longer distances; transportation
problems become more difficult of solution; store delivery service is
made more expensive, and the expense to individuals of riding or
walking longer distances to and from their work is increased.
Losses such as these may actually be much greater where speculation
is commonly thought of as not acute than where it is supposed to be
rampant. The speculator in a rapidly growing town who soon sells out
to users, even though at a high profit to himself, at least does not
cause the incident waste, so far as his lots are concerned, to
continue a very long time. But the owner of vacant lots in a slowly
growing town who holds them for many years waiting for them to rise in
price or, equally, to avoid selling at a loss, is to that extent
responsible for the long continuance of waste and loss to others.
If, with all this economic loss to the community from the keeping of
good and well-situated land out of use there may be also at times some
avoidance of waste, the ideal method might be to penalize keeping the
land out of use when such speculation causes a net waste and not to
penalize such action when it avoids waste. But no legislature or
administration could formulate any precise and satisfactory rule for
determining when such balance of good exists.
Something might be gained if we could devise a system which would
cause the gains and losses incident to land speculation to impinge on
a single mind; and that, the mind of the person who has title to the
land, is in a position to determine whether the land shall or shall
not be yet used. If the gains from holding the land out of use until a
later date accrue to a private speculator, whereas the economic losses
therefrom fall on the community at large, then, even though these
losses vastly exceed the gains, this fact will exert no slightest
influence towards getting the land used and so terminating the losses.
But there is perhaps danger in assuming that the speculation in
question is more intelligent than it really is. What about that large
mass of owners of vacant lots who have property which they hold with a
kind of vague hope that it may rise in price, who are unwilling to
sell except at a price higher than available buyers will pay, no
matter how great the economic waste to the community, and whose
holding of the land certainly is no benefit, in the way of economy, to
the community.
If, in general, vacant lots in cities were kept vacant until they
could be used for banks, office buildings, and department stores, then
the tearing down of less valuable structures would be avoided,
although the waste of waiting through the years and having meanwhile
to extend wires, delivery service, etc., longer distances might amount
to a sum far exceeding the incident benefits. But what if the vacant
lots are held vacant and builders of dwelling houses are driven
farther out from the city's center, only that the lots may be sold
after the lapse of 10 or 20 or 30 years to new residents who build
there houses of the same general type as would have been built in the
first place? All of us see lots remaining unused for years, even for
decades, while new houses are built farther from the city's center,
the unused lots, however, being developed, after more distant sections
have been partly settled, for the building of houses similar to those
farther out. We know that, after years have passed, the more centrally
located areas finally come to have very few vacant lots, so that when
the need for putting skyscrapers upon them does arise the ground is
encumbered by buildings which must be torn down. It would be rash to
assert, on the basis of the evidence, that land speculation, with the
speculator comparatively untaxed and a loss from his holding the land
idle falling heavily on others, actually benefits the community or
that it does not, on the average, cause a real and definite loss.
Economists sometimes present a theoretical argument intended to show
that land speculation is really very little practiced. This argument
runs to the effect that speculative holding of land is not on the
whole profitable, and that people will not therefore engage in the
practice. It is supposed that the landowner, even if he hopes for a
rise in the value of his land, will not refuse to make use of this
land or allow others to do so for a price, while he is waiting for the
rise in value to come. He will, it is supposed, allow his land to be
used because to do so is more profitable than not to do so.
The trouble is that much land which, if improved, would be well worth
using, cannot be advantageously used unless it is improved. But who is
to do the improving. It must be the speculating owners themselves, or
tenants who are users of the land, or other owners who acquire it by
purchase. Let us see, by considering each class of persons, why land
may be held out of use although such holding is less profitable than
use would be.
Among those who hold land out of use for a rise are some who have not
the means to improve it, unless they sell part to raise the means for
improving the rest, and this, if they anticipate a rise, they will not
desire to do. Others among such owners expect, although doubtless
often mistakenly, such rapid increase in the value of land, that they
would rather purchase more of it than to improve what they have,
hoping to make a higher return than by improving. Still others have
not the energy or confidence to go ahead with improvements.
