The Way Toward the Model City

Frederic C. Howe

[Reprinted from World's Work, December 1910]

Germany has set the pace in city-building, as in many other reforms. It is the only country in the world that has treated the subject as a science. Germany designs its cities as the World's Fairs at Chicago or St. Louis were designed by landscape artists and architects. They are planned from the bottom up. And the thing in most striking contrast with our own cities is the power which the German municipality enjoys over the land within its limits. During the summer of 1909 I visited a number of the leading cities of Germany and found that many officials insisted, with no feeling of apology, that the city must own all of the land within its limits.

Only by ownership, it was said, could the housing problem be solved; only in this way could parks, streets, boulevards, and planning projects be carried out and industrial development be made to harmonize with the ideals of what these experts felt that the modern city could be made. In pursuance of this policy the German city approaches the land question in three ways, all of which are novel. First, by ownership. A surprising number of cities own not only parks and open spaces, but great wooded estates outside of the city, which are used for pleasure as well as for profit. They are worked as forest preserves. A large part of the building area within the city is owned as well. Some idea of the holdings of the cities can be got from the accompanying diagrams.

Some cities are also active speculators in city and suburban land. They make a business of buying and selling for profit. Diisseldorf, for instance, a city of 300,000, has set side a fund of $5,500,000 for the purpose of land-speculation.

The city controls the land-owner and land-speculator in yet another way. Only a part of the site may be built upon. The percentage differs according to the section of the city. In the business centres the owner may use as much as 60 per cent.; in the outskirts, only 35 per cent. Buildings, too, are limited in height, the usual provision being that they shall not exceed the width of the street. Similar restraints are imposed on factory owners, who are confined to certain sections of the outlying territory, usually to that side of the town which is away from the prevailing winds. Thus the land-speculator, owner, builder, and manufacturer are compelled to use their land so that it will not be offensive to neighboring owners or in any way prejudicial to the harmonious planning of the city as laid out by the city council. The city and the comfort of its citizens are the primary considerations.

The German Tax on Land-Values

The third contribution which Germany has made to the subject of city planning - ^and a contribution which has swept over Europe into Great Britain, Austria, Belgium, and Switzerland -- is a system of local taxation which discourages the land-speculator and gives to the city a new and constantly-increasing revenue. Autocratic Germany, ruled as it is by the reactionary three-class system of voting, which places the cities in the hands of the large tax-payers, is the last country in the world where we should expect the teachings of Henry George to take root and be applied. And the Germans deny that they have adopted the single-tax idea in taxing the "unearned increment," just as they deny that there is anything socialistic in the state-ownership of mines and railroads or the city-ownership of docks, street railways, gas, and many kinds of enterprises which in this country are in private hands. Still Germany does tax the "unearned increment" of land.

"Of course we do not like to pay any more taxes," a prominent manufacturer in one of the German cities said to me; "but we cannot very well object to the taxation of increasing land-values, for of course the city creates them; they would not exist were it not for the people and the industry; they do not really belong to the owners, and in all justice the city ought to take at least a part of what it has created." Under the new tax the land is appraised every fifteen or twenty years, and any increase in value is subject to a tax. In case of sale the profits realized are subject to the same sort of taxation. The seller is compelled to give up a portion of the gains which have been created by the growth of the city, the opening of new territory, the development of transit to the suburbs, or any of the thousand influences which add to the value of city land. Unimproved land is taxed more heavily than that which is improved, while the percentage taken by the city increases with the profit realized by the owner. It ranges from 1 to 33 per cent, of the net profits.

This experiment, which had its beginning in Frankfort less than ten years ago, has spread to nearly all of the cities of Germany. It inspired the budget of Great Britain in 1909, which the great land-owners in the House of Lords rejected. And it is of especial interest to America, where every innovation in taxation is viewed with suspicion, because the German city is administered by experts, by men trained in the universities and in the technical schools and by years of experience in city matters; and the officials are chosen, not by a democratic ballot, but by the business men and the large tax-payers who (under the Prussian three-class system of voting) are absolutely in control of the politics of the cities. Moreover, we have the best sort of machinery for applying the German system, for we already levy a large part of our taxes upon land; and, as we revalue our real estate periodically (often every year), we can easily ascertain the increase in values with accuracy.

Land-Taxation and City-Planning

What has the taxation of land- values to do with city-planning and the housing question? How will it promote the city beautiful or aid in the realization of the ambitious plans which our cities are beginning to project? Has municipal taxation anything to do with the price of land? Can taxation be adjusted to promote a social policy as well as defray the increasing needs of the community?

