In economic and social discussion the word reform is commonly opposed to the word revolution. It implies modification rather than abolition, gradual rather than violent change. Hence reforms of the system of land tenure do not include such radical proposals as those of land nationalisation or the Single Tax. On the other hand, some extension of State ownership of land, and some increase in the proportion of taxes imposed upon land, may quite properly be placed under the head of reform, inasmuch as they are changes in rather than a destruction of the existing system.
In general, the reform measures needed are such as will meet the defects described in the last chapter; namely, monopoly, excessive gains, and exclusion from the land. Obviously they can be provided only by legislation; and they may all be included under two heads, ownership and taxation.
By far the greater part of the more valuable lands of the country are no longer under the ownership of the State. Urban land is practically all in the hands of private proprietors. While many millions of acres of land suitable for agriculture are still under public ownership, almost all of this area requires a considerable outlay for irrigation, clearing, and draining before it can become productive. Forty years ago, three-fourths of the timber now standing was public property; at present about four-fifths of it is owned by private persons or corporations.[76] The bulk of our mineral deposits, coal, copper, gold, silver, etc., have likewise fallen under private ownership, with the exception of those of Alaska. The undeveloped water power remaining under government ownership has been roughly estimated at fourteen million horse power in the national forests, and considerably less than that amount in other parts of the public domain.[77] This is a gratifying proportion of the whole supply, developed and undeveloped, of this national resource, which is said to be somewhere between 27 and 60 millions horse power.[78] Only about seven million horse power has yet been developed, almost all of which is privately owned.
The Leasing System
In many countries of Europe it has long been the policy of governments to retain ownership of all lands containing timber, minerals, oil, natural gas, phosphate, and water power. The products of these lands are extracted and put upon the market through a leasing system. That is; the user of the land pays to the State a rental according to the amount and quality of raw material which he takes from the storehouse of nature. Theoretically, the State could sell such lands at prices that would bring in as much revenue as does the leasing system; practically, this result has never been attained. The principal advantages of the leasing arrangement are: to prevent the premature destruction of forests, the private monopolisation of limited natural resources (which has happened in the case of the anthracite coal fields of Pennsylvania) and the private acquisition of exceptionally valuable land at ridiculously low prices; and to enable the State to secure just treatment for the consumer and the labourer by stipulating that the former shall obtain the product at fair prices, and that the latter shall receive fair wages.
This example should be followed by the United States. All timber, mineral, gas, oil, and water power lands which have not been alienated to private persons should remain under government ownership, and be brought into use through a leasing arrangement which would enable the private operators to obtain the rates of profit and interest which are ordinarily yielded by enterprises subject to the same degree of risk. Happily this policy now seems likely to be adopted. In 1913 a law was passed by the United States providing for the operation of the coal mines of Alaska on leases. The amount that can be leased by any person or corporation is limited to 2560 acres, and the penalty for attempting to monopolise the product is forfeiture of tenure. The Secretary of the Interior has urged a similar arrangement for the development and extraction of water power, coal, oil, gas, phosphate, sodium, and potassium on the public domain of Continental United States, and his recommendation will probably be adopted by Congress. Thus the rent of these lands will go to the whole people instead of to a comparatively small number of individuals, monopoly of the products will be made impossible, and our remaining public resources will be protected from rapid and ruinous exploitation.
To the objection that capitalists will not invest their money in nor carry on extractive enterprises on a leasing basis, the sufficient answer is that they are doing it now. In 1909, 24.5 per cent. of all the lands producing minerals, precious metals, and stone; 94.6 per cent. of the lands producing petroleum and gas; and 61.2 per cent. of the two groups of lands combined, were operated under leases from private owners or from the government.[79] If the rental or royalty demanded is not unreasonably high capitalists will be quite as willing to produce raw materials of these kinds from leased land as they are to manufacture or sell goods in a rented building. Not the leasing system, but the terms of the particular lease are the important consideration.
Public grazing lands should remain government property until such time as they become available for agriculture. Cattle owners could lease the land from the State on equitable terms, and receive ample protection for money invested in improvements.
Public Agricultural Lands
The leasing system cannot well be applied to agricultural lands. In order that they may be continuously improved and protected against deterioration, they must be owned by the cultivators. The temptation to wear out a piece of land quickly, and then move to another piece, and all the other obstacles that stand in the way of the Single Tax as applied to agricultural land, show that the government cannot with advantage assume the function of landlord in this domain. In the great majority of cases the State would do better to sell the land in small parcels to genuine settlers. There are, indeed, many situations, especially in connection with government projects of irrigation, clearing, and drainage, in which the leasing arrangement could be adopted temporarily. It should not be continued longer than is necessary to enable the tenants to become owners. With this end in view the State should make loans to cultivators at moderate rates of interest, as is done in New Zealand and Australia.
Whether the State ought to purchase undeveloped land from private owners in order to sell it to settlers, may well be doubted. The only lands to which such a scheme would be at all applicable are large estates which are held out of use by their proprietors. Even here the transfer of the land to cultivators could be accomplished indirectly, through an extra heavy tax. This method has been adopted with success by Australia and New Zealand. The only other action by the State that seems necessary or wise in order to place settlers upon privately owned agricultural land, is the establishment of a comprehensive system of rural credits. The need of cheaper food products, and the desirability of checking the abnormal growth of our urban populations, are powerful additional reasons for the adoption of this policy. The Hollis Rural Credits Bill recently enacted into law by Congress goes a considerable way toward meeting these needs.
Public Ownership of Urban Land
No city should part with the ownership of any land that it now possesses. Since capitalists are willing to erect costly buildings on sites leased from private owners, there is no good reason why any one should refuse to put up or purchase any sort of structure on land owned by the municipality. The situation differs from that presented by agricultural land; for the value of the land can easily be distinguished from that of improvements, the owner of the latter can sell them even if he is not the owner of the land, and he cannot be deprived of them without full compensation. While the lessee paid his annual rent, his control of the land would be as complete and certain as that of the landowner who continues to pay his taxes. On the other hand, the leaseholder could not permit or cause the land to deteriorate if he would; for the nature of the land renders this impossible. Finally, the official activities involved in the collection of the rent and the periodical revaluation of the land, would not differ essentially from those now required to make assessments and gather taxes.
The benefits of this system would be great and manifest. Persons who were unable to own a home because of their inability to purchase land, could get secure possession of the necessary land through a lease from the city. Instead of spending all their lives in rented houses, thousands upon thousands of families could become the owners and occupiers of homes. The greater the amount of land thus owned and leased by the city, the less would be the power of private owners to hold land for exorbitant prices. Competition with the city would compel them to sell the land at its revenue-producing value instead of at its speculative value. Finally, the city would obtain the benefit of every increase in the value of its land by means of periodical revaluation, and periodical readjustment of rent.