To say that people will not hold land out of use speculatively
because such holding does not pay on the average, is just as
reasonable as it would be to say that people will not engage in
lotteries or in wagering money on roulette wheels because in the long
run such gambling does not pay. Whatever the advantages, in economic
reasoning, of positing an "economic man," it is unsafe to
base conclusions on the supposition that every person is such an "economic
man." Everyone who is not inwardly determined to believe the
contrary knows that land speculation is practiced and practiced on a
considerable scale.
What about the possibility of the speculatively-held land being
improved by potential tenants with the owners' consent? Here the
trouble lies in the fact that tenants cannot afford to make
improvements except as they can secure long leases or other
satisfactory guarantees against losing to the owners most of the
benefits of the improvements. Moreover, speculating owners, who desire
the privilege of selling their land without restricting encumbrances
when a good chance comes, will not ordinarily consent to such long
leases.
Construction by non-owners of the speculatively-held lots, who must
buy them before improving them, may be further prevented by
exaggerated notions of the speculative owners regarding their value.
Speculative anticipations of owners who will not themselves improve
their land, may cause them to refuse to sell except at prices so high
as to make purchase by persons who would improve the land seem, for a
long time, not worth while.
If owners of vacant land do not have the losses of the community from
land speculation brought home to them as personal losses, if they are
induced to hold land vacant because of exaggerated hopes, and if
improvement by themselves, by potential tenants or by possible new
owners is thus prevented, may it not be desirable to penalize the
holding of land out of use to a greater extent than it is now
penalized, to the end that a saner balance be established between used
and unused land?
However, it may be noted that a per- son who believes speculative
holding of land to be socially desirable, may still consistently
support very heavy taxation of land values. But he would need to urge
that only used land be taxed. Or, if he believed land speculation to
be, on the whole, socially advantageous, but believed also that it is
carried too far at times and should be somewhat discouraged, he might
at the same time uphold very heavy taxation on rent actually received
and lower taxation on the potential rent of valuable land held out of
use.
Is the Principle of Taxation According to Ability Valid?
The idea back of the ability principle seems to be that the relative
sums taken from rich and poor should be such as to impose "equal
sacrifice" upon them, per individual. If it takes $1,000 to live,
a person with an income of $100,000 has as much ability to pay $99,000
as a person with an income of $1001 has to pay $1. But this is not
what ability theorists seem to have in mind. Their idea apparently is
that a tax of $10,000, for example, from the richer person may, in the
average of cases, mean as much "sacrifice" to him as does a
contribution of $1 from his poorer fellow citizen. Then these
theorists would wish, in case the latter citizen were taxed l/10 of 1%
on his annual income, to tax the former l0%.
One may well inquire where a logical defense is to be found for this
principle. Surely it does not lie in the idea of maximizing utility?
To do this would involve carrying the tax discrimination against the
rich very much further. Suppose we have already taxed the richer man
$10,000, and still more funds are needed for governmental purposes.
Clearly it will cause less sacrifice, less loss of utility, to take
the 10,001st dollar from the same individual than to take a dollar
from the other. So with every additional dollar (assuming the
individuals to be similar in their needs and wants, as they would tend
to be except for differences in habituation and utterly incalculable
differences in inborn traits) up to the point where the remaining
incomes are equal. In short, it is a fair question whether one who
favors the "ability theory" of taxation on the ground that
it involves less sacrifice or burden than some other system can
logically stop with the proposal to establish equal sacrifice. Must he
not insist on a basis of least sacrifice? Must he not also, if his
theory of public policy is so based on maximizing utilities and
minimizing disutilities, necessarily end by supporting the whole
theory of communism? Logically, and in all consistency, where else can
he end?
But, of course, he will not want to end there and he will demur to
the contention that he must. In the long run, he may say, such a
communistic system, whether applied in general or applied only to
taxation, would so penalize efficiency and thrift as to reduce the
productiveness of industry and decrease the total of goods which all
may enjoy. To maximize utility for the time being would not,
therefore, he may say, maximize utility in the long run and would not
be desirable public policy.