I spent some years as secretary of the Tax Conference of Pennsylvania and recently served on the Board of Real-Estate Appraisers of the city of Cleveland, Ohio. And I have become convinced that the taxation of land- values is not only just but it is the easiest and most fundamental of all means for the cure of the housing question and the proper building and planning of cities. By the taxation of land-values I mean the taxation of the site or speculative value in land, and not land itself. In other words, that all of the local revenues should be taken from ground or land rents, just as is now commonly done by private individuals under the ground-rent system which prevails universally in Baltimore and in the business centres of our large cities. This would be brought about by a very simple law which exempted houses, buildings, improvements and personal property from taxation. Then local taxes would fall automatically on the land alone.

There is no difficulty about ascertaining the real value of land, as was for a long time assumed. As a matter of fact, it is the easiest thing in the world to do. New York City has since 1903 separated its valuations of land and improvements. Boston has done the same thing for a much longer period. The tax board of Cleveland perfected an organization, trained its. experts, and completed the assessments of all land as well as all the buildings within the city in six months* time; and did it more justly, more easily, and more economically than I thought possible. And the land valuation was made with the minimum of complaint and protest. It met with almost universal approval.

Is this suggestion just? Is it fair to tax only one kind of property - land? I fancy the apparent injustice of the proposal delays this reform more than any other cause. And yet the taxation of land- values alone is the most just of all systems of taxation. It is merely taking that which has been created by society. The 4,000 million dollars of land- values in New York City, equal to two-thirds of the cost of the Civil War, is due to the growth and development of the city. It was not created by the thrift, enterprise, or ability of the owners, or by any service which they render to society. So far as they are concerned, the colossal value is an unearned increment. It is due wholly to the growth of population and the progress of society. And the tax suggested involves merely the taking by the community of that which the community has created.

No Other City Revenue Required

Is such a tax adequate? Can we abandon all other forms of revenue? As a matter of fact the ground-rents (not including building-rents) of our cities are colossal. They far exceed every possible need of the most extravagant community. They would more than pay all of the local needs. In New York City, the real estate is valued every year. During the four years from 1904 to 1908 the value of the land, exclusive of improvements, increased from $3,057,161,290 to $3,843,165,597. In four years' time the speculative increase alone amounted to $786,004,307, or nearly $200,000,000 a year. The increase is fairly normal from year to year and reflects the birth-rate and the growth of population. During these four years the total expenditures of the city amounted to about $160,000,000 a year, or $40,000,000 less than the speculative increase in the value of the land.

With perfect safety New York could declare: "We will levy no taxes on real estate or personal property in 191 1; we will abandon all revenues from licenses, from the excise taxes and all other form of revenue, and will content ourselves with the increase in value which takes place in the land. From this source, which is our creation, we will run the city and relieve all property and business from taxation." Under such a proposal, which would take not a penny of anything which exists to-day, the city could be operated and in addition enjoy a surplus which would build a subway every year equal to the first one constructed from the Battery to Harlem, and at no cost to the people of the city. The German statisticians estimate that land-values in a growing city increase at the rate of about 4 per cent, a-year, which would be somewhat less than the increase above indicated.

New York City is not exceptional. Similar investigations and assessments in Boston, Washington, San Francisco, and elsewhere show that the speculative increase in the value of the land amounts to more than the annual expenditures of these cities.

But even were land-values stationary, the present ground-rents far exceed the city's needs. In New York the land-rent (not including building-rents) enjoyed by ground landlords amounts to approximately $200,000,000 a year. This is arrived at by assuming that the total assessed value of $3,843,165,597 has this value by reason of a fair return in interest, which, figured at 5 per cent, amounts to $192,158,279. This, too, is after the city has taken in taxation at least $50,000,000 from these total rentals ; so that the total fund available for taxation, is approximately $250,000,000, or nearly $100,000,000 more than the present local budget.

Were the city to abandon all other forms and sources of revenue and tax only land-values, the distribution of ground-rent would be as follows: Total ground- or land-rent of city (including taxes), $250,000,000. Total taxes taken from rent, $160,000,000. Total income left to owners, $90,000,000.

Let us see what would follow from exempting houses and buildings from taxation and an increase in the rate on land. How would it affect the building of cities and the housing of the people? What are the social and industrial consequences of such a taxing policy?