Unfortunately the amount of municipal land available for such an arrangement in our American cities is negligible. If they are to establish the system they must first purchase the land from private owners. Undoubtedly this ought to be done by all large cities in which the housing problem has become acute, and the value of land is constantly rising. This policy has been adopted with happy results by many of the municipalities of France and Germany.[80] At the state election of 1915 the voters of Massachusetts adopted by an overwhelming majority a constitutional amendment authorising the cities of the commonwealth to acquire land for prospective home builders. In Savannah, Georgia, no extension of the municipal limits is made until the land to be embraced has passed into the ownership of the city. Another method is to refrain from opening a new street in a suburban district until the city has become the proprietor of the abutting land. Whatever be the particular means adopted, the objects of municipal purchase and ownership of land are definite and obvious: to check the congestion of population in the great urban centres, to provide homes for the homeless, and to secure for the whole community the socially occasioned increases in land values. Indeed, it is probable that no comprehensive scheme of housing reform can be realised without a considerable amount of land purchase by the municipalities. Cities must be in a position to provide sites for those home builders who cannot obtain land on fair conditions from private proprietors.[81]
Turning now from the direct method of public ownership to the indirect method of reform through taxation, we reject the thoroughgoing proposals of the Single Taxers. To appropriate all economic rent for the public treasury would be to transfer all the value of land without compensation from the private owner to the State. For example: a piece of land that brought to the owner an annual revenue of one hundred dollars would be taxed exactly that amount; if the prevailing rate of interest were five per cent. the proprietor would be deprived of wealth to the amount of two thousand dollars; for the value of all productive goods is determined by the revenue that they yield, and benefits the person who receives the revenue. Thus the State would become the beneficiary and the virtual owner of the land. Inasmuch as we do not admit that the so-called social creation of land values gives the State a moral right to these values, we must regard the complete appropriation of economic rent through taxation as an act of pure and simple confiscation.[82]
Appropriating Future Increases of Land Value
Let us examine, then, the milder suggestion of John Stuart Mill, that the State should impose a tax upon land sufficient to absorb all future increases in its value.[83] This scheme is commonly known as the appropriation of future unearned increment. Either in whole or in part it is at least plausible, and is to-day within the range of practical discussion. It is expected to obtain for the whole community all future increases in land values, and to wipe out the speculative, as distinguished from the revenue-producing value of land. Consequently it would make land cheaper and more accessible than would be the case if the present system of land taxation were continued. Before discussing its moral character, let us see briefly whether the ends that it seeks may properly be sought by the method of taxation. For these ends are mainly social rather than fiscal.
To use the taxing power for a social purpose is neither unusual nor unreasonable. "All governments," says Professor Seligman, "have allowed social considerations in the wider sense to influence their revenue policy. The whole system of productive duties has been framed not merely with reference to revenue considerations, but in order to produce results which should directly affect social and national prosperity. Taxes on luxuries have often been mere sumptuary laws designed as much to check consumption as to yield revenue. Excise taxes have as frequently been levied from a wide social, as from a narrow fiscal, standpoint. From the very beginning of all tax systems these social reasons have often been present."[84] Our Federal taxes on imports, on intoxicating liquors, on oleo-margarine, and on white phosphorus matches, and many of the license taxes in our municipalities, as on pedlars, saloon keepers, and dog owners, are in large part intended to meet social as well as fiscal ends. They are in the interest of domestic production, public health, and public safety. The reasonableness of effecting social reforms through taxation cannot be seriously questioned. While the maintenance of government is the primary object of taxation, its ultimate end, the ultimate end of government itself, is the welfare of the people. Now if the public welfare can be promoted by certain social changes, and if these in turn can be effected through taxation, this use of the taxing power will be quite as normal and legitimate as though it were employed for the upkeep of government. Hence the morality of taxing land for purposes of social reform will depend entirely upon the nature of the particular tax that is imposed.
Some Objections to the Increment Tax
The tax that we are now considering can be condemned as unjust on only two possible grounds: first, that it would be injurious to society; and, second, that it would wrong the private landowner. If it were fairly adjusted and efficiently administered it could not prove harmful to the community. In the first place, landowners could not shift the tax to the consumer. All the authorities on the subject admit that taxes on land stay where they are put, and are paid by those upon whom they are levied in the first instance.[85] The only way in which the owners of a commodity can shift a tax to the users or consumers of it, is by limiting the supply until the price rises sufficiently to cover the tax. By the simple device of refusing to erect more buildings until those in existence have become scarce enough to command an increase in rent equivalent to the new tax, the actual and prospective owners of buildings can pass the tax on to the tenants thereof. By refusing to put their money into, say, shoe factories, investors can limit the supply of shoes until any new tax on this commodity is shifted upon the wearers of shoes in the form of higher prices. Until these rises take place in the rent of buildings and the price of shoes, investors will put their money into enterprises which are not burdened with equivalent taxes. But nothing of this sort can follow the imposition of a new tax upon land. The supply of land is fixed, and cannot be affected by any action of landowners or would-be landowners. The users of land and the consumers of its products are at present paying all that competition can compel them to pay. They would not pay more merely because they were requested to do so by landowners who were labouring under the burden of a new tax. If all landowners were to carry out an agreement to refrain from producing, and to withhold their land from others until rents and prices had gone up sufficiently to offset the tax, they could, indeed, shift the latter to the renters of land and the consumers of its products. Such a monopoly, however, is not within the range of practical achievement. In its absence, individual landowners are not likely to withhold land nor to discontinue production in sufficient numbers to raise rents or prices. Indeed, the tendency will be all the other way; for all landowners, including the proprietors of land now vacant, will be anxious to put their land to the best use in order to have the means of paying the tax. Owing to this increased production, and the increased willingness to sell and let land, rents and prices must fall. It is axiomatic that new taxes upon land always make it cheaper than it would have been otherwise, and are beneficial to the community as against the present owners.
In the second place, the tax in question could not injure the community on account of discouraging investment in land. Once men could no longer hope to sell land at an advance in price, they would not seek it to the extent that they now do as a field of investment. For the same reason many of the present owners would sell their holdings sooner than they would have sold them if the tax had not been levied. From the viewpoint of the public the outcome of this situation would be wholly good. Land would be cheaper and more easy of access to all who desired to buy or use it for the sake of production, rather than for the sake of speculation. Investments in land which have as their main object a rise in value are an injury rather than a benefit to the community; for they do not increase the products of land, while they do advance its price, thereby keeping it out of use. Hence the State should discourage instead of encouraging mere speculators in land. Whether it is or is not bought and sold, the supply of land remains the same. The supreme interest of the community is that it should be put to use, and made to supply the wants of the people. Consequently the only land investments that help the community are those that tend to make the land productive. Under a tax on future increases in value, such investments would increase for the simple reason that land would be cheaper than it would have been without the tax. Men who desired land for the sake of its rent or its product would continue as now to pay such prices for it as would enable them to obtain the prevailing rate of interest on their investment after all charges, including taxes, had been paid. Men who wanted to rent land would continue as now to get it at a rental that would give them the usual return for their capital and labour.