Probably so. In other words further effects are to be considered
besides the possible temporary maximizing of utility. But on what
basis is it to be argued, then, that we are to levy taxes in such a
way as to impose equal (as distinct from least) sacrifice? Is the
advocacy of such a policy the result of a secretly felt agreement with
the communistic ideal, coupled with a sense of horror at the notion of
the consummation of communism? Such a complex of feelings might result
in the advocacy of a certain amount of communism in our tax system yet
not enough of it to change very greatly the general nature of our
economic institutions.
Let it be understood that I am not attempting here to take an extreme
or dogmatic position. I am not asserting either that the comparative
utility at the margin of the incomes of different persons or classes
should or should not have any bearing on the relative amounts of their
taxes. But I am contending that there is no single principle on which
the so-called "ability theory" can be defended except a
principle which, if it is to be followed, must in all consistency
carry us to communism. And if it be said that this principle is not
the only one to be considered but that other principles are of great
importance to justice and wisdom in taxation, then the question
immediately arises whether these other relevant principles may not
support a system of taxation which is not at all in proportion to
ability.
There are at least two classes of persons who cannot with logic and
consistency support taxation according to "ability" in
preference to taxation of the rental value of land, although many of
both classes actually do so. First, there are those who favor taxation
on the basis of "ability" because they sympathize with the
masses and desire that the "common man" shall have the best
possible chance for attaining high net current income and a modicum of
property. As hinted earlier in this article, a tax on the rental value
of land is not only really less burdensome to the masses than present
taxes but even than a highly progressive tax on incomes in general or
on all property. A tax on the rental value of land is certainly not
shifted to laborers in the form of reduced wages. The person who,
though poor, is hard- working and thrifty, seeking thus to rise
economically above the ranks of those who are merely workers by
becoming an owner of property, finds that he can secure a larger
interest (because it is untaxed) on his savings. Furthermore, the land
will cost him enough less under the land-value tax system fully to
make up or more than make up for the tax on it. Whether or not there
are classes that would bear an extra burden from a land-value tax,
which may properly discredit it as a revenue raising device, is not
the present question. The question here is whether those persons who
profess adherence to the so-called ability theory of taxation because
they want to make conditions the best possible for the masses and who
prefer such taxation to land-value taxation for that reason, do not
simply lack understanding of the nature of the consequences to which
land-value taxation leads.
The other class of opponents of land- value taxation whose position
is an illogical and inconsistent one is that class which professes
itself opposed to communism -- shall we say to Bolshevism? -- and
which thinks itself further away from such "isms" in
supporting progressive taxation of all incomes than in supporting
heavier taxes on land values. I am not here arguing that taxation
based on the idea of maximizing utility is "wrong" or even
that communism or "Bolshevism" is necessarily and inevitably
"wrong" but merely that such taxation bears fundamentally a
closer resemblance to communism than does heavier taxation of
community-produced land values.
For land-value taxation takes for public purposes only what is almost
altogether community-produced value, and, so far as it is concerned
(i. e., unless or in so far as it is supplemented by other taxes), the
more efficient laborer, professional man or executive receives higher
income than the less efficient one by the entire amount of his
superior efficiency with no tax subtraction. Any tax on his land value
does not take more from him by virtue of his superior efficiency but
only by virtue of a superior location which is made superior almost
solely by the community rather than by himself. Likewise the thrifty
person, who is trying to accumulate a competence and who is thus
responsible for adding to the capital equipment of society, is allowed
to receive all the benefit of his thrift in the form of return or
interest on the capital saved and with no tax deduction. In short,
land-value taxation, whatever may be its evils, distinctly does not
attempt to reduce the efficient to the level of the inefficient or the
thrifty to the level of the thriftless, while taxation according to
so-called ability does, in at least some degree, exactly that.
d Bare-Land-Value Taxation Burden the Farmers?
The idea that removing taxes from improvements and concentrating them
on the economic rent of the bare land would be an especial burden upon
owners of farms as compared with owners of land in cities seems to be
widespread. I am strongly of the opinion that this idea is entirely
incorrect. Indeed, I rather suspect it may be the opposite of the
truth. Certainly there can be no doubt that a good many farmers are
now paying annually in taxes much more than the economic rent of their
bare land and that if the maximum tax they were asked to pay should
become even l00% of their economic rent, their taxes would be greatly
reduced below what they now pay.
