CHAPTER 17

THE PROPOSITION TRIED
BY THE CANONS OF TAXATION

Inasmuch as any popular discussion must deal with the concrete, rather than with the abstract, we may try the remedy I have proposed by the accepted canons of taxation. In doing so, many incidental bearings may be seen that otherwise might escape notice.

The best tax by which the public revenues can be raised is evidently that which will most closely conform to the following conditions:

1. That it bear as lightly as possible upon production so as least to check the increase of the general fund from which taxes must be paid and the community maintained.

2. That it be easily and cheaply collected, and fall as directly as may be upon the ultimate payers - so as to take from the people as little as possible in addition to what it yields the government.

3. That it be certain so as to give the least opportunity for tyranny or corruption on the part of officials, and the least temptation to law-breaking and evasion on the part of the taxpayers.

4. That it bear equally so as to give no citizen an advantage nor put any at a disadvantage as compared with others.

Let us consider what form of taxation best accords with these conditions. Whatever it be, it will evidently be the best mode in which the public revenues can be raised.

Effects upon Production

All taxes must evidently come from the produce of land and labour, since there is no other source of wealth than the union of human exertion with the material and forces of nature. But the manner in which equal amounts of taxation may be imposed may affect very differently the production of wealth. Taxation that lessens the reward of the producer necessarily lessens the incentive to production; taxation that is conditioned upon the act of production, of the use of any of the three factors of production, necessarily discourages production. Thus taxation that diminishes the earnings of the labourer or the returns of the capitalist tends to render the one less industrious and intelligent, the other less disposed to save and invest. Taxation that falls upon the processes of production interposes an artificial obstacle to the creation of wealth. Taxation that falls upon labour as it is exerted, wealth as it is used as capital, land as it is cultivated, will manifestly tend to discourage production much more powerfully than taxation to the same amount levied upon labourers whether they work or play, upon wealth whether used productively or unproductively, or upon land whether cultivated or left waste.

The mode of taxation is, in fact, quite as important as the amount. As a small burden badly placed may distress a horse that could carry with ease a much larger one properly adjusted, so a people may be impoverished and their power of producing wealth may be destroyed by taxation which, if levied in another way, could bc borne with ease. A tax on date trees, imposed by Mohammed Ali, caused the Egyptian fellahs to cut down their trees; but a tax of twice the amount imposed on the land produced no such result.

The checking of production is in greater or less degree characteristic of most of the taxes by which the revenues of modern governments are raised. All taxes upon manufactures, all taxes upon commerce, all taxes upon capital, all taxes upon improvements, are of this kind. Their tendency is the same as that of Mohammed Ali's tax on date trees, though their effect may not be so clearly seen.

Unlike taxes upon commodities, or exchange, or capital, or any of the tools or processes of production, taxes levied upon the value of land do not bear upon production. The value of land does not express the reward of production, as does the value of crops, of cattle, of buildings, or of any of the things which are styled personal property and improvements. It expresses the exchange value of monopoly. Hence the community can take it all without in any way lessening the incentive to improvements or in the slightest degree lessening the production of wealth. Taxes may be imposed upon the value of land until all rent is taken by the state, without reducing the wages of labour or the reward of capital one iota; without increasing the price of a single commodity, or making production in any way more difficult.

But more than this. Taxes on the value of land not only do not check production as do most other taxes, but they tend to increase production by destroying speculative rent. How speculative rent checks production may be seen not only in the valuable land withheld from use, but in the paroxysms of industrial depression that, originating in the speculative advance in land values, propagate themselves over the whole civilized world, everywhere paralysing industry. Taxation that would take rent for public uses would prevent all this. If land were taxed to anything near its rental value, no one could afford to hold land that he was not using; and consequently, land not in use would be thrown open to those who would use it.

It is evident that, with regard to production, the tax upon the value of land is the best tax that can be imposed. Tax manufactures, and the effect is to check manufacturing; tax improvement, and the effect is to lessen improvement; tax commerce - and the effect is to prevent exchange; tax capital, and the effect is to drive it away. But the whole value of land may be taken in taxation, and the effect will be to stimulate industry, to open new opportunities to capital, and to increase the production of wealth.

Ease and Cheapness of Collection

With, perhaps, the exception of certain licenses and stamp duties, which may be made almost to collect themselves but which can be relied on for only a trivial amount of revenue, a tax upon land values can, of all taxes, be most easily and cheaply collected. For land cannot be hidden or carried off; its value can be readily ascertained and, the assessment once made, nothing but a receiver is required for collection.