So much for the effect of the tax upon the community. Would it not, however, be unjust to the landowners? Does not private ownership of its very nature demand that increases in the value of the property should go to the owners thereof? "Res fructificat domino:" a thing fructifies to its owner; and value-increases may be classed as a kind of fruit.
In the first place, this formula was originally a dictum of the civil law merely, the law of the Roman Empire. It was a legal rather than an ethical maxim. Whatever validity it has in morals must be established on moral grounds, by moral arguments. It cannot forthwith be assumed to be morally sound on the mere authority of legal usage. In the second place, it was for a long time applied only to natural products, to the grain grown in a field, to the offspring of domestic animals. It simply enunciated the policy of the law to defend the owner of the land in his claim to such fruits, as against any outsider who should attempt to set up an adverse title through mere appropriation or possession. Thus far, the formula was evidently in conformity with reason and justice. Later on it was extended, both by lawyers and moralists, to cover commercial "fruits," such as, rent from lands and houses, and interest from loans and investments. Its validity in this field will be examined in connection with the justification of interest. More recently the maxim has received the still wider application which we are now considering. Obviously increases in value are quite a different thing from the concrete fruit of the land, its natural product. A right to the latter does not necessarily and forthwith imply a right to the former. In the third place, the formula in question is not a self evident, fundamental principle. It is merely a summary conclusion drawn from the consideration of the facts and principles of social and industrial life. Consequently its validity as applied to any particular situation will depend on the correctness of these premises, and on the soundness of the process by which it has been deduced.
The increment tax is sometimes opposed on the ground that it is new, in fact, revolutionary. In some degree the charge is true, but the conditions which the proposal is intended to meet are likewise of recent origin. The case for this legislation rests mainly on the fact that, for the first time in the world's history, land values everywhere show an unmistakable tendency to advance indefinitely. This means that the landowning minority will be in a position to reap unbought and continuous benefits at the expense of the landless majority. This new fact, with its very important significance for human welfare, may well require a new limitation on the right of property in land.
It is also objected that to deprive men of the opportunity of profiting by changes in the value of their land would be an unfair discrimination against one class of proprietors. But there are good reasons for making the distinction. Except in the case of monopoly, increases in the value of goods other than land are almost always due to expenditures of labour or money upon the goods themselves. The value increases that can be specifically traced to external and social influences are intermittent, uncertain, and temporary. Houses, furniture, machinery, and every other important category of artificial goods are perishable, and decline steadily in value. Land, however, is substantially imperishable, becomes steadily scarcer relatively to the demand, and its value-increases are on the whole constant, certain, and permanent. Moreover, it is the settled policy of most enlightened governments to appropriate or to prevent all notable increases in the value of monopolistic goods, either through special taxation or through regulation of prices and charges. Taking the increment values of land is, therefore, not so discriminative as it appears at first glance.[86]
Another objection is that the proposal would violate the canons of just taxation, since it would impose a specially heavy burden upon one form of property. The general doctrine of justice in taxation which is held by substantially all economists to-day, and which has been taught by Catholic moralists for centuries, is that known as the "faculty" theory.[87] Men should be taxed in proportion to their ability to pay, not in accordance with the benefits that they may be assumed to receive from the State. And it is universally recognised that the proper measure of "ability" is not a man's total possessions, productive and unproductive, but his income, his annual revenue. Now, the increment tax does seem to violate the rule of taxation according to ability, inasmuch as it would take all of one species of revenue, while all other incomes and properties pay only a certain percentage.
All the adherents of the faculty theory maintain, however, that it is subject to certain modifications. Incomes from interest, rent, and socially occasioned increases in the value of property should be taxed at a higher rate than incomes that represent expenditures of labour; for to give up a certain per cent. of the former involves less sacrifice than to give up the same per cent. of the latter. Therefore, increments of land-value may be fairly taxed at a higher rate than salaries, personal property, or even rent and interest. When, however, the law absorbs the whole of the value increments, it seems to be something more than a tax. The essential nature of a tax is to take only a portion of the particular class of income or property upon which it is imposed. The nearest approach to the plan of taking all future increases in land value is to be found in the special assessments that are levied in many American cities. Thus, the owners of urban lots are frequently compelled to defray the entire cost of street improvements on the theory that their land is thereby and to that extent increased in value. In such cases the contribution is levied not on the basis of the faculty theory, but on that of the benefit theory; that is, the owners are required to pay in proportion to benefits received. All adherents of the faculty theory admit that the benefit theory is justifiably applied in situations of this kind. It might be argued that the latter theory can also be fairly applied to increments of land value that are to arise in the future. In both cases the owner returns to the State the equivalent of benefits which have cost him nothing. There is, however, a difference. In the former case the value increases are specifically due to expenditures made by the State, while in the latter they are indirectly brought about by the general activities of the community. We do not admit with the Single Taxers that this "social production" of value increments creates a right thereto on the part of either the community or the civil body; but even if we did we should be compelled to admit that the two situations are not exactly parallel; for the social production of increases in the value of land involves no special expenditure of labour or money. Hence it is very questionable whether the appropriation of the whole of the future value increments can be harmonised with the received conceptions and applications of the canons of taxation.
The Morality of the Proposal
However, it is neither necessary nor desirable to justify the proposal on the mere ground of taxation. Only in form and administration is it a tax; primarily and in essence it is a method of distribution. It resembles the action by which the State takes possession of a newly discovered territory by the title of first occupancy. The future increases of land value may be regarded as a sort of no man's property which the State appropriates for the benefit of the community. And the morality of this proceeding must be determined by the same criterion that is applied to every other method or rule of distribution; namely, social and individual consequences. No principle, title, or practice of ownership, nor any canon of taxation, has intrinsic or metaphysical value. All are to be evaluated with reference to human welfare. Since the right of property is not an end in itself, but only a means of human welfare, its just prerogatives and limitations are determined by their conduciveness to the welfare of human beings. By human welfare is meant not merely the good of society as a whole, but the good of all individuals and classes of individuals. For society is made up of individuals, all of whom are of equal worth and importance, and have equal claims to consideration in the matter of livelihood, material goods, and property. In general, then, any method of distribution, any modification of property rights, any form of taxation, is morally lawful which promotes the interests of the whole community, without causing undue inconvenience to any individual. Whether a given rule of ownership or method of distribution which is evidently conducive to the public good is, nevertheless, unduly severe on a certain class of individuals, is a question that is not always easily answered. Some of the methods and practices appearing in history were clearly fair and just, others clearly unfair and unjust, and still others of doubtful morality. Frequently the State has compelled private persons to give up their land at a lower price than they paid for it; in more than one country freebooters and kingly favourites robbed the people of the land, yet their heirs and successors are recognised by both moralists and statesmen as the legitimate owners of that land; in Ireland stubborn landlords are to-day compelled by the British government to sell their holdings to the tenants at an appraised valuation; in many countries men may become owners of their neighbours' lands by the title of prescription, without the payment of a cent of compensation. All these practices and titles inflict considerable hardship upon individuals, but most of them are held to be justified on grounds of social welfare.