I believe that the important requirement here is for us to get
clearly in mind just what economic rent is. It is the amount which a
person could afford to pay, and which the competition of others would
force him to pay, for the use of a given piece of land, in excess of
what he would pay for the use of its improvements. Or, it is what the
land yields to the person who owns and works it, in excess of return
on improvements and return on the efficiency of his work. It is
something which he derives from the bare land, as such, and its
situation. It is not the extra sum which an efficient manager gets
above what an inefficient one would get. That is return for efficient
management, i. e., pay for a particular kind of labor. Economic rent
is a surplus over this due to the land. Furthermore, the fertility of
agricultural land is constantly being exhausted and having to be
restored. Constant care in crop rotation, treatment with manure or
artificial fertilizer, and sometimes treatment with lime, are
essential to its continued productiveness. Fertility then is to be
reckoned, in large part, as capital.[10]
But the tax on bare-land value is supposed and intended, by its
adherents, not to be a tax on improvements. The present system is
indicted because it fines a man for building or for painting a house
or for planting an orchard. It would clearly not be consistent for
those who oppose our present tax system and who would substitute a tax
on bare-land values, to desire to tax that part of a farm's fertility
value which is restored or even maintained by the farmer's effort and
investment. Logically, then, the taxes on the economic rent of land
would have to be so levied that the farmer who improved or who merely
maintained the fertility value of his land would be asked to pay no
higher tax than the farmer who, with an equally good situation,
allowed the fertility of his farm to run down.
But surely those persons are really inconsistent who, in the same
breath, contend that farmers in general cannot now get any reasonable
return for their effort and also that land-value taxation would burden
them. As we have seen, a tax on economic rent, as such, takes only
from the surplus above wages and managerial productiveness and above
interest on worth-while improvements. If it takes more it is not a
mere tax on rent, but something else. Now to say that such a tax on
the rental value of a farmer's land would be a heavy burden is to say
that the farmer does receive a considerable surplus above remuneration
for his effort and above interest on all his improvements including
fertility.
If farmers in general are now doing so poorly as is commonly stated
by their spokesmen, then most of them must be receiving either no
economic rent at all or, at best, very little. If so, a tax only on
economic rent would be either no tax at all upon them or a very light
tax. It hardly seems likely that in most cases such a bare-land-rent
tax could be as burdensome as the tax now levied on the assessed value
of the entire property. It is evident that the taxes now being paid by
a great many farmers much exceed their entire economic rent.
At any rate, attempts which have been made in economic literature to
show that the "single tax" would burden the farmer but which
have been based on the supposition that all fertility value -- and
sometimes even the value of established fruit orchards -- is to be
classed as land value, certainly are of little evidential
significance.
In passing, the reader might be asked to recall the fact emphasized
in a previous section, that to tax bare-land values operates to make
the sale price of land low and to make easier the road from tenancy to
ownership.
Conclusion
And now, for those who, though they may be doubtful of the virtues of
the land taxation policy with tax exemption of all improvements, yet
do not regard any slightest step in that direction as mortal sin, I
venture one parting suggestion. There might be some advantage in
allowing such a system to get a fair foothold in the United States, as
a matter of experiment. If a dozen or score of cities of consequence
were to move by degrees in that direction, the result would hardly be
calamitous. (No economic earthquake has destroyed Pittshurgh!) And we
might so have a chance, by watching their growth and development, to
determine whether we wished to extend the system further.
Some would willingly, if they could, apply the system everywhere
without waiting for such a trial, being confident from general
reasoning and from apparently satisfactory results in Australia and
elsewhere that only good could come. Others would not consent, under
any circumstances, to even a brief and narrowly localized trial in the
United States of a system they think so wholly bad. Is there, also, a
third group, of which, perchance, the reader is one, who are not quite
certain either way, but who are willing to support a trial of the
scheme, here and there, as a bit of worth-while adventurous
exploration? To leave bare-land value untaxed makes land prices high.
Home and farm ownership are therefore difficult save through the
assumption of heavy mortgage indebtedness which, in every period of
unemployment in the cities or of price recession of farm products,
leads to bankruptcies, foreclosures and distress.