Penalising Industrious Owners

France levies a tax on windows. As one travels through French villages he sees the windows of the peasant sealed up with cement. The people live in darkness in order to escape a tax. During the eighteenth century a chimney-tax was imposed in Ireland. The Irish tenant met the tax by tearing down his chimneys. He preferred to live in the dirt and smoke of a chimney-less cabin rather than be taxed. The tax destroyed the thijig taxed, just as it always tends to do.

Economists all protest against these medieval taxes. They smile at the short-sightedness of the French statesmen. Are we in America any wiser than the French in our methods of local taxation? They are probably just as honest in their approval of the window-taxes as we are in our admiration of the tax on houses and improvements which discourages, fines, and punishes him who builds a house, or improves his estate, or erects a model tenement, or conforms to the sanitary regulations of our cities. For do we not tax the man who builds a beautiful building more heavily than him who builds an ugly one? Do we not punish with a fine him who erects a model tenement, and thereby encourage the lazy owner who is content with his slum? Do we not penalize the farmer or the workman who paints his house, or adorns his dwelling with things of art and beauty, or employs an architect instead of a contractor? Do not our laws in effect applaud the man who leaves his property and his land as disreputable as possible? Do we not say to the farmer: if you put your land in market gardening we will assess you $500 an acre, but if you let it grow up in weeds we will assess you but $50 an acre? At least that is the way it appears to every tax-payer, be he great of small. It consciously or unconsciously affects his mind in every contemplated improvement. These are the arguments that are advanced to village and township-assessors by farmers and home-owners who resent instinctively the injustice of being taxed because they do a thing for which they know they should be applauded. Further than this, we encourage men to hold land idle. We discourage improvements. This is clearly the result of taxing houses, buildings, crops, machinery, and personal property.

Build a Fire Behind the Speculator

Now let us see what would happen to the idle land-speculator, to the man who does nothing with his land in the city or in the suburbs, as well as to the energetic farmer who wants to own as beautiful a house as possible, to the man who erects a fine apartment or a model tenement, to the man who instals new plumbing and complies with all the tenement regulations -- if we were to reverse our present system and repeal all taxes on improvements and houses. We should then give legal encouragement to the things that we most want : to buildings, to houses and factories, to model tenements, to truck gardening, to art, architecture, and beauty. We should encourage industry and cheapen the prices of things in the stores as well as the rents in the cities. We should stamp with public approval the man who contributes to the well-being of humanity, rather than penalize him for his industry. We should encourage the man who produces wealth. These surely are the results which would follow from ceasing to tax the things that we most want, just as the taxation of windows and chimneys led to their disuse.

To Bring Idle Land to Market

But I have not yet touched on the greatest of all benefits which would follow city-planning, the building of cities, and the housing question - and that benefit is the cheapening of land. It would do this in two ways. First, the taxation of land forces it into use; it brings it to the market. And this is an unmixed blessing. We should feel that it is a crime for men to produce bread or clothes or shoes and hold them merely for speculation. And yet the speculative holding of land is even more costly to society than the withholding of these necessities of life. For, given the land, we can produce wealth; and the forcing of idle land into the market would bring down its price. This is the inevitable result of increasing the supply of any commodity. It has been estimated that at least half of the land in every large city is held out of use all the time by speculators.

The second influence that cheapens land-values is the reduction of the rent or income which it produces. For a tax on land-values is paid by the landlord ; it is taken from ground- rent. The landlord cannot shift it on to some one else as he can a tax on houses or on any other wealth produced under competition. I need hardly verify this from authorities, yet an appreciation of this fact is so fundamental to an understanding of the effects which would follow, that I quote two leading economists on the subject. Ricardo, the great English political economist, says:

A tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers. The landlord could not raise rent.

John Stuart Mill confirms this statement. He says:

A tax on rent falls wholly on the landlord. There are no means by which he can shift the burden upon any one else. A tax on rent, therefore, has no effect other than the obvious one. It merely takes so much from the landlord and transfers it to the state.

Let us make the statement concrete. If a man is getting $50 a year ground-rent from a piece of land, the land is worth the capitalized value of the ground-rent, or $1,000. Now if the state increases the tax and takes $20 of this ground-rent, the landlord's income will fall to $30, which (capitalized as before) makes the land worth $600. If the tax is still further increased to 4 per cent., the capital value of the land is reduced to $200; and if the tax is increased to 5 per cent., the capital value of the land disappears altogether, for all of its earnings have been taken in taxes. In other words, ground-rent is the income that is left after taxes are deducted. If taxes are increased, rent is decreased. If taxes are diminished, rent is increased. The landlord and the state are really partners in the ownership of the land.

