The theory that taxes on land and other non-reproducible goods continue to remain a burden upon the owner of the property at the time of the tax levy, has not gone unchallenged. A brief consideration of some of the criticisms may be well worth while. They have been suggested, in fact, in the above treatment of the capitalization principle.

An individual who wishes to invest capital has a number of possibilities - industry, buildings, land, bonds, as well as other fields. Assuming similar degrees of risk, the important factor which will govern the decision is the rate of return. He must, however, compare the rate of return to be received from the taxed land with that from other industries, also taxed. If all other forms of investment of the same degree of risk as land were so taxed that 1 per cent of the net income be taken, which would leave a realizable return of 5 per cent, then the purchaser of land will be satisfied with a 5 per cent return from his land. But in accepting this return he unconsciously bears the tax burden placed upon the investments with which he made comparisons.

1 For an able criticism of this principle, see an article by T. S. Adams in the American Economic Review for June, 1916. E, R. A. Seligman has a, reply in the December issue of the same year.

If the landowner were bearing no tax burden, his rate of return would be greater than that received from taxed industries. What the purchaser of land would capitalize and refuse to include as a part of the purchase price would be any excess in land taxes over the taxes on other forms of investment. He expects the current rate of return, and will not be willing voluntarily to shoulder a tax burden which would cause his return to be less than this. Investments in land, after all, possess no special privileges or immunities. It may seem that the purchaser is only tacitly paying a tax whose burden has already been shouldered. In reality, however, he is silently bearing the tax burden in that he has accepted, as a return on his investment, the current return from other taxed industries.

Correction of Injustice. - If a tax on land and similar investments becomes burdenless, then a rank injustice is being perpetrated by allowing such a condition to continue to exist. A particular class is escaping tax burdens which other classes are called upon to bear. The just solution for such an evil would be, not only to have this class pay the tax which is no burden, but to place an additional tax upon it equal to the burdens felt by other classes. That is, immediately after the sale of a piece of land, bonds, or other similar forms of property, there should be a new or additional tax placed on them. But in order to do this the purchaser would somehow have to be led to believe that it was not going to be done - other-wise he will capitalize the contemplated tax, not only the immediate one, but all future ones, and the logical outcome would be the destruction of values.

Illustration of Bond Sales. - An illustration will make clear the effect of an attempt to make use of such a scheme

» as that just outlined. Suppose a purchaser contemplates buying bonds on which the annual tax is 1 per cent. Under the capitalization scheme he will escape this burden by paying less for the bonds than he otherwise would have paid. To somewhat equalize tax burdens, then, suppose an additional 1 per cent tax be added. On a resale this would also be capitalized, and the purchase price accordingly reduced, necessitating another increase in the tax rate to equalize burdens. After a few such sales the income from the bonds would be entirely taken in taxes.

If the original purchaser knew this was to be the future policy in levying taxes, allowance would be made for the capitalization of all these new taxes after resales, and the price he would be willing to pay would be materially lessened. It could be only through some form of deception - through levying some form of tax that the purchaser did not expect - that he could be made to bear the so-called burden. The situation would be more literally true with land than with bonds. The latter might be purchased with the idea of holding to maturity, while the only way of securing capital invested in land is by resale.

Conclusion as to Burdenless Taxes. - Such reasoning, no doubt, seriously questions the commonly accepted "burdenless taxes" which are supposed to arise from the purchaser deducting the capitalized tax from his otherwise purchase price. The important thing to be considered in making an investment, aside from risk, is the rate of return. A tax is one of the factors which will affect this. When the current rate of interest is 5 per cent, 5 per cent bonds will sell at par. They are, however, silently bearing the tax placed upon other investments, because it is the return from these investments with which the bondholder is satisfied. If, somehow, all taxes should be removed from these other investments, the returns from them would immediately go to 6 or 7 per cent. The immediate effect of this on the bond values would be to force them below par, till the same return were realized.

By using the current rate of return, then, as the basis for his calculations, an investor bears the ordinary rate of taxes in purchasing land and similar kinds of property. If, however, the property to be purchased bore taxes in excess of the ordinary rate, which would result in a less than normal net return, this excess would be capitalized and deducted, in order that the return be the same as for similar forms of investment.