Extracts from an Article by Professor Edgeworth in the "Economic Journal," March, 1906, entitled "recent schemes for rating urban Land Values."
It is only the disciples of Henry George who would treat a landowner like a slaveowner,1 whose unhallowed property may be confiscated without compensation. It is not proposed to argue here against this principle; argument about first principles is unavailing. There is postulated a general agreement with the doctrine of unearned increment - as taught by Mill, not as caricatured by George.
The application of Mill's doctrine would be simple, but that the law on which it is based is cut into by another law of incidence. It is not only true that, in the words of Ricardo, "a tax on rent [proper] would fall wholly on landlords," but also that "a partial tax on profits will raise the price of the commodity on which it falls." Now a site-value tax under the prevalent system of urban tenures is apt to fall to some extent on the profits of the businessmen who supply house-accommodation. The prospect of a rise in the value of house property encourages the supply of house accommodation; the prospect of an additional impost, however named, to be levied in the future on those who in the present are making efforts and sacrifices in the way of production tends to discourage that supply.
1 The parallel is expressly drawn in the Eighth Report of the Illinois Labour Bureau.
It may be objected that the prospect is too remote to affect present action; and it has been admitted that the producer of a house will not be so much affected by the prospect of taxation extending over a series of future years as the producer of a hat - Ricardo's favourite instance - is affected by an ordinary tax.1 Full allowance being made for this difference, a considerable effect in the way of increased burden to the consumer must still be attributed to the prospect of diminished profits for the producer. The distance in time to which the outlook of the building entrepreneur extends is well illustrated by a form of lease which seems to be not unknown in Chicago, in which the future increase in the value of the property is the subject of stipulation. Here is a specimen: 2 the lease of a certain plot of ground for ninety-eight years and eleven months from June, 1894. The lessee is to construct a first-class building thereon by May 1st, 1895. He is to pay up to April 30th, 1895, $5,000, and afterwards annual rents as follows: -
For nine years
For next ten years
For next ten years
For next ten years
For remaining fifty-nine years ...
The prospect of future increment is evidently not indifferent to the lessee. Prima facie, if the Government exacted from that enterpreneur, under the title of site value, a sum in excess of that surplus which he can afford to hand to the ground landlord, the supply of house accommodation would be restricted.
1 Economic Journal, Vol. X., pp. 510 - 511.
2 Taken from the aforesaid report of the Illinois Labour Bureau.
No! it may be objected, all that will happen is that the rent of the ground landlord will be pro tanto diminished. Fine issues are here raised. Let us approach the question by first considering a rate of the ordinary kind ad valorem on the rent payable by the occupier. This impost, if levied on the building owner, would not be thrown by him altogether on the ground landlord, as some high authorities have conceived, but in part at least, and very possibly altogether on the occupier.1 Now when we substitute for this kind of impost that reduction of profits which may be apprehended from a site-value tax levied on the building owners, is the case materially different? The answer of pure theory is, yes. There is in the abstract all the difference between a tax on a margin and a tax on a surplus.2 But the theory is seldom applicable in all its purity to concrete circumstances. There is not usually a practical difference of first importance between a specific tax and a tax by way of licence. To be sure, there is usually absent a condition which is apt to be present in the case now under consideration - namely, the existence of land for which there is no other use at all comparable in profitableness with the production of that commodity on the producer of which it is proposed to levy an impost. But this condition is not always present in the case under consideration. Suppose the Chicago builder above instanced to forsee that in the first three periods in which he had been ready to give the ground landlord 12,000, 15,000, and 17,000 dollars per annum respectively, he
1 Economic Journal, Vol. VII., p. 66 and context; Vol. X., p. 340 and context.
2 See Economic Journal, Vol. VII., p. 57.
R.L.V. K would in consequence of the new impost be exposed to an exaction of 50 per cent. more in each of those periods; will not his enterprise be damped? He cannot withhold from the ground landlord more than he was prepared to offer him; the prospect of a charge on profits which cannot thus be recouped tends to check building enterprise. Moreover, it is doubtful how far a rate on site value of the kind proposed is to be regarded as a tax on surplus. Suppose that transactions by which the building owner raises money on the security of the premises are hampered by the prospect that the interest payable in return for those advances will be in the future pursued with a so-called site-value tax, even into the hands of the creditor. Lenders would insist on more onerous terms, and the extension of the entrepreneur's operations would be checked; the effect of the impost would then be of that marginal kind which, as we have seen, restricts the application of building capital, and imposes a burden on the consumer of house-accommodation.
Altogether, the case may be compared, in respect of the uncertainty of its incidence, to a customs duty. The incidence of such a duty is not the same as that of a duty on home-made articles. Theory admits that a part of the tax may fall on the foreigner. But only reckless and ignorant politicians act upon the supposition that all the tax is always borne by the foreigner.