Now the public appropriation of all future increments of land value would evidently be beneficial to the community as a whole. It would enable all the people to profit by gains that now go to a minority, and it would enable the landless majority to acquire land more easily and more cheaply. We have in mind, of course, only those value increases that are not due to improvements in or on the land, and we assume that these could be distinguished in practice from the increments of value that represent improvements. Would the measure in question inflict undue hardship upon individuals? Here we must make a distinction between those persons who own land at the time that, and those who buy land after, the law is enacted.
The only inconvenience falling upon the latter class would be deprivation of the power to obtain future increases in value. The law would not cause the value of the land to decline below their purchase price. Other forces might, indeed, bring about such a result; but, as a rule, such depreciation would be relatively insignificant, for the simple reason that it would already have been "discounted" in the reduction of value which followed the law at the outset. The very knowledge that they could not hope to profit by future increases in the value of the land would impel purchasers to lower their price accordingly. While taking away the possibility of gaining, the law enables the buyers to take the ordinary precautions against losing. Therefore, it does not, as sometimes objected, lessen the so called "gambler's chances." On the other hand, the tax does not deprive the owners of any value that they may add to the land through the expenditure of labour or money, nor in any way discourage productive effort. Now it is, as a rule, better for individuals as well as for society that men's incomes should represent labour, expenditure, and saving instead of being the result of "windfalls," or other fortuitous and conjunctural circumstances. And the power to take future value increments is not an intrinsically essential element of private property in land. Like every other condition of ownership, its morality is determined by its effects upon human welfare. But we have seen in the last paragraph that human welfare in the sense of the social good is better promoted by a system of landownership which does not include this element; and we have just shown that such a system causes no undue hardship to the individual who buys land after its establishment. Such is the answer to the contention, noticed a few pages back, that the landowner has a right to future increments of value because they are a kind of fruit of his property. It is more reasonable that he should not enjoy this particular and peculiar "fruit." Were the increment tax introduced into a new community before any one had purchased land, it would clearly be a fair and valid limitation on the right of ownership. Those who should become owners after the regulation went into effect in an old community would be in exactly the same moral and economic position. Finally, there exists some kind of legal precedent for the proposal in the present policy of efficient governments with regard to the only important increases that occur in the value of goods other than land; namely, increases due to the possession of monopoly power. By various devices these are either prevented or appropriated by the State.
Those persons who are landowners when the increment tax goes into effect are in a very different situation from those that we have just been considering. Many of them would undoubtedly suffer injury through the operation of the measure, inasmuch as their land would reach and maintain a level of value below the price that they had paid for it. The immediate effect of the increment tax would be a decline in the value of all land, caused by men's increased desire to sell and decreased desire to buy. In all growing communities a part of the present value of land is speculative; that is, it is due to demand for the land by persons who want it mainly to sell at an expected rise, and also to the disinclination of present owners to sell until this expectation is realised. The practical result of the attitude of these two classes of persons is that the demand for, and therefore the value of land is considerably enhanced. Let a law be enacted depriving them of all hope of securing the anticipated increases in value, and the one group will cease to buy, while the other will hasten to sell, thus causing a decline in demand relatively to supply, and therefore a decline in value and price.
All persons who had paid more for their land than the value which it came to have as a result of the increment tax law, would lose the difference. For, no matter how much the land might rise in value subsequently, the increase would all be taken by the State. And all owners of vacant land the value of which after the law was passed did not remain sufficiently high to provide accumulated interest on the purchase price, would also lose accordingly. To be sure, both these kinds of losses would exist even if the law should cause no decline in the value of land, but they would not be so great either in number or in volume.
Landowners who should suffer either of these sorts of losses would have a valid moral claim against the State for compensation. Through its silence on the subject of increment-tax legislation, the State virtually promised them at the time of their purchases that it would not thus interfere with the ordinary course of values. Had it given any intimation that it would enact such a law at a future time, these persons would not have paid as much for their land as they actually did pay. When the State passes the law, it violates its implicit promise, and consequently is under obligation to make good the resulting losses.
Is it not obliged to go further, and pay for the positive gains that many of the owners would have reaped in the absence of the law? For example: a piece of land is worth one thousand dollars the day after the tax goes into effect, and that was exactly the price paid for it by the present owner; another piece has the same value, but was bought by the present owner for eight hundred dollars. While neither of these men suffer any loss on their investments, they are deprived of possible gains; for had the law not been enacted their holdings would be worth, say, eleven hundred dollars. Nevertheless, they are no worse off in this respect than those persons who buy land after the increment tax goes into effect, and have no greater claim to compensation for abolished opportunities of positive gain. As we have seen above, the certain advantages of the measure to the community, the doubtful advantages to individuals of profiting by changes in price which do not represent labour, expense, or saving, show that the owners have no strict right to compensation. And it is still clearer that no landowner has a valid claim on account of value increases that would have taken place subsequent to the time that the measure was enacted. There is no way by which owners who would have held their land long enough to profit by these increments can be distinguished from owners who would not have availed themselves of this conjectural opportunity, nor any method by which the amount of such gains can be determined.
On the other hand, it might be objected that, in reimbursing all owners who suffer the positive losses above described, the State is unduly generous; for if the law had not been enacted many of the reimbursed persons would have sold their holdings at a price insufficient to cover their losses. But these cannot be distinguished from those who would have sold at a remunerative price. Hence the State must compensate all or none. The former alternative is not only the more just all round, but in the long run the more expedient.
In view of the social benefits of the increment tax, especially the removal of many of the inequities of the present taxing system, the State might sometimes be justified in making good only a part of the losses that we have been discussing. But this could probably occur only for administrative reasons, such as the difficulty of determining the persons entitled to and the amounts of compensation. It would not be justified merely to enable the State to profit at the expense of individuals. And, in any case, there seems to be no good reason why the unpaid losses should amount to more than a small fraction of the whole.