A tax on land values does not add to prices, and is thus paid directly by the persons on whom it falls; whereas all taxes upon things of unfixed quantity increase prices, and in the course of exchanges they are shifted from seller to buyer, increasing as they go.

If we impose a tax upon money loaned, as has been often attempted, the lender will charge the tax to the borrower, and the borrower must pay it or not obtain the loan. If the borrower uses it in his business, he in his turn must get back the tax from his customers, or his business becomes unprofitable.

If we impose a tax upon buildings, the users of buildings must finally pay it, for the erection of buildings will cease until building rents become high enough to pay the regular profit and the tax besides.

If we impose a tax upon manufactures or imported goods, the manufacturer or importer will charge it in a higher price to the buyer, the buyer to the retailer, and the retailer to the consumer. Now the consumer, on whom the tax thus ultimately falls, must not only pay the amount of the tax, but also a profit on this amount to every one who has thus advanced it - for profit on the capital he has advanced in paying taxes is as much required by each dealer as profit on the capital he has advanced in paying for goods.

In this way all taxes which add to prices are shifted from hand to hand, increasing as they go, until they ultimately rest upon consumers, who thus pay much more than is received by the government.

Though a tax on rent compels payment from landowners, it gives them no power to obtain more for the use of their land. On the contrary, by compelling those who hold land on speculation to sell or let for what they can get, a tax on land values tends to increase the competition between owners and thus to reduce the price of land.

The Element of Certainty

Certainty is an important element in taxation, for just as the collection of a tax depends upon the diligence and faithfulness of the collectors and the public spirit and honesty of those who are to pay it, so will opportunities be opened for tyranny and corruption on the one side and for evasions and frauds on the other.

The constant under-valuations of the Custom House, the ridiculous untruthfulness of income tax returns, and the absolute impossibility of getting anything like a just valuation of personal property, are matters of notoriety. The material loss that such taxes inflict - the item of cost that this uncertainty adds to the amount paid by the people but not received by the government - is very great. When coasts and frontiers are lined with an army of men endeavoring to prevent smuggling, and another army of men is engaged in evading them, it is evident that the maintenance of both armies has to come from the produce of labour and capital. The expenses and profits of the smugglers, as well as the pay of the Custom House officers, constitute a tax upon the industry of the nation, in addition to the tax that is received by the government. And so all moneys expended in procuring acts or decisions which avoid taxation; all the costly modes of so bringing in goods as to evade duties; all expenses of legal proceedings and punishments, not only to the government, but to those prosecuted, are so much which these taxes take from the general fund of wealth without adding to the revenue.

Yet this is the least part of the cost. Taxes that lack the element of certainty tell most fearfully upon morals. The revenue laws as a body might well be entitled, "Acts to promote the corruption of public officials, to suppress honesty and encourage fraud, to set a premium upon perjury and the subornation of perjury, and to divorce the idea of law from the idea of justice." This is their true character, and in this they succeed admirably.

The tax on land values possesses in the highest degree the clement of certainty. It may be assessed and collected with a definiteness that partakes of the immovable and inconcealable character of the land itself. Were all taxes placed upon land values, irrespective of improvements, the scheme of taxation would be so simple and clear, and public attention would be so directed to it, that the valuation for taxation could and would be made with the same certainty as when a real estate agent determines the price a seller can get for a lot.

The Element of Equality

The common idea which our systems of taxing everything vainly attempt to carry out is that everyone should pay taxes in proportion to his means, or in proportion to his income. But waiving all the insuperable practical difficulties in the way of taxing everyone according to his means, it is evident that justice cannot be thus attained.

Here, for instance, are two men of equal means, or equal incomes, one having a large family, the other having no one to support but himself. Upon these two men indirect taxes fall very unequally, as the one cannot avoid the taxes on the food, clothing, etc., consumed by his family, while the other need pay only upon the necessaries consumed by himself. But supposing taxes levied directly, so that each pays the same amount. The income of the one is charged with the support of six, eight, or ten persons; the income of the other with that of but a single person. But it may be said that this is a difficulty that cannot be got over; that it is nature herself that brings human beings helpless into the world and devolves their support upon the parents, providing in compensation therefore her own sweet and great rewards. Very well then, let us turn to nature and read the mandates of justice in her law.

