Mortgages and Mortgages

They Are of Several Kinds

Joseph Dana Miller

[Reprinted from Single Tax Review, Vol.XIX, No.1, January-February 1919]

WE have received the following inquiry from a new subscriber:

"Will you please state through the columns of the Review what effect Single Tax would have upon the hundreds of millions of mortgages upon land alone, and upon land and improvements, which form the basis of security for the investments of so many fiduciary institutions, trust estates and individuals throughout the world."

Chas. F. Cushman

As the mortgages mentioned in the above inquiry are of two kinds, viz., those upon land values alone, and those upon land and improvements, let us consider them separately. In the next place, let us keep in mind that the proposed Single Tax on land values involves the simultaneous release of at least an equivalent amount of taxes upon improvements, capital, labor and all legitimate forms and products of industry.

Let us now consider the case of a mortgage upon land alone, without improvements.

In this case the interest on the mortgage, though guaranteed by the title on the land, is really supplied from other sources. Unused land never yet paid the interest on its own or any. other mortgage. Now the effect of the Single Tax on this kind of mortgage may be viewed from these two points: that of the land held in mortgage, and that of the land really providing the interest. In the case of the land which provides the interest, the mortgagee is clearly placed by the operation of the Single Tax in a better position to meet his obligations. The shift of the incidence of taxation is in favor of his productive activities, ie., his ability to pay. If the more favorable position in which he now stands as a producer induces him to turn to productive use the vacant land upon which he has raised a mortgage, then his solvency as a debtor is still further strengthened.

We are of course assuming that the mortgage in question is based upon the only legitimate foundation of credit, viz., the capacity of the mortgagee or of the property to produce. Mortgage operations based upon speculative futurities in the selling price of land are not the province of sound financial institutions. The sooner they come to grief and cease to seduce capital from productive enterprise, the better for the morality and economic health of the community.

SPECULATIVE VENTURES BASED ON FISCAL EXEMPTIONS

Land prices based upon the capitalized value of any existing tax privileges must always be subject to alterations due to changes in fiscal conditions. Fiscal freedom of action of no community can be subordinated to the requirements of any speculative venture founded on fiscal exemptions, save and except when the community expressly enters into obligation as contracting partner, a not frequent case, where, in order to stimulate specific industries, a special bonus or tax exemption is awarded for a term of years. Otherwise it would be intolerable. It would stereotype legislation, stultify progress and ultimately redound to the injury of the privileged interests concerned.

The paragraph above is introduced in order to call attention to a distinction not sufficiently emphasized, between mortgage operations which promote productive development, and mortgages which are substantially co-partnerships in speculative land deals. The term mortgage is, indeed, used too indiscriminately, often covers transactions pernicious to sound economic activities and are barely defensible in law. It would be well if the more serious fiduciary corporations would consider carefully the whole situation; and define clearly their position as to the bases of their credit operations. In so far as these are based on the capitalization of fiscal favors not guaranteed by agreement with the government and in fair exchange of services, they are necessarily precarious investments, partaking more of the nature of a gamble, and should be ruled out by any prudent board of directors.

MORTGAGES FALLING UPON LAND AND IM- PROVEMENTS

How does the matter stand with the second class of mortgages mentioned in the inquiry, in which the mortgage falls upon land and improvements? Presumably, in this case the improvements, utilized by business or industrial activities, are the source from which the interest on the capital advance is derived. Otherwise, the presumption is that some other piece of land more productively used is the source, which would bring us back to the conditions of the class of mortgages already considered. The difference between the two classes, is, after all, merely a question of the location of the improvements and activities which are to provide the interest payments. In both cases, the Single Tax releases improvements and productive activities from taxation and stimulates the only source from which interest, in its true economic sense, can be derived.

The complaint may be made that, eventually, the guarantee of every mortgage would have to rest upon productive industry. That is substantially so now. The fact that a mortgagee may fail and forfeit his land, does not alter the fact that the latter, when sold, simply makes a draft on the community's industry as distinct from that of the individual. That may be very convenient for the mortgage holder, but by no means enters into any agreement to which the community is consenting partner. It is a situation that may terminate at any moment, having in it at present an essential immorality that cannot endure. If ever the community's industry is required to supplement the individual's industry by an operation of credit, the operation may be carried on direct between the parties concerned, the community and the individual. In other words, community values are not the proper basis of credits between individuals. The mortgage, when so used, is an abusive appropriation of public functions, and, under the Single Tax, will disappear.

THE INTERNATIONAL ASPECT OF THE QUESTION

We have purposely deferred considering the international aspect of the mortgage as affected by the Single Tax. In the case of a foreign mortgagee of American land, whose productive activities are carried on exclusively abroad, it would seem clear that the application of the Single Tax to America would bring to him no equivalent release of taxes on his foreign improvements and productive activities. But the American community, which offers under the Single Tax favorable conditions for any industry the foreigner may wish to establish on his land here, is not and cannot be held responsible for his fiscal disabilities in his own country. America is quite justified in expecting that a foreign investor in American land shall put that land to productive use and expect no fiscal favors as distinguished from the American investor who does turn his land to use, even though it only be to pay the interest on mortgage issued on an unused portion thereof.

A particularly vicious form of mortgage investment is that of foreign financial companies operating in this country, using as pawn our community values. We prefer to think of such credit operations, if necessary, being carried out by the community itself, using its own community values as security. This rational readjustment of positions is made possible by the Single Tax.

A HINT FOR REPUTABLE FIDUCIARY INSTITU- TIONS

We repeat, all reputable fiduciary companies will do well to consider carefully to what extent they are operating on the basis of community values as distinguished from individual values. The community is not having a square deal in the former case, in which values are merely absorbed, whereas, in the latter case, and under discrete management, the operation may represent productive and legitimate functions of capital. The line between the speculative land interests and legitimate combinations of capital and labor in industry is not clearly enough drawn at present. Reputable corporations should make the character of their operations unmistakable. The Single Tax, when applied, will inevitably separate the sheep from the goats, not the least of its services to society.