The Land-Owner Pays the Tax

It may be said that the landlord will meet any increase in taxes by an increase in rent, just as the taxes on sugar, clothes, or any other commodity are shifted to the final consumer. But this he cannot do, as experience has demonstrated. The land-tax remains where it is originally placed. Certainly, so far as vacant land is concerned, there is no one but the landlord to pay the taxes. He could only shift the tax by leasing the land to some one to use; and if all the land were thus brought into use, the competition of sellers and users would be such that this of itself would bring down the price of land, just as it does the price of everything else.

It is this cheapening of land-values that is so important in the solution of the housing question or the planning of cities. This, with the stimulus to use the land, would bring about a revolution in city-building that would surpass all of the regulatory measures and all of the health and sanitary inspection that can be devised. There is no reason why the building of homes should not inspire the same sort of ingenuity, skill, and scientific enthusiasm that is awakened by the building of automobiles. And such skill would be awakened were the land-owner subjected to the same sort of pressure that drives the manufacturer and the business man. This the taxation of land will bring about. And if the owner of land were compelled to build houses, and were those houses relieved from taxation, there would arise a competition for tenants that would of itself solve the housing problem. Then owners would introduce beauty and the latest sanitary devices from necessity rather than from legal compulsion. The builders would be moved by self-interest to devise attractive homes rather than warehouses for human beings. Home-building is a backward industry. It has not begun to keep pace with other things. In all essentials we build houses much as we did fifty years ago. The reason is that population is always outrunning the supply of houses. Almost anything can be rented in our cities, no matter how cheap, tawdry, or unhomelike it may be.

This I think is verified by New York City. No city in the world approaches the American metropolis in the convenience, attractiveness, and splendor of the office-buildings and apartment-houses, or the wonderful ingenuity of the hotels. Buildings begin to be antiquated almost as soon as they are completed. Twenty years' time sees a great reduction in their rent, or brings about their demolition. This is not due to the high price of land. If that were the cause, London would surpass New York in splendor, and Chicago would vie with it. It is due to the honest valuation of land and the high tax imposed upon it. And if we carried the tax still higher, if we doubled the existing rate, landlords would be compelled to enter a race for tenants just as automobile manufacturers now race for purchasers. House and apartment building and the housing question would be subject to the same laws of competition that govern other businesses.

This cheapening of land, which can be carried to any extent by taxation, would make city building easy. It would enable parks, boulevards, and docks to be acquired and developed; it would permit the location of public buildings and the opening up of open spaces and playgrounds. Public buildings could be grouped so as to secure the maximum of architectural effect, while suburbs could be laid out in a generous and beautiful manner. There is no reason why the cities of the future should not be garden cities - just such garden cities as Washington, Diisseldorf, Frankfort, and a dozen cities in Europe - just such garden cities as have been planned by philanthropists and business men. The only obstacle is the prohibitive price of city land.

The great advantage of the reform suggested lies in the fact that it is automatic. An ounce of taxation will do more to clean up a slum than a score of sanitary policemen. Self-interest is the moving force in all other business. Why should it not be made operative on the land-owner? He has no vested right to be made rich by the growth of the community. Nor has he any vested right to hold land out of use, to block the orderly development of the city, and at the same time make the price of all other land so high that the rents of the whole community are forced up in consequence. For that is what happens. It is the withholding of land from use that explains the high rents of our cities ; it is this that lies at the root of the housing problem; it is this that is responsible for the high cost of living-for only a fraction (and a very small fraction) of the land in America is used. And yet it is all owned. And I have never met a landowner who did not feel that his land was worth from 50 to 100 per cent more than it would really produce. Try to buy farming land within twenty miles of any large city and see the prices which are asked. Study the metropolitan values asked for business sites in the Western cities.

The cities of Australasia as well as those of northwest Canada have already recognized the justice as well as the expediency of exempting improvements from local taxation. Nearly a hundred communities in Australasia have abolished the house and improvement-tax, while within the last few years quite a number of the new cities in western Canada have, by municipal action, done the same thing. The inspiration of this action was in each case the same. It was the desire to check land-speculation and to encourage building. And the testimony of all these experiments is to the same effect. Officials, business men, and ordinary citizens unite in admitting that the burden of taxation has tended to the breaking-up of great estates; it has led to an encouragement to building that was unprecedented, and has stimulated not only the building of homes but their ownership as well.