Nature gives to labour, and to labour alone. In a very Garden of Eden a man would starve but for human exertion. Now here are two men of equal incomes - that of the one derived from the exertion of his labour, that of the other from the rent of land. Is it just that they should contribute equally to the expenses of the state? Evidently not. The income of the one represents wealth he creates and adds to the general wealth of the community; the income of the other represents merely wealth that he takes from the general stock, returning nothing. The right of the one to the enjoyment of one's income rests on the warrant of nature, which returns wealth to labour. The right of the other to the enjoyment of his income is a mere fictitious right, the creation of municipal regulation, which is unknown and unrecognized by nature. The father who is told that from his labour he must support his children must acquiesce, for such is the natural decree; but he may justly demand that from the income gained by his labour not one penny shall be taken, so long as a penny remains of incomes that are gained through monopoly of the opportunities nature offers impartially to all, and in which his children have, as their birthright, an equal share.

The equal taxation of all species of property is commonly insisted upon on the ground that all property is equally protected by the state. The basis of this idea is evidently that the enjoyment of property is made possible by the state; that there is a value created and maintained by the community, which is justly called upon to meet community expenses. Now, of what values is this true? Only of the value of land. This is a value that does not arise until a community is formed and, unlike other values, it grows with the growth of the community. It exists only as the community exists. Scatter again the largest community, and land, now so valuable, would have no value at all. With every increase of population the value of land rises; with every decrease it falls. This is true of nothing else save of things which, like the ownership of land, are in their nature monopolies.

The tax upon land values falls upon those who receive from society a peculiar and valuable benefit, and upon them in proportion to the benefit they receive. It is the taking by the community, for the use of the community, of the value that is the creation of the community. It is the application of the common property to common uses. When all rent is taken by taxation for the needs of the community, no citizen will have an advantage over any other citizen save as is given by his industry, skill and intelligence; and each will obtain what he fairly earns.

CHAPTER 18

ENDORSEMENTS AND OBJECTIONS

The grounds from which we have drawn the conclusion that the tax on land values or rent is the best method of raising public revenues have been admitted expressly or tacitly by all economists of standing, since the determination of the nature and of the law of rent.

Ricardo (1) 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," for it "would leave unaltered the difference between the produce obtained from the least productive land in cultivation and that obtained from land of every other quality.... A tax on rent would not discourage the cultivation of fresh land, for such land pays no rent, and would be untaxed."

McCulloch (2) declares that "in a practical point of view, taxes on the rent of land are among the most unjust and impolitic that can be imagined," but he makes this assertion solely on the ground of his assumption that it is practically impossible to separate the gross rent of land in an old settled and highly improved country into its components or to distinguish between the sum paid for the use of the soil and that paid on account of the capital expended upon it. On the other hand, he asserts that, if this separation were effected "the sum paid to landlords for the use of the natural powers of the soil might be entirely swept away by a tax, without their having it in their power to throw any portion of the burden upon anyone else," and without affecting the price of produce.

In fact, that rent should be the peculiar subject of taxation, on grounds both of expediency and justice, is involved in the accepted doctrine of rent, and may be found in embryo in the works of all economists who have accepted the law of Ricardo. That these principles have not been pushed to their necessary conclusions evidently arises from the indisposition to endanger or offend the enormous interest involved in private ownership in land, and from the false theories in regard to wages and the cause of poverty that have dominated economic thought.

The French Physiocrats

But there has been a school of economists who plainly perceived, what is clear to the natural perceptions of men when uninfluenced by habit, that the revenues of the common property, land, ought to be appropriated to the common service. As I am acquainted with the doctrines of Quesnay and his disciples only at second hand, through the medium of the English writers, I am unable to say how far his peculiar ideas as to agriculture being the only productive avocation, etc., are erroneous apprehensions, or mere peculiarities of terminology. But of this I am certain from the proposition in which his theory culminated - he saw the fundamental relation between land and labour that has since been lost sight of, and he arrived at practical truth, though, it may be, through a course of defectively expressed reasoning. The causes that leave in the hands of the landlord a "produce net" were by the Physiocrats no better explained than the suction of a pump was explained by the assumption that nature abhors a vacuum. But the fact in its practical relations to social economy was recognized, and the benefit that would result from the perfect freedom given to industry and trade by a substitution of a tax on rent for all the impositions that hamper and distort the application of labour was as clearly seen by them. One of the things most to be regretted about the French Revolution is that it overwhelmed the ideas of the Economists, just as they were gaining strength among the thinking classes, and were apparently about to influence fiscal legislation.