FOOTNOTES AND REFERENCES
- The reader who is interested
in a consideration of these qualifications will find them in Harry
Gunnison Brown, The Economics of Taxation, (New York:
Henry Holt & Co., 1924), pp. 2I9-232.
- For analysis and criticism of
possible objections, see Harry Gunnison Brown, Economic
Science and the Common Welfare, (Columbia, Mo.: Lucas Bros.,
1926, 3rd ed. pt. II, Ch. IV, secs. 5, 6 and 9.
- op. cit., supra n. I, pp.
219-232.
- Here, as elsewhere, some
little qualification may be desirable. Many buyers and sellers of
lots probably make no calculations regarding probable actual
yields. They sell for what they can get or buy for a price that
corresponds to what others seem to be paying. They may buy solely
for speculation intending to sell to others for as much as they
can persuade the latter to give. But would-be purchasers of land
who themselves wish to use it productively can scarcely afford not
to calculate the probable future advantage or yield of the sites
they would purchase. And would-be sellers who are themselves
capable of using the land they would sell are unwise unless they
too make such calculations. Even the would-be buyers and sellers
who do not themselves so calculate are bound to be affected, at
least indirectly, by the estimates of those who do. Thus we get
back, inevitably, to our original basis for the valuation of land,
viz., its expected future net yield and the current rate of
interest.
- Except as, possibly, kept down
by inflow of funds from the area where capital is taxed. See the
next paragraph but one.
- 0f course it will be said, and
with some justice, that the flow of investment is likely to make
impossible the continuance of such a difference in rates of return
on improvement. Such an objection, however, if made, would be at
the same time a significant admission. It would be an admission
that the territories which tax bare land more and improvements not
at all are more desirable or profitable places for investment than
the territory which continues to tax all property alike.
- Clearly, we must guard against
the danger of exaggeration. Even though net returns on all new
investments were raised by 2% in the coast states, while remaining
the same in the valley states, this might not at once greatly
affect the flow of investment. Only as education of investors
proceeded to the point where they really comprehended the effects
of the policy, or at least became cognizant of the difference in
net per cent. return, would they be influenced. But it is truly
difficult to avoid the conclusion that sooner or later such a flow
of investment funds must occur.
- I once heard, in conversation
with an agricultural economist of some reputation, an interesting
comment on the proposition that the tax on land values might be
increased gradually. The comment was to the effect that to
increase the tax by degrees was like cutting off a dog's tail by
degrees. Of course, any real thought at once reveals the fact that
the analogy is false. To cut off a dog's tail in sections
multiplies the animal's pain according to the number of times it
is done, whereas to raise a tax on bare land by degrees very
greatly reduces the loss to the landowner, even assuming that the
removal of taxes on improvements does not really offset or more
than offset his loss in regard to the land. For the salable value
of the land is arrived at, as we have already seen, by
capitalizing its prospective rent, and, in this process of
capitalizing, the rent of the more remote future years is of
negligible arithmetic significance. So a gradually rising tax
which slightly diminishes net rents of the first few years and
diminishes greatly only the rents of the remote future, lowers the
present salable value of the taxed land and its salable value for
the first few years by a comparatively small amount; whereas an
immediate increase of the tax to the maximum lowers the present
salable value of the land by a great deal. All this is not to
deny, of course, that whatever advantages land-value taxation
might bring are also delayed in their arrival by the attempt to
postpone, for the benefit of present landowners, any rapid fall in
land values. (It should not be necessary to elaborate on the
arithmetic of this. It is simple enough to be understood by anyone
who knows the process of finding the present value of a series of
future incomes.)
- See Harry Gunnison Brown, Economic
Science and the Common Welfare, 3rd edition, (Columbia, Mo.
Lucas Bros., 1926), Part II, Ch. VI and Taxation of Unearned
Incomes, 2nd edition (Lucas Bros., 1925), and various articles in
the Journal of Political Economy in 1925-1928.
- For a more precise theoretical
formulation of the line of distinction, see Harry Gunnison Brown,
Economic Science and the Common Welfare, Part II, footnote
beginning on page 253.
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