In the foregoing pages we have been considering a law which would from the beginning of its operation take all the future increments of land value. There is, however, no likelihood that any such measure will soon be enacted in any country, least of all, in the United States. What we shall probably see is the spread of legislation designed to take a part, and a gradual growing part, of value increases, after the example of Germany and Great Britain. Let us glance at the laws in force in these two countries.
The German and British Increment Taxes
The first increment tax (Werthzuwachssteuer) was established in the year 1898 in the German colony of Kiautschou, China. In 1904 the principle of the tax was adopted by Frankfort-am-Main, and in 1905 by Cologne. By April, 1910, it had already been enacted in 457 cities and towns of Germany, some twenty of which had a population of more than 100,000 each, in 652 communes, several districts, one principality, and one grand duchy. In 1911 it was inserted in the imperial fiscal system, and thus extended over the whole German Empire. While these laws are all alike in certain essentials, they vary greatly in details. They agree in taking only a per cent. of the value increases, and in imposing a higher rate on the more rapid increases. The rates of the imperial law vary from ten per cent. on increases of ten per cent. or less to thirty per cent. on increases of 290 per cent. or over. In Dortmund the scale progresses from one to 12-1/2 per cent. Inasmuch as the highest rate in the imperial law is 30 per cent., and in any municipal law (Cologne and Frankfort) 25 per cent.; inasmuch as all the laws allow deductions from the tax to cover the interest that was not obtained while the land was unproductive; and inasmuch as only those increases are taxed which are measured from the value that the land had when it came into the possession of the present owner,—it is clear that landowners are not obliged to undergo any positive loss, and that they are permitted to retain the lion's share of the "unearned increment."[88]
It is to be noted that most of the German laws are retroactive, since they apply not merely to future value increases, but to some of those that occurred before the law was enacted. Thus, the Hamburg ordinance measures the increases from the last sale, no matter how long ago that transaction took place. The imperial law uses the same starting point, except in cases where the last sale occurred before 1885. Accordingly, a man who had in 1880 paid 2500 marks for a piece of land which in 1885 was worth only 2000 marks, and who sold it for 3000 marks after the law went into effect, would pay the increment tax on 1000 marks,—unless he could prove that his purchase price was 2500 marks. In all such cases the burden of proof is on the owner to show that the value of the land in 1885 was lower than when he had bought it at the earlier date. Obviously this retroactive feature of the German legislation inflicts no wrong on the owner, since it does not touch value increases that he has paid for. Indeed, the value of the land when it came into the present owner's possession seems to be a fairer and more easily ascertained basis from which to reckon increases than any date subsequent to the enactment of the law. On the one hand, persons whose lands had fallen in value during their ownership would be automatically excluded from the operation of the law until such time as the acquisition value was again reached; on the other hand, those owners whose lands had increased in value before the law went into effect would be taxed as well as those whose gains began after that event; thus the law would reach a greater proportion of the existing beneficiaries of "unearned increment." Moreover, it would bring in a larger amount of revenue.
The British law formed a part of the famous Lloyd-George budget of 1909. It taxes only those increments that occur after its enactment. These are subject to a tax of twenty per cent. on the occasion of the next transfer of the land, by sale, bequest, or otherwise.[89] In some cases this arrangement will undoubtedly cause hardship. For example: if land which was bought for 1,000 pounds in 1900 had fallen to 800 pounds in 1909, and were sold for 1,000 pounds in 1915, the owner would have to pay a tax of twenty per cent. on 200 pounds. This would mean a net loss of forty pounds, to say nothing of the loss of interest in case the land was unproductive. It would seem that some compensation ought to be given here; yet the rarity of such instances, the administrative difficulties, and the general advantages of this sort of legislation quite conceivably might forbid the conclusion that the owner was made to suffer certain injustice. The compensating social advantages of the increment tax as well as of other special taxes on land, will receive adequate discussion presently.
Transferring Other Taxes to Land
Another taxation plan for reducing the evils of our land system consists in the imposition of special taxes on the present value of land. As a rule, these imply, not an addition to the total tax levy, but a transfer of taxes from other forms of property. The usual practice is to begin by exempting either partly or wholly buildings and other kinds of improvements from taxation, and then to apply the same measure to certain kinds of personal property. In most cases the transfer of such taxes to land is gradual, extending over a period of five, ten, or fifteen years. The plan is in operation in Canada and Australasia, and to a slight extent in the United States.
It has received its greatest development in the western provinces of Canada; namely, British Columbia, Alberta, Saskatchewan, and Manitoba. The cities of Edmonton, Medicine Hat, and Red Deer; Vancouver, Victoria, and thirteen others of the thirty-three cities of British Columbia; all the towns of Alberta except two; all but one of the villages of Alberta, and one-fourth of those in Saskatchewan; all the rural municipalities and local improvements districts in Alberta, Manitoba, and Saskatchewan, and 24 of the 28 in British Columbia,—exempt improvements entirely from taxation. The three cities in Alberta which retain some taxes on improvements; all the cities and towns and three-fourths of the villages in Saskatchewan; the four largest cities in Manitoba; and a considerable number of the municipalities in Ontario (by the device of illegal under-assessment in this instance),—tax improvements at less than full value, in some cases as low as fifteen per cent. Land is invariably assessed at its full value. It is to be observed that these special land taxes provide only local revenues; they do not contribute anything to the maintenance of either the provincial or the dominion governments. The reason why the local jurisdictions have adopted these taxes so much more extensively in Alberta than in the other provinces is to be found in a provincial law enacted in 1912, which requires all towns, villages, and rural areas to establish within seven years the practice of exempting from taxation personal property and buildings. Saskatchewan permits cities and towns to tax improvements up to sixty per cent. of their value, while British Columbia and Manitoba leave the matter entirely in the hands of the local authorities. The provincial revenues are derived from many sources, chiefly real estate, personal property, and incomes; but British Columbia, Saskatchewan, and Alberta levy a special tax on unimproved and only slightly improved rural land. The rate of this "wild lands tax" is in British Columbia four per cent., and in the other two provinces one per cent. Some of the municipalities of British Columbia and Saskatchewan also impose a "wild lands tax." By a law passed in 1913 Alberta levies a provincial tax of five per cent. on the value increases of non-agricultural lands. A movement for the reduction of the tax on buildings has developed considerable strength in the eastern provinces of Ontario, Nova Scotia, and New Brunswick.[90]
New Zealand and most of the states of Australia have for several years levied special taxes on land, consisting mainly of general rates on estates of moderate size, and a progressive super tax on large estates. The Commonwealth of Australia also imposes a tax of one penny in the pound on the value of land. A considerable proportion of the cities and towns in both New Zealand and Australia derive practically all their revenues from land, exempting improvements entirely. In both countries, however, the bulk of the total revenue is obtained from other sources than land taxes. In New Zealand they yield less than thirteen per cent. of the national receipts.[91]
Pittsburgh and Scranton were required by a law enacted in 1913 to reduce the local tax rate on buildings at such a pace that in 1925 and thereafter it would be only one-half the highest rate on other forms of property. Everett, Wash., and Pueblo, Col., within recent years adopted by popular vote more sweeping measures of the same character, but the Everett law has never gone into effect, and the Pueblo statute was repealed two years after it had been passed. In many cities of the United States, buildings are undervalued relatively to land by the informal and illegal action of assessors. The most pronounced and best known instance of this kind is Houston, Texas, where in 1914 land was assessed at seventy per cent. of its value and buildings at only twenty-five per cent. In 1915, however, the practice was forbidden by the courts as contrary to the Texas constitution. At more than one recent session of the New York legislature, bills have been introduced providing for the gradual reduction of the tax on buildings in New York City to a basis of fifty per cent. of their value. While none of them has been passed, the sentiment in favour of some such measure is probably increasing. A similar movement of opinion is apparent in many other sections of the country.