Separating the Value of Land

No one can be rightfully entitled to the
ownership of anything which is not the produce
of his labor... and the recognition
of private property in land is a wrong.
The only objection to the tax on rent or land values that is to be met with in standard politico-economic works is one which concedes its advantages. It is that, because of the difficulty of separating the value of land from the value of improvements, we might, while taxing the rent of land, tax something else. McCulloch, for instance, declares taxes on the rent of land to be impolitic and unjust because the return received for the natural and inherent powers of the soil cannot be clearly distinguished from the return received from improvements and meliorations, which might thus be discouraged. If it discourages production to tax values that labour and capital have intimately combined with the value of land, how much greater discouragement is involved in taxing not only these, but all the clearly distinguishable values that labour and capital create?

But as a matter of fact, the value of land can always be distinguished from the value of improvements. In countries like the United States there is much valuable land that has never been improved; and in many of the States the value of the land and the value of improvements are habitually estimated separately by the assessors, though afterwards re-united under the term real estate. Frequently land is owned by one person and the buildings by another, and when a fire occurs and improvements are destroyed, a clear and definite value remains in the land. In the oldest country in the world no difficulty whatever can attend the separation, if all that be attempted is to separate the value of the clearly distinguishable improvements, made within a moderate period, from the value of the land, should they be destroyed. This, manifestly, is all that justice or policy requires. Absolute accuracy is impossible in any system, and to attempt to separate all that the human race has done from what nature originally provided would be as absurd as it is impracticable. A swamp drained or a hill terraced by the Romans constitutes now as much a part of the natural advantages of the British Isles as though the work had been done by earthquake or glacier. The fact that after a certain lapse of time the value of such permanent improvements would be considered as having lapsed into that of the land, and would be taxed accordingly, could have no deterrent effect on such improvements. The fact is that each generation builds and improves for itself, and not for the remote future.

Attitude of Interested Parties

But it may be asked: If the tax on land values is so advantageous a mode of raising revenue, how is it that so many other taxes are resorted to in preference by all governments?

The answer is obvious: The tax on land values falls upon the owners of land, and there is no way in which they can shift the burden upon any one else. Hence a large and powerful class is directly interested in keeping down the tax on land values and substituting, as a means for raising the required revenue, taxes on other things, just as the landowners of England, in the seventeenth century, succeeded in substituting an excise, which fell on all consumers, for the dues under the feudal tenures, which fen only on them.

There is thus a definite and powerful interest opposed to the taxation of land values; but to the other taxes upon which modern governments so largely rely there is no special opposition. The ingenuity of statesmen has been exerted in devising schemes of taxation that drain the wages of labour and the earnings of capital. Nearly all of these taxes are ultimately paid by the consumer; and he pays them in a way that does not call his attention to the fact - pays them in such small amounts and in such insidious modes that he does not notice it, and is not likely to take the trouble to remonstrate effectually. Those who pay the money directly to the tax collector are not only not interested in opposing a tax they so easily shift from their own shoulders, but are very frequently interested in its imposition and maintenance, as are other powerful interests that profit, or expect to profit, by the increase of prices such taxes bring about. Licence taxes are generally favoured by those on whom they are imposed, as they tend to keep others from entering the business. Imposts upon manufactures are frequently grateful to large manufacturers for similar reasons. Duties on imports not only tend to give certain producers special advantages, but accrue to the benefit of importers or dealers who have large stocks on hand. And so in the case of all such taxes, there are particular interests, capable of ready organization and concerted action, which favour the imposition of the tax, while, in the case of a tax upon the value of land, there is a solid and sensitive interest ready to oppose it steadily and bitterly.

(1) Principles of Political Economy and Taxation, chapter 10.
(2) Note No. 24 Of the "Supplemental Notes and Dissertations" in his edition, 1838, of Adam Smith's Wealth of Nations.
(3) This alleged difficulty can only apply to expenditures on improvements like manuring, draining, levelling, embankment and reclamation that merge in the land and are therefore not readily observable in the eyes of the valuer whose instructions are to assess the value of land on the assumption that any buildings and improvements thereon or therein did not exist. Making allowance for improvements that merge in the land is a familiar feature in the legislation in several countries where land value taxation is in some measure already in operation. For example, in Denmark, provision for such allowance is made on proof of the expenditure incurred, setting however a time limit of thirty years during which the expenditure is considered to have been recouped. Of similar effect are the provisions in United Kingdom law whereby occupiers of farm land are indemnified, on the transfer or sale of land, for the unexhausted value of the improvements they have made at their own expense during their tenure. A.W.M.


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