Chapter VIII & IX —The Tax as a Social Reform
from The Taxation of Land Value
A Study of Certain Discriminatory Taxes on Land
by Yetta Scheftel
(Footnotes and Tables not reproduced)
CHAPTER VIII—THE TAX AS A SOCIAL REFORM
§ 1. If it is true of all taxes that the fiscal considerations are not to be divorced from the economic and other effects in judging of their expediency, it is especially important to consider the economic and social effects of the tax on land value. As a modified realty tax, the proposed changes involved in the tax on land value must be discussed in all their aspects. While no one will dispute the expediency and necessity of full-value assessment and of scientific valuation of real property, there is less unanimity of judgment with regard to the exemption of improvements from taxation. This is not strange when we consider that some fundamental social problems are involved in the proposal to exempt improvements. There is no agreement upon the meaning and prevalence of “unearned increment” and of speculation in land, nor upon the seriousness of the so-called housing problem in the various communities; while the whole problem of property in land will ever remain a logically controversial one. The best that can be done is to attempt to understand the nature of the above-mentioned problems in the light of the facts under the existent order; to examine certain social evils and the proposed reforms; and to test the efficacy of the tax on land value as a social reform by the effects of its operation where it exists.
It will be agreed that the most currently potent argument for the taxation of land value is that land rent is an “unearned” increment. The justification of this view is based on the rent concept explained in the preceding chapter. Now, the criticism generally directed by economists and laymen alike against the tax is that land rent is not the sole differential, that other incomes are likewise “un-earned.” Thus quasi-rents arising from capitalistic enterprises, from speculation in general, and even from natural ability* are likewise called “unearned” increments. As commonly understood “unearned” increment is any surplus value accruing to an individual not by virtue of sacrifice or exertion on his part, but by virtue of his property right to a commodity. But it is also questioned whether even a transaction in landed property does not involve some labor on the part of the owner. Whatever view we admit, so much is certain. There is a tendency in recent years to diflferentiate between income accruing to labor in its widest sense including entrepreneurship, and that accruing from the investment of capital in any form. The latter is commonly considered the source of the enormous wealth accumulated by individuals which, it is evident, the modern “Sozialpolitik” would prevent. Misleading as the term “unearned” income may logically appear, it will probably be retained, since English and German legislation has recognized the distinction between earned and unearned income.*
Just as in the case of monopoly and large scale capitalistic’ production, legislation has been employed to check the concentration of wealth in the interest of the social wellbeing, so with regard to the land-value increments, it is proposed to prevent some of the putative evils by means of a tax. The fiscal expediency of the proposal having been discussed,* the problem is now to discover (1) whether those putative increments in land value are of widespread occurrence, if they occur at all, (2) the causes and the social evils that ensue therefrom, and (3) the effectiveness of the tax to remedy the evils.
§ 2. What are the facts concerning the appreciation in the value of the land? The difficulties encountered in attempting an answer become apparent when we consider the several kinds of land, the lack of uniformity in the development of the several countries, the social, economic, and physical differences of communities, and the inadequate data due partly to insufficient information, partly to the practice of assessing, as a single class of property, both the land and improvements upon it.
To begin with, it will be necessary to classify land into three main categories:—
(1) Land used in the production of raw stuffs, i.e., agricultural land which forms the main source of human sustenance.
(2) Land necessary for dwellings and industrial purposes, i.e., urban land.
(3) Land containing the product in a form ready for use—in contradistinction to that requiring fertilization—i.e., mines and forests.
The following considerations make the distinction between rural and urban land apparent: First, agricultural production must be put in a class by itself. And it must be borne in mind that as yet the prevailing unit in agricultural industry is the small farm. Secondly, the transition from extensive to intensive farm cultivation has been very much retarded on account of the relative abundance of virgin soil. Thirdly, the demand for urban land is not merely for industrial purposes. The demand is composite; for it is a demand also for dwellings by a comparatively numerous population in a comparatively limited area. Fourthly, the unit of valuation of rural land is the acre, as compared with the lot in towns. The third kind of land, namely, natural resources in a limited sense, must be differentiated from the other kinds for many reasons. Unlike the other kinds, mines and forests belong in the category of wasting assets.* Upon their proper use or misuse, therefore, depends the welfare of society. Hence in considering this kind of land, the whole problem of conservation confronts us.
In the following sections, then, we may expect to find the tendency of values in the three kinds of land to vary not only with regard to one another, but with regard to the diverse conditions of place, population, and stage of development.
§ 3. The discussion of agricultural values necessitates a further division, for the lands under cultivation in the old countries are not comparable to the virgin soils of Australasia and America. Bearing this fact in mind, we shall first present some data regarding the European situation, and then shall endeavor to show the tendency of value changes in the newer countries.
Table. Not reproduced
This figure was obtained from Mulhall, Industries and Wealth of Nations, p. 406.