On the whole, the special land taxes of Canada and Australasia are not remarkably high. They seem to be as low or lower than the average rates imposed on land, as well as on other forms of general property, in the United States. In the provinces, the special land taxes provide only a small portion of the total revenues; in the cities and towns, there are, as a rule, other sources of revenue as well as land, and the expenses of municipal government are probably not as high as in this country. Hence the land taxes of Canada have not reached an abnormally high level, and are probably lower than most persons who have heard of them would be inclined to expect. The chief exceptions to the foregoing statements are to be found in the "wild lands tax" of British Columbia, and in the land taxes of some of the towns (not the cities) of Alberta. A rate of four per cent. on unimproved and slightly improved rural land is extraordinary in fiscal annals, and is scarcely warranted by any received principle of taxation, although it may possibly be justified by peculiar social and administrative conditions in the province of British Columbia. Some of the smaller towns of Alberta which adopted the land tax during the recent period of depression have been compelled to impose even higher rates, the maximum being reached by Castor in 1912, with a rate of 8-1/2 per cent. As a natural consequence, a large proportion of the land in this town was surrendered by its owners to the municipality. While this amazing tax rate is probably temporary, and is likely to be lowered after the return of the average conditions of prosperity, it inflicts unfair hardship upon those owners whose circumstances are such that they must give up their land, instead of awaiting the hoped for decline in the rate of taxation.
The Morality of the Plan
The losses of various kinds that would result from the transfer of other taxes to land may be thus summarised. Land would depreciate in value by an amount equal to the capitalised tax. For example; if the rate of interest were five per cent., an additional tax of one per cent. would reduce land worth one hundred dollars an acre to eighty dollars. This decline might, indeed, be partly, wholly, or more than offset by a simultaneous rise due to economic forces. In any case, however, the land would be worth twenty dollars less than it would have been worth had the tax not been imposed. For some owners this would mean a positive loss; for others it would signify mere failure to gain. The latter would happen in the case of all those owners who at any time after the imposition of the tax sold their land at as high a price as they had paid for it. Not all of the owners whose land was forced by the tax to a figure below their purchase price would suffer positive loss; for the land might subsequently rise in value sufficiently to wipe out the unfavourable difference. In this respect a special tax on the present value of land has a different effect from a tax that appropriates all the future value increases. Only those owners who actually sold their land below their purchase price could charge the former tax with inflicting upon them positive losses. In the case of the land exemplified above, the owner who sold at ninety dollars per acre could properly attribute to the tax a loss of ten dollars; the owner who sold at eighty dollars would have a grievance amounting to twenty dollars; and a loss would be suffered by any owner who sold for less than eighty dollars. In the second place, all owners of vacant land who sold at a price insufficient to provide for accumulated interest on the purchase price, could justly hold the tax responsible, so long as the deficiency did not exceed the value-depreciation caused by the tax. Thirdly, all persons whose land had an unusually high value relatively to the value of their exempted property, would suffer losses as taxpayers. They would lose more through the heavier land taxes than they would gain through the lighter taxes, or the absence of taxes, on their other property.
To compensate all owners who underwent these three kinds of losses would be practically impossible. The number of persons would be too large, the difficulty of proving many of the claims would be too expensive, and the compensation process would be too long drawn out, since it would have to continue until the death of all persons who had owned land when the last instalment of the increased land taxes went into effect. Therefore, the losses in question must be counterbalanced by other and indirect methods. These will be found mainly in the following considerations: the amount of the new taxes; the gradual method of imposing them; and their socially beneficial results.
Amount of Taxes Practically Transferable
According to Professor King's computations, the total rent of land in the United States in 1910 was $2,673,900,000, while the total expenditures of national, state, county and city governments were $2,591,800,000.[92] In his opinion (p. 162) "the rent would have been barely sufficient to pay off the various governmental budgets as at present constituted, and with the growing concentration of activities in the hands of the government, it appears that rent will soon be a quantity far too small to meet the required changes. With increasing pressure on our natural resources, however, it is probable that the percentage of the total income paid for rent will gradually increase and, since this is true, the lag behind the growing governmental expenses will be considerably less than would otherwise be the case."
A change in our fiscal system providing for the immediate derivation of all revenues from land taxes would, therefore, involve the confiscation of all rent, and the destruction of all private land values. Land would be worth nothing to the owners when its entire annual return was taken by the State in the guise of taxes. Even if the process of imposing the new taxes on land were extended over a long term of years the same result would be reached in the end; for whatever increase had taken place in the economic value of land during the process would in all probability have been neutralised by the increase in governmental expenditures. It is evident, therefore, that the proposal to put all taxes on land must be rejected on grounds of both morals and expediency.
Let us suppose that all national revenues continued, as now, to be raised from other sources than land, and that all state, county, and city revenues remained as they are, except those derived from the general property tax. This would mean that all the following taxes would be unchanged: all federal taxes, the taxes on licenses of all kinds, all taxes on business, incomes, and inheritances, and all special property taxes. If, then, the whole of the general property tax were concentrated on land; that is, if all the taxes on improvements and on all forms of personal property were legally shifted to land,—the entire revenue to be raised from land would in 1912 have amounted to $1,349,841,038.[93] This is slightly more than one-half of Professor King's estimate of the total rent for 1910, which was $2,673,900,000. But this figure equals four per cent. of the land values of the country; hence the concentration of the general property tax on land would mean a tax rate of two per cent. on the full value of the land.
How much would this change increase the present rate of land taxes, and decrease existing land values? While no accurate and definite answer can be given to either of these questions, certain approximations can be attempted which should be of considerable service.
In 1912 the average tax rate on the assessed valuation of all goods subject to the general property tax was .0194, or $19.40 per thousand dollars.[94] The assessed valuation of taxed real property and improvements (land, buildings, and other improvements) was nearly fifty-two billion dollars, while the true value of the same property was nearly ninety-eight and one-half billions.[95] Consequently, the actual tax rate of .0194 on the assessed valuation was exactly one per cent. on the true value of real estate. On the assumption that both land and improvements were undervalued to the same extent, the land tax was one per cent. of the full value of the land. If now we take Thomas G. Shearman's estimate, that land values form sixty per cent. of the total value of real estate, we find that the taxes derived from land constituted only forty-four per cent. of the total revenues raised by the general property tax. To concentrate the whole of the general property tax on land, by transferring thereto the taxes on improvements and on personal property, would, accordingly, cause the land tax to be somewhat more than doubled. It would be slightly above two per cent. on the full value of the land. This is the same estimate that we obtained above by a different process; that is, by comparing Professor King's estimate of land value and rent with the total revenues derived from the general property tax.
However, it is not improbable that sixty per cent. is too low an estimate of the ratio of land values to entire real estate values. In 1900, farm land and improvements, exclusive of buildings, formed 78.6 per cent. of the value of real estate, i.e., land, improvements, and buildings. In 1910, the per cent. was a little less than 82. Now it is quite unlikely that the value of non-building improvements on farms amounted to the difference between sixty per cent. and seventy-eight per cent. in 1900, or between sixty per cent. and eighty-two per cent. in 1910. Hence the value of farm land is something more than sixty per cent. of farm real estate. On the other hand, the value of factory land in 1900 formed only 41.5 per cent. of the total value of factory land and buildings, while the value of city and town lots in five rural states varied from 34 to 62 per cent. of this species of real estate.[96] In Greater New York land constitutes 61 per cent. of real estate values.[97] Owing to the lack of data, the average ratio for all kinds of real estate for the whole country is impossible of determination. If the estimate of seventy per cent. be adopted, which is probably the upper limit of the average proportion between land values and real estate values throughout the country, the portion of the general property tax now paid by land amounts to about fifty-two per cent. Consequently the imposition of the whole general property tax on land would not quite double the present rate on land. To the first of the two questions raised above the answer can be given with a fair amount of confidence that the transfer of improvement and personal property taxes to land would cause land taxes to be about twice what they are at present.
To the second question, concerning the extent to which land values would fall in consequence of the heavier taxes, the answer must be somewhat less definite. The added land taxes would be about one-half the present general property taxes, or $675,000,000. This is about one per cent. the total land values of the country. One per cent. of land values capitalised at five per cent. represents a depreciation of twenty per cent. in the value of land; capitalised at four per cent., it represents a depreciation of twenty-five per cent. For example; if land worth one hundred dollars an acre returns to its owner a net income of five dollars annually, the appropriation of one dollar by a new tax will leave a net revenue of only four dollars; capitalised at the current rate of five per cent., this represents only eighty dollars of land value, or a depreciation of twenty per cent. If the land has the same value of one hundred dollars, and still yields only four dollars revenue, a deduction of one dollar in new taxes will leave only three dollars net; capitalised at the current rate of four per cent., this represents only seventy-five dollars of land value, or a depreciation of twenty-five per cent. Using the other method of calculation, which estimated the present tax rate on the full value of land at one per cent., we get exactly the same results; namely, the new tax is one per cent., which is equivalent to a depreciation of twenty per cent. or of twenty-five per cent., according as we assume an interest rate of five per cent. or of four per cent. Suppose, however, that the assessors do not undervalue land to the extent that we have been assuming; suppose that the present rate of .0194 on assessed valuation is equivalent to, not merely one per cent., but one and one-half per cent. of the full value of land. In that hypothesis the additional tax would likewise be one and one-half per cent., which capitalised at five per cent, would represent a depreciation of thirty per cent., and at four per cent. a depreciation of thirty-seven and one-half per cent. Combining in one generalisation the various suppositions made in this paragraph, we estimate the depreciation of land values resulting from the proposed tax transfer as somewhere between twenty and forty per cent.
We have considered two hypothetical transfers of taxes to land. The first we found to be out of the question because it would appropriate the whole of the rent and destroy all private land values. The second would apparently amount to two per cent. of the value of land, and cause land values to depreciate from twenty to forty per cent. It is unnecessary to consider the probable effects of any plan that would involve heavier land taxes than the second; that is, the scheme of imposing all the general property tax on land; for it represents the extreme feasible and fair limit of the movement within, at any rate, the next fifteen or twenty years.
Even this degree of tax transference would be unjust to the landowners if it were brought about at once. No social or other considerations exist that would justify a depreciation in land values of from twenty to forty per cent. If, however, the process were extended over a period of, say, twenty years, the decline would be only one or two per cent. annually, which is considerably less than the rate at which farm lands and the land in large cities have risen in value during recent years. Under such an arrangement the great majority of owners would probably find that the depreciation caused by the heavier land taxes, had been more than offset by the upward tendency resulting from the increased demand for land.
Nevertheless, there would still be positive losses of the three kinds described a few pages back; namely, to owners who sold land below the price that they had paid for it; to owners who sold vacant land at a price insufficient to cover accumulated interest on the investment; and to owners whose aggregate tax burdens were increased. Some degree of each of these sorts of losses would be due specifically to the new land taxes. As noted above, public compensation in all such cases would be impracticable. Consequently the justification of a law that inflicts such losses must be found, if it exists, in social considerations.
The Social Benefits of the Plan
These may be summed up under three heads: making land easier to acquire; cheapening the products and rent of land; and reducing the burdens of taxation borne by the poorer and middle classes. An increase in the tax on land would reduce its value and price, or at least cause the price to be lower than it would have been in the absence of the tax. This does not mean that land would be more profitable to the purchaser, since he is enabled to buy it at a lower price only because it yields him less net revenue, or because it is less likely to increase in value. The value of land is always determined by its revenue-producing power, and by its probabilities of price-appreciation. Consequently, what the purchasers would gain by the lower price resulting from the new tax, they would lose when they came to pay the tax itself, and when they found the chances of value increases diminished. If a piece of land which brings a return of five dollars a year costs one hundred dollars before the new tax of one per cent. is imposed, and can be bought for eighty dollars afterward, the net interest on the purchase price has not changed. It is still five per cent. Hence the only advantage to the prospective purchaser of land in getting it cheaper consists in the fact that he can obtain it with a smaller outlay of capital. For persons in moderate circumstances this is a very important consideration.