From the above table we note that the rental value rose steadily until early in the nineteenth century, held its own until the eighties, although the percentage of increase diminished gradually, and since the eighties has declined considerably. The tendency of agricultural land values in the United Kingdom (1781-1880) to fluctuate about an average, showing comparative stability and appreciation in the price of the land, is illustrated also by the following table:—
Table. Not reproduced
Evidence of the decline in agricultural land values in Great Britain since the eighties is abundant. For example, the Royal Commission on Agriculture of 1895* quoted numerous illustrations of the decline in rental; in fact cases occurred where no rent could be paid. That this depression has continued to the present the following statement by Professor Nicholson is evidence: “The conclusion, then, is that for the last half century instead of an unearned increment from agricultural land, there has been an unearned (and certainly undeserved) decrement.”
Turning to France the situation regarding agricultural land values is similar to that in England. In France “land trebled in value between 1817 and 1879, but it has since fallen one-third.”* This estimate is borne out by the following table showing the value of arable land in France:*
From another source of information, the percentage of decrease in the value of agricultural land in France was estimated at less than appears from the preceding figures.* This more conservative estimate was derived after a careful valuation of the land in 13,606 French communes, covering, therefore, a large part of the territory of France. From 1879 to 1884 the rural land in these communes was valued at 783,636,000 fr.; in 1909-10 the value had fallen to 616,540,000 fr., or 21.3 per cent. Another authority estimates the decline in the value of farm land at forty per cent.* Although the estimates of the extent of the depression vary, the fact remains that during the last generation the value of agricultural land has considerably depreciated.
Belgium has been likewise affected by the agricultural depression of the eighties. The average value of farm land per hectare declined from 4261 fr. in 1880 to 2838 fr. in 1895, about thirty-one per cent; the rental value declined during the same period from 107 fr. to 90 fr.* Ample evidence exists to show that this trend of values has been general throughout Europe.
The causes for this situation are not far to seek. They are to be found chiefly in the low prices of grain due to American and Australian competition, resulting from the improved facilities for transportation, and in the greater profitableness of manufacturing industries. An effect which is at the same time a proof of the general condition of agricultural depression in Europe is the marked decrease in the rural population. For example, the English rural population, which was 42 per cent of the total population in 1771, constituted 22 per cent of the total in 1841 and less since then;* the agricultural population in Belgium fell from 24.98 per cent to 18.79 per cent of the total population from 1846 to 1895;* in Germany too the percentage of those engaged in agricultural production decreased from 42.5 per cent in 1882 to 28.65 per cent in 1907.*
§ 4. But while value decrements, not value increments, characterize European farm land, the opposite tendency seems characteristic of the newer countries. Generally speaking, with the progress of the nineteenth century to the present, with the introduction of railroad and improved waterway transportation, the superior fertility of the soil in America and Australasia caused an extension of the grain market to a world market, while the growth in population had the same effect, an increased demand for agricultural land. The result has been a corresponding increase in the value of farm land as the accompanying table shows.
It is obvious that to determine precisely the real increase in the value of the land when farms and buildings are classed together as in the subjoined table is impossible. Nevertheless, as the ratio of the value of the buildings to that of the land in the country is small, the degree of error in estimating the percentage of increase can be but slight. It will be noted that while the number of farms since 1850 increased nearly 339 per cent, the value of the farm land and buildings increased almost 964 per cent. Furthermore, during the last decade, 1900-10, the increase in farm land per se was over fifteen billion dollars, or 118 per cent.
If we turn to the conditions in Australasia, it will be discovered that a similar trend of value increment exists there as appears from the data given in the table on page 356.
It would be possible to show the same tendency of rising value for farm land in the other Australian states and Canada* and wherever the development of the country and the demand for foodstuffs is growing.