In the second place, higher taxes would cause many existing owners either to improve their land, in order to have the means of meeting the added fiscal charges, or to sell it to persons who would be willing to make improvements. And the desire to erect buildings and other forms of improvements would be reinforced by the reduction or abolition of taxes on those kinds of personal property which consist of building materials. An increase in the rapidity of improvements on land would mean an increase in the rate at which land was brought into use, and therefore an unusual increase in the volume of products. This virtual increase in the supply of land, and actual increase in the supply of products, would cause a fall in three kinds of prices: the price of products, the rent of land, and the price of land. The last named reduction would be distinct from the reduction of land value caused in the first instance by the imposition of the tax.
In the third place, the reduction, and finally the abolition, of taxes on improvements and personal property would be especially beneficial to the poorer and middle classes because they now pay a disproportionate share of these charges. Lower taxes on dwellings would mean lower rents for all persons who did not own their homes, and lower taxes for all owners whose residence values were unusually large relatively to their land values. And the tendency to lower rents on dwellings would be reinforced by the lower cost of building materials resulting, as noted above, from the increased supply and the lower tax on this form of personal property. Lower taxes on that species of personal property which consists of consumers' goods, such as household furniture and wearing apparel, would lessen the present inequity of taxation because this class of goods is reached to a much greater extent in the case of the poor than in the case of the rich. It is not easy to conceal or to undervalue a relatively small number of simple and standard articles; but diamonds, costly furniture, and luxurious wardrobes can be either hidden, or certified to the assessor at a low valuation. As for those forms of personal property which are of the nature of capital and other profit producing goods, such as machinery and tools of all kinds, productive animals, money, mortgages, securities, the stocks of goods held by manufacturers and merchants, and likewise buildings which are used for productive purposes,—the taxes on all these kinds of property are for the most part shifted to the consumer. The latter ultimately pays the tax in the form of higher prices for food, clothing, shelter, and the other necessaries and comforts of life.[98] Now a tax on consumption is notoriously unfair to the poorer and middle classes because it affects a greater portion of their total expenditures, and takes a larger per cent. of their income than in the case of the rich. Hence the removal of the taxes specified in this paragraph would be at once the abolition of a fiscal injustice, and a considerable assistance to the less fortunate classes.
All those landowners who occupied rented dwellings would benefit by the reduction in house rent, and all landowners without exception would reap some advantage from the reduction or abolition of the taxes on consumers' goods and on the various forms of producers' goods. It is not improbable that a considerable proportion of them would gain as much in these respects as they would lose in the capacity of landowners.
Would the social benefits summarily described in the foregoing paragraphs be sufficient to justify the increased land taxes in the face of the losses that would be undergone by some landowners in the three ways already specified? In view of our ignorance concerning the probable amount of benefits on the one hand and losses on the other, it is impossible to give a dogmatic answer. However, when we reflect on the manifold social evils that are threatened by a rapid and continuous increase in land values, and the resulting decrease in the proportion of the population that can hope to participate in the ownership of land, we are forced to conclude that some means of checking both tendencies is urgently necessary for the sake of social justice and social peace. The project that we have been considering; namely, the transfer of taxes on improvements and on personal property to land by a process extending over twenty years, seems to involve a sufficiently large amount of advantage and a sufficiently small amount of disadvantage to justify systematic and careful experiment.
A Supertax on Large Holdings
Every estate containing more than a maximum number of acres, say, ten thousand, whether composed of a single tract or of several tracts, could be compelled to pay a special tax in addition to the ordinary tax levied on land of the same value. The rate of this supertax should increase with the size of the estate above the fixed maximum. Through this device large holdings could be broken up, and divided among many owners and occupiers. For several years it has been successfully applied for this purpose in New Zealand and Australia.[99] Inasmuch as this tax exemplifies the principle of progression, it is in accord with the principles of justice; for relative ability to pay is closely connected with relative sacrifice. Other things being equal, the less the sacrifice involved, the greater is the ability of the individual to pay the tax. Thus, the man with an income of ten thousand dollars a year makes a smaller sacrifice in giving up two per cent. of it than the man whose income is only one thousand dollars; for the latter case the twenty dollars surrendered represent a privation of the necessaries or the elementary comforts of life, while the two hundred dollars taken from the rich man would have been expended for luxuries or converted into capital. While the incomes of both are reduced in the same proportion, their satisfactions are not diminished to the same degree. The wants that are deprived of satisfaction are much less important in the case of the richer than in that of the poorer man. Hence the only way to bring about anything like equality of sacrifice between them is to increase the proportion of income taken from the former. This means that the rate of taxation would be progressive.[100]
It is in order to object that the principle of progression should not be applied to the taxation of great landed estates, since a considerable part of them is unproductive, and consequently does not directly affect sacrifice. But the same objection can be urged against any taxation of unoccupied land. The obvious reply is that the equal taxation of unproductive with productive land is justified by social reasons, chiefly, the unwisdom of permitting land to be held out of use. The same social reasons apply to the question of levying an exceptionally high tax on large estates, even though they may at present produce no revenue.
While the tax is sound in principle, it is probably not much needed in America in connection with agricultural or urban land. Its main sphere of usefulness would seem to be certain great holdings of mineral, timber, and water power lands. "There are many great combinations in other industries whose formation is complete. In the lumber industry, on the other hand, the Bureau now finds in the making a combination caused, fundamentally, by a long standing public policy. The concentration already existing is sufficiently impressive. Still more impressive are the possibilities for the future. In the last forty years concentration has so proceeded that 195 holders, many interrelated, now have practically one-half of the privately owned timber in the investigation area (which contains eighty per cent. of the whole). This formidable process of concentration, in timber and in land, clearly involves grave future possibilities of impregnable monopolistic conditions, whose far reaching consequences to society it is now difficult to anticipate fully or to overestimate."[101] In January, 1916, the Secretary of Agriculture called the attention of Congress to the fact that a small number of corporations closely associated in a policy of community of interest were threatening to secure and exercise a monopoly over the developed water power of the country. Ninety per cent. of the anthracite coal lands of Pennsylvania are owned or controlled by some nine railroads acting as a unit in all important matters. For situations of this kind a supertax on large estates would seem to hold the promise of a large measure of relief.
To sum up the main conclusions of this very long chapter: Exceptionally valuable lands, as those containing timber, minerals, oil, gas, phosphate, and water power, which are still under public ownership should remain there. Through a judicious system of loans, deserving and efficient persons should be assisted to get possession of some land. Municipalities should lease rather than sell their lands, and should strive to increase their holdings. To take all the future increases in the value of land would be morally lawful, provided that compensation were given to owners who thereby suffered positive losses of interest or principal. To take a small part of the increase, and to transfer very gradually the taxes on improvements and on personal property to land, would probably be just, owing to the beneficial effects upon public welfare. A supertax on large holdings of exceptionally valuable and scarce land would likewise be beneficial and legitimate.[102]