§ 5. It may be expected that with the further extension of the cultivation of the soil and with the closer settlement of the country rural land will continue to rise in value in new countries and ultimately in the European countries. Nevertheless, it would be erroneous to assume that all farm land even in the newer countries tends to rise in value. The fact is that the value of farm land is subject to great fluctuation. In many parts of the United States, for example, much country land has become impoverished and abandoned. This impoverishment has been greatest in our south central states, except Alabama, Kentucky, and Tennessee. There has also been considerable impoverishment and retardation in the south-eastern states, especially in West Virginia and Georgia; also in North Dakota, Nebraska, and Kansas land values have depreciated when cultivation of the soil had to be abandoned. West of the Mississippi four states reported a considerable reduction in productivity. The total area of counties comprising impoverished land has been estimated as 307,730 square miles or 10.3 per cent of the total land area of the United States.^ Moreover, 16,597 square miles, 0,6 per cent of the total area, have been abandoned. Half of this abandoned land is in south-eastern United States.* Temporary fluctuations frequently occur with the extension of production to our western prairie regions as well as with the exhaustion of the soil. Again, considered for short periods of time, through the introduction of improvements in the methods of cultivation and the substitution of intensive for extensive production nu-al land values are very often affected.*
Similarly, fluctuations are frequent in Australasia and Canada. Speculation in these countries has been and continues to be rampant, leading to “land booms” or to inordinate appreciation in land value, which later result in precipitate depressions. An illustration from Ontario, Canada, will make this tendency of rural land value to fluctuate more apparent. Consequent upon the opening up of Manitoba, the value of farm land experienced a decline in Ontario from $625,478,706 in 1884 to $587,246,117 in 1894.*
To conclude: (1) The extension of distant sources of grain supply due to the improvement of transportation facilities, along with social causes, e.g., dissatisfaction with rural life, changed conditions of labor, etc., has been the cause of the agricultural depressions and of the decline of rural land value in European countries. (2) In the new world, the extension of production, so detrimental to European agriculture, has not only been a boon to the farmers, but is also the cause of the appreciation in the value of rural land of the country as a whole. (3) The general upward trend of values is, however, not universal throughout the more newly opened countries, nor is the rise in value uniform. In many states and sections of the country, the value of rural land is subject to great fluctuation; in others the value remains constant. (4) Although, as free land is taken up and cultivated, as intensive supersedes extensive cultivation, and as the population increases, agricultural land will tend to appreciate in value; for a long time to come, we may expect to find constant values and decrements, more often than increments, characteristic of rural land.
§ 6. The problem of determining the trend of land value in urban communities presents serious difficulties. The rise and growth of cities in the nineteenth century have been phenomenal and unprecedented in the history of the world. And it is generally held that the movement of concentration of the population in cities will tend to continue.* Cities, however, do not always progress in the same way, nor to the same degree, the growth of some being far more rapid than that of others. Their relative growth depends upon such factors as differences in wealth, in the character of the industries undertaken, in the number of population, in topography, in transportation facilities, in climate, in the platting system, and so forth.* All these factors in urban growth likewise exercise an influence on the value of the land. The value of urban land, indeed, is affected and disturbed even by changes in the current rate of interest (the capitalization rate for realty varies with the character and use of the building and neighborhood, etc.), and by any judicial decisions affecting property rights. Other influences that are apt to depreciate land value are public or quasi-public structures, as, for example, the elevated roads and other so-called “nuisances.” In studying the data presented below, therefore, showing the general movement of values, it must not be overlooked that even in the most developed cities there are districts markedly retrogressive and deteriorated.
The value of urban land is, of course, attributable to the fact that land is needed for residence and business purposes and that the number of more desirable sites is limited. It may therefore be laid down as a general principle that in all countries, wherever the concentration of population and progress are in evidence, the value of land will tend to rise. Not to illustrate any abnormal growth in value, but to show the general trend and to emphasize the extraordinary character of the increase especially in the larger cities, the following statistics are presented.
In New York City the assessed value of real estate has increased as follows:*
Table. Not reproduced (But this is common knowledge)
In considering the above figures, it must be noted that the assessed value of the land here given does not include the value of the land owned by corporations, which is, however, included in the total value of the real estate; and that until a few years ago the assessment was much below the actual value, in some cases as much as thirty per cent below. Since 1906 the per capita value of the land itself has fluctuated from between eight and nine hundred dollars.
In 1915, the per capita value was estimated at $816. Allowing for the incompleteness of the data, the enormous increments in land value are, nevertheless, evident. In the decade, 1898-1908, the increase in the total value of real estate was nearly five thousand millions of dollars, or 262 per cent; since 1908, the increment has been again more than one thousand millions. To take a particular instance of the enrichment of private individuals by the enormous increments of land value, it was estimated by the assessors that the bare site on which Macy’s store in New York City is located was worth, in 1907, $10,000,000 per acre.* And lest this be considered an exceptional case, attention is again called to the fact that for every additional member to the population of New York City the value of the land is enhanced about $800.*
Similar value increments have occurred in London, where it has been estimated that the increase in the value of the land from 1870-90 amounted to about £7,620,000, annually, and where every new inhabitant added during that same period more than $400 to the value of the land.*
Or take Chicago for illustration. The financial history of a quarter acre of land in Chicago, not unlike that in all the larger cities, has been traced as shown in the subjoined table.*
The correlation of land- value increments with the growth of population will be noted. In the same connection the following estimate quoted by Mr. Marsh* is impressive: “In 1818 the United States gave the square mile between State, Madison, Halsted, and Twelfth Streets (Chicago) to the State of Illinois to be held in trust for the support of the public schools and the education of the children of Chicago. Except for one block between Madison, Dearborn, State, and Monroe Streets, nearly all of this square mile was sold about seventy years ago for less than $40,000. Within fifteen years after it was sold this square mile was worth six million dollars. To-day its value is hundreds of millions of dollars (without improvements). The rent from this square mile of land would be sufficient to support for all time the entire school system of the State of Illinois without an additional dollar of taxation.”
The development of German cities, likewise, has been and continues to be extraordinary. From agricultural values about 1870, land has risen many hundred fold in value as the towns grew. Examples have already been given of this oft-cited phenomenon.* A few more must suffice here. As in the other countries the metropolis, in this case Berlin, leads and exemplifies this tendency best.
The approximate value of the area on Kurfürstendamm, the principal thoroughfare of Charlottenburg, a comparatively new portion of Berlin, is shown below:
Table. Not reproduced
The value of the land in Charlottenburg as a whole has also appreciated enormously: ‘
Table. Not reproduced
From Professor Conrad’s* illustrations of land-value increments we quote the following: “In Frankfurt a. M. in a period of fifteen years, 1880-95, the land had appreciated sixty per cent in value, while in Karlsruhe it had increased from 400 to 500 per cent in a period of thirty years.”
In a paper delivered before the Congres International de la Propriete Fonciere, Professor Philippovich was cited as authority for the case of a piece of land in Vienna whose present value increment amounted to 3526 per cent of its original value in 1875.* Similar striking instances were cited at this conference. For example, a certain part of Paris was worth, less than a century ago, scarcely fifty centimes per square metre (5000 fr. per hectare); this land has since increased 699,900 per cent in value. “The value increment of unbuilt property in the environs of Paris, that is suburban land, has been estimated to have increased 1,793.07 per cent between the years 1851-79.”*
The general trend of urban land values is unmistakable. The best proof of this is the fact that realty experts have been able to formulate an approximate scale of normal values per front foot like the following one,* “it being understood that the actual highest values in the various cities vary widely from any average scale, owing to the marked differences between these cities in wealth, character of industries …”:—
Table. Not reproduced
According to Lawson Purdy, the president of the tax department of New York City, the annual rate of increase of real property in New York City should be from four to five per cent, since real property tends to increase somewhat faster than the annual increase in population, which is about three per cent.*
§ 7. In spite of the facts cited to show the upward tendency of urban land value, it must not be inferred that no decrements occur. Even in the most advanced urban communities, land does not increase in value always and everywhere. Some of the reasons have already been given for the occurrence of depreciation in value.* Changes in the development of the city or town are apt to depress values in certain districts. For example, when the utilization of land either for business or residence purposes declines, the value of the land likewise declines. Sometimes through changes in the internal structure of the city, e.g., when the residence section is superseded by industrial undertakings, or when a factory and a foreign population invade a neighborhood, values are adversely affected. Sometimes districts retrograde because of encroachments of public utilities or so-called “nuisances.”* As a general rule retail property tends to follow the best residence section, while wholesale business replaces retail property or changes its location so as to be near the wharves and railroad terminals.*
Besides decrements that reflect changes in the city’s development,* urban land has often experienced a depreciation in value because of a previous overvaluation. For example, take the case of the quarter acre of Chicago land whose changing value has been tabulated.* Had the complete original table in which the annual changes were traced been reproduced, it would have been observed that in the sixty-five years, from 1830 to 1894, decrements in its value had occurred seventeen times.* Indeed, Chicago is an illustration of fluctuating values in real estate. As a result of the speculation and overcapitalization of land, Chicago real estate is said to be valued to-day on an 1889 basis,* for the expected rentals on which the value of the land was then based have failed to materialize. For example, in 1851 certain sites on Twenty-fifth Street were valued at $250 per acre; six years later the value had risen to $5000; after three years it sold for $25,000; in 1862 the value fell to $20,000, after which the property was improved, its value rising enormously until 1900, when it sold for only one-half its value twenty years earlier.* According to a real estate dealer this example is typical of Chicago property. “Real estate is now selling about on an 1889 basis. It reached high figures in the early seventies, too high for that time, and it required some fifteen or twenty years for the city to reach the values fixed in 1873; but while the city was growing to these values, the values themselves were falling back, so that somewhere about 1885 real estate was selling at about what it was worth. Another upward movement in the early nineties carried values some ten years ahead of real conditions. The city began rapidly to overtake these values while the values themselves fell back to meet real conditions. This process has gone on now for fifteen years. Since the World’s Fair a new city has been added to each of the sides of the river, wealth has accumulated, public improvements have been made, every token which goes to make a great metropolis has come into evidence, but the real estate pendulum has only begun to swing upward.”
In still another way are depreciations likely to occur for a shorter or longer period. Whenever the attempt to build artificial towns or cities, “paper towns,” fails, the result is disastrous to the value of land. In Hurd’s words:* “An apparent exception to the general law of no value in the site when the city starts occurs where cities are speculatively undertaken and the future is discounted, lots selling at comparatively high prices in advance of utility. The difference between price and value is usually demonstrated before many years, the swing of the pendulum carrying these lots as far below their value as prices were formerly above it. Thus lots in Columbus, Ohio, which sold in 1812 at $200 to $300, sold in 1820 at $7 to $20, and of recent instances there are many, such as the collapses in the early history of the speculatively started towns of West Superior, Wis., Tacoma, Wash., Everett, Wash., and Birmingham, Ala.”
§ 8. With regard to the third class of land, namely, mines and forests, the problem is of a different character. We are here concerned with the problem of the conservation of natural resources. Mineral and forest lands are, moreover, distinguished from each other by the important fact that when exhausted or used up minerals cannot be replaced, while forests can be cultivated provided a sufficiently long time is allowed. Nevertheless, as operated to-day forests as well as mines may be regarded as wasting assets. The United States Conservation Commission estimated that at the present increasing rate of production the coal supply of the United States will be near exhaustion before the middle of the next century, and that the high-grade iron ore will not last beyond the middle of the present century; so with the known supply of petroleum in the United States. “The consumption of nearly all our mineral products is increasing far more rapidly than our population. In many cases the waste is increasing more rapidly than the number of our people. In 1776 but a few dozen pounds of iron were in use by the average family; now, our annual consumption of high-grade ore is over 1200 pounds per capita. In 1812 no coal was used; now, the consumption is over five tons and the waste nearly three tons per capita.”*
As regards our forests there are to-day over 200,000,000 acres less forest land than there were originally. “We take from our forests each year, not counting the loss by fire, three and one half times their yearly growth.”* Of the countries exporting timber, only three, Russia, Finland, and Sweden, “have increased their exports to great extent without encroaching on their timber capital.”* Yet, in spite of the substitutes for timber for various purposes, the consumption of timber has increased many fold.
In these circumstances the value of mineral and forest land has enormously appreciated. And taking these lands as a whole, the upward trend of values will continue as the opening of inferior mines is necessitated, and as the supply of timber is lessened. But the exhaustion of these natural resources, unless a policy of conservation is pursued, is inevitable. Moreover, as regards particular mines or forests, under ordinary circumstances, when the resources give out the value increments do also. Great fortunes have been made through the increased value of natural resources and great fortunes will continue to be thus gained, but the process is limited. This class of land, then, is not only to be differentiated from the other two classes; but the problem presented by it is also of a different character from that which either the agricultural or urban land presents.*
§ 9. If we summarize the results concerning the three kinds of land we shall answer the inquiries: First, what gives land its value and its value-increment? Secondly, what factors distinguish one kind of land from each of the others? Thirdly, what problems does the phenomenon of increments and decrements present?
Scarcity, not of land as such, but of the various grades of land, depending upon the fertility, location, or richness of deposit, is the cause of the value of land. Land as a non-reproducible good becomes subject to monopoly price, whenever the demand for a certain quality or kind exceeds the supply. This demand, which is reflected in the high value or value increment, is created by an ever-increasing population and progress. By the latter are meant the changes in mode of life, pleasures, and comfort which occasion a proportionately greater demand for all products, including urban land. Granting that the population will grow and progress continue, we may assume that higher values will follow in all three classes of land. That, however, is a hypothesis concerned with the remote future. At present the problem is practically different for each kind of land and it is with the present conditions that we are here concerned.
To-day, in the case of agricultural land, the fact that decrements in value prevail in the older countries shows that there exists no world scarcity of farm land below a certain grade. And the fact that in new countries agricultural land tends to appreciate in value in some sections, but to depreciate in others, shows exceptionally favorable conditions of the soil which render the competition with foreign countries and with other parts of the same country profitable. Here, then, there is no problem of discriminatory legislation to divert to the coffers of the state the excessive profit accruing from the rise in the value of land. On the contrary, the government may find it expedient to promote the profit of the farm owners in the interest of greater and cheaper production.
With regard to urban land, on the other hand, the problem of monopoly value becomes more acute. Every person added to the urban population affects the value of the land more or less. The tendency of urban land value to appreciate is unmistakable. The result is that the owners of this commodity, land, reap the ever-increasing profit at the expense of the consumers, the tenants. The first problem, therefore, is that of the distribution of the value increment of the land. But the universal need on the one hand, and the scarcity of the commodity on the other, raises a second question, namely, does the present system of land tenure insure the best utilization of the land; since any misuse of the land by self-seeking individuals affects the social wellbeing. The evils charged to the present system of tenure are briefly: (1) speculation in land; (2) the so-called housing problem; (3) the misuse of natural resources.
The charges against speculation in land are that it fosters the monopolization of an indispensable commodity; that it artificially screws up the value of land; that it enriches one class at the expense of society in general. It is claimed that in cities a great deal of ripe building land is kept out of use by speculators who wait to pocket the profits arising from the appreciation in value. In this way they control or affect the supply like other monopolists, and through this practice rent in urban communities is unnecessarily exorbitant. As a further result, it is contended, the masses, upon whom the expenditure of rent falls most heavily as compared with the wealthier classes, are compelled either to resort to poorer dwellings, in the unsanitary and congested districts, or to give up a greater proportion of their income for rent, leaving other urgent wants unsatisfied. It is further charged that the private appropriation of land value breeds and perpetuates an idle class who contribute nothing to the improvement of the land or to social wellbeing. Such are the criticisms and problems which the phenomenon of urban land-value increments awakens.
As for mines and forests where speculation is also rampant, it is not so much the matter of distribution of the value, as the matter of conserving the natural resources, which calls for solution. Yet, it must not be overlooked that in this country, at any rate, the mineral and forest wealth is in the possession of a comparatively small group of persons, who practically control the prices of the natural products. The recent protests of the governments against the wasteful management of the natural resources which is a menace to social welfare is proof of the necessity for reform. As regards this class of land, therefore, the most expedient use of the resources must be considered.
All the above-mentioned problems fundamentally involve the expediency of private land ownership. Before, however, the latter is even considered, certainly before any conclusions can be reached, it is necessary to raise the questions: How rampant is speculation in land? What evils does it create? What are the extent and effect of bad housing? It is to the examination of these conditions that we now turn.
§ 10. That speculation in land exists needs no elaborate proof. The value of land is subject to change, and the essence of speculation in any commodity consists in the anticipated fluctuations in its value. Yet there is a marked distinction between the speculation in land and that in other commodities which deserves mention. We note that practically no real estate stock is sold on the stock exchange in this country and that no dealings in realty on the other exchanges occur.* The explanation for this lies in the peculiarity of land speculation, namely, that no short selling in land occurs. Land speculation is always “bullish.”*
The fact seems to be that of all investments real estate is considered the safest and as yielding the most permanent income.* Nothing is more solid and permanent, more enduring in its nature and steadier in its value during cycles of time. Land cannot be destroyed, burned up, carried away by thieves, worn out or lost, nor can its real value be ‘watered’ by exploiters and impaired by the peculations and speculations of dishonest bank or corporation officials.” … “It has been proved that the element of gamble in realty is less than in any other venture. Life itself is not so certain. …”* It is said that no commodity is so little affected in value during depressions as land. Some one has described the cycle of speculation somewhat as follows: At the beginning of a “boom” period there is but slight demand for real estate; at such times even realty dealers turn to the stock market. Everybody invests in personal property. Then the demand for realty improves, and so does its value. Although real property is the last thing to be affected, the speculative mania does finally set in, screwing up the value of land. The result is an overvaluation of property that cannot last long. As some one put it, “after real estate speculation comes the deluge.”* It is these “fictitious” values that when the panic sets in need readjustment for the most part.* Aside from this element of safety and aside from the “bullish” character of the speculation in land, the fact that real estate security constitutes poor collateral for banks, makes this class of property a less attractive commodity for exchange speculation. Thus speculation in land must be placed in a class by itself.*
§ 11. Since the essence of speculation is to buy cheap and sell dear, we find the best examples of land speculation in new settlements where there is an abundance of free land, e.g., in the United States when first settled, the Australasian colonies, or western Canada. With the extended use of minerals in industry, mines formed an especially fertile field for speculators. And as urban communities assumed greater and greater importance, a further field was opened up for speculative operations. So long as free and cheap land existed, the speculator was generally an individual. All he had to do was to invest in a piece of land in a district which he expected to develop, sit down and wait until the anticipated value was realized. For example, lots in the Bronx, New York, which sold in the eighties for $200 are now valued at $16,000 to $18,000 apiece. One who at that time invested $60 or $65, if he retained possession, can now sell the land for $6500 to $7000.* The returns, to be sure, were not immediate, but one of the cardinal traits of the land speculator is patience. Here is an actual illustration of a speculative transaction: In 1853 Morris sold to Nimphius a parcel of land, 150 feet front, for $300; in 1895 two lots of the parcel were sold for $9500. The following year the owner received from the city for exercising its right of eminent domain, for 9 feet, $40,000. In 1900 he received $70,000 for the balance of the land, making on his outlay of $300, $119,500, besides the usufruct of the property for fifty years.* Another person similarly realized, on an investment of $8000, $295,000 plus the rent of $4000 to $5000 annually. In this connection it may be pointed out that many of the millionaires owe their vast fortunes in part to land-value appreciations. The Astor fortune of $450,000,000 is a standard example. According to one writer* eighty-nine per cent of the millionaires started with real estate investments, and sixty per cent continue to invest in it largely.
But land speculation is no longer the same as it was even a generation ago. Of course, to this day, let the building of a railroad or a subway be contemplated and the surrounding ground becomes appropriated, to be sold at a profit in the future. Or, let a new mine be discovered, and not only the mine but the country round about is soon in the hands of promoters or speculators. “Long Island’s waste land,” quotes Marsh,* “is much of it held now by speculators who, paying no taxes to speak of and undoubtedly in many cases none at all, can afford to wait for the natural rise. …” In Brooklyn, where a subway is waiting construction, 20,000 lots, assessed at a value of $15,000,000, are in the hands of speculators, who are waiting for the value increments.* Speculation in suburban and vacant land to-day, however, is mainly in the hands of realty dealers or of “development” companies. Land speculation, according to realty men themselves, is a profession, the four requisites of the speculator being time, capital, courage and judgment.* “The real estate operator at one time was a drone in the community. He was really a real estate speculator, would buy and sell at a profit, but would do nothing himself to create increased value. To-day realty operating is a profession, and the speculative side is very unimportant.” That is, the real estate operator must be familiar with the market situation, with the economic conditions which influence values, and he must recognize, too, the social forces which tend to build up the community.
In this country, speculators in land are in the main individuals, while realty corporations are comparatively few;* in Germany, on the contrary, the latter are said to control realty operations. In the German cities, especially in Berlin, professional realty speculation is said to flourish as nowhere else. These corporations resemble the so-called “development” companies of this country in that building forms part of their operations. It is claimed that the seventy-three or more “Terraingesellschaften” have practically controlled building operations in Berlin and its suburbs. In fact the magnificent apartment houses of uniform size and structure in and around Berlin are attributed to the activity of these speculators. The extent and character of these operations is shown in the following statement by an American realty agent:* “I have great respect for the magnitude of our realty operations in New York, but Berlin can make us sit up and take notice when it comes to buying undeveloped suburban land and taking chances. Imagine a seventeen-million dollar deal in vacant lots in New York. Recently a part of the Tempelhof Parade Ground was bought by a syndicate from the government for 72,000,000 Marks.” Then he tells how the Schoenberg apartment-house quarter was founded by the President of the Berlin Realty Company, which has paid one hundred per cent dividends annually for years. The president formed a syndicate and bought the site which ten years ago had been farm land. “It took him several years to get control of what he wanted and he then started to lay out model streets on curved lines.” This land was afterwards sold to building contractors, but the realty company retained control of the architectural designs. In this manner some sections of Charlottenburg, Grünewald, and other suburbs were founded.*
§ 12. From the social standpoint it is questionable whether this changed character of land speculation is an improvement. To-day the professional land speculator and the building operator are generally combined in the same person. Or they form a corporation. The methods of operation vary. In some cases the speculator borrows money with the land as security to finance the building. Or he may arrange with the building contractor for the construction of the building, and thus undertake operations involving hundreds of thousands of dollars with only a small sum of his own. In many cases speculators have manipulated deals so as to get both the value of the lot and house, the latter costing him practically nothing. This is said to be a common practice in New York State where he can exploit the workmen, because in New York State the mechanic’s lien does not take precedence over a mortgage claim except when such a claim is recorded prior to the recording of the mortgage.*
In fact, between the speculator, the loan association and the building contractor, many kinds of frauds and socially disadvantageous operations are perpetrated. For example, some cheaply built, ill-equipped houses are often erected, advertised, and sold to workingmen for the most part at a price exceeding enormously the actual value of the property. Nor is this all; in most cases the terms of sale are so manipulated that after a failure to pay interest on the mortgage, the property reverts to the speculator, who repeats the deal, exploiting one person after another.
Through cooperation with building-loan associations enormous sums of capital are put at the command of land speculators, which must facilitate their control of the community’s housing. Whole towns have been established, streets laid out and houses built by such operators, who reap enormous profits through the growth of settlements and of industry. A recent illustration is Gary, Indiana.* It is claimed, of course, that these land promoters, by developing the suburbs and erecting houses, are benefactors to the city population in relieving the congestion of the cities. This to a certain degree must be admitted. Nevertheless, when the importance of the commodities they deal in, i.e., land and houses, are considered, the expediency of putting the welfare of the community into the hands of moneymaking corporations may well be questioned.
One kind of operation, for example, undertaken by the above-mentioned cooperative speculators and financed by banking or other loan associations, is the erection of the magnificent apartment houses in suburban districts. The timeliness, that is, the need for these is in question. According to some realty authorities these operations in New York City (the upper part of the city) have been losing ventures because untimely. In Germany the erection of these tenements or “Mietkasernen” has given rise to a great deal of controversy as to their social value.* The enormously rapid growth of speculative building operations in communities scarcely urban has been pointed out by Professor Eberstadt as a social evil. Quoting from a work entitled, “Viel Hauser und Kein Heim,” he illustrates his theory that besides its un-timeliness, speculative building drives up rather than reduces rents.* In the city of Cassel, according to him, a wealthy man bought up some land which would have yielded a good profit at twenty-five marks per square metre, if three-story houses with gardens had been erected thereon. But the landowner had tall tenements put up to yield him a rental from fifty to seventy-five marks per square metre. This resulted in higher rents to the tenants; but because of the oversupply of apartments, many of which remained vacant, the income of the landlord was no higher than if the three-story houses had been built. This violation of the law of supply and demand is illustrated also by the facts in our cities where, in spite of the unsatisfied demand for better dwellings, many apartments stay vacant indefinitely. A significant example of this is furnished by St. Louis. A few years ago it was estimated that about 11,000 houses and flats in St. Louis, exclusive of stores and offices, were vacant. Nevertheless, rents were said to have been higher there than in Chicago.* The reason is probably, as in the instance cited from Eberstadt, that it is to the advantage of the owner who is a speculator to keep the houses vacant rather than to reduce the rent, for by reducing the rent the market or capitalized value of his property is depreciated.
§ 13. A graver charge even than those discussed above is that in urban communities land is kept from its best utilization by owners whose chief interest lies in the value increment which the property will in time realize. That the withholding from market and from improvement of land situated in the heart of a populous city causes unnecessary enhancement of rent is logical. The question is whether there actually are so many such undeveloped sites ripe for building as to cause concern to the community. Full data regarding this point are lacking. Upon an examination of the assessment roll of the downtown section of Chicago—the central business property from the river to Sixteenth Street and the river to Lake Michigan*—not counting the property owned and occupied by the railroads, nearly one hundred vacant lots with from twenty-five to two hundred feet frontage each were enumerated by the writer. The number of frame buildings, moreover, of trifling value was considerable, although most of these deteriorated structures were on the outskirts rather than in the center of this section. But taking Chicago as a whole, the proportion of vacant lots would undoubtedly be much greater than in the business center.
Valuable data in regard to vacant land in New York City are reproduced in the following table: *
With reference to the above table it is evident that there are relatively fewer vacant lots in Manhattan than in the other boroughs. In Manhattan, where property is so enormously high, rents so excessive, and the tax rate on improved and unimproved land alike so heavy, it is less profitable to keep land vacant than in Queens, where 62.5 per cent is unimproved.* The demand for dwellings is also less in the latter borough; perhaps much of the land is not yet ripe for building purposes in Queens. Nevertheless, the enormous value of this vacant land, over 142 million dollars in Queens alone, is significant. When it is considered that in all the boroughs about 645 millions represent speculative values, since the vacant property does not yield any annual income, the problem as to the regulation of private ownership of land in New York City is seen to be a serious one.* Moreover, the number of vacant parcels enumerated by the tax assessors does not include land with deteriorated and almost valueless improvements upon it.*
During the Lloyd George Budget agitation, the discussions with regard to un-developed land revealed the conditions in Great Britain. For example, it was said that one-fifth of the land within the boundaries of the County of London lay vacant; that in Edinburgh 2000 acres of unused land excluding parks and gardens were kept unused, “until a clear feu-duty of £160 per acre per annum can be obtained.”* It was estimated in 1892 that in Manchester the total area of vacant land (excluding gardens, roads, and other land unsuitable for building purposes) was 4200 acres. In Birmingham, out of 13,477 acres, 3500 were un-built upon. It was shown that in Bradford the density in some sections was 301 persons to the acre, although the average density was only 21; and that of 10,776 acres of the land in that city, 4512 acres available for building were still vacant. Indeed, two-fifths of the entire population of England and Wales, it is claimed, are crowded on about one eight-hundredth part of the total area of the country, another two-fifths occupy a little more than one two-hundred-and-fiftieth part, and the remainder are scattered over the rest of the land.
There is, however, more reason for the withholding of land from use in European countries than in the United States. In England unimproved land is not taxable under the rating system, and the land is largely inherited. In this country, to hold vacant or undeveloped land involves the payment of taxes and special assessments as well as the foregoing for a long time of the return on the capital invested. Real estate authorities confirm this opinion. “Where assessed valuation and taxes are both high, there is no money to be made in holding vacant land for an indefinite period. Every lot which is worth say $3000 and which is unimproved has annual charges against it of at least $200, not to speak of assessments. This charge is so heavy that it usually counterbalances the increase in value. Money made in vacant land accrues to purchasers who are shrewd or lucky enough to buy at just the right moment, and who capture a quick profit.”* Or, as another one puts it:* “Unless a lot doubles in value every five years, its value will not keep pace with taxes, special assessments and interest.” In cities, therefore, as in New York, where an earnest attempt is made to assess landed property at its full value and where the tax rate is considerable, speculation in vacant land is probably less prevalent than in other cities. Nor must it be thought that such speculation is always profitable.* Concerning vacant land that bears an urban value, so much may be said in conclusion: either the land is not yet ripe for building, or if ripe for building it is deliberately withheld from utilization. In both cases the purpose is speculative, but it is only in the latter that the practice is reprehensible. And yet the following consideration deserves attention. In a large, congested city, where land values are high but stable,* and taxes high, the ordinary investor will more likely find it profitable to build upon his land, if only to cover its annual cost. This holds true even of the land owned by the thirteen millionaire families quoted as the landed monopolists of Manhattan. For of the 205 or more millions of land value owned by them, less than ten millions comprise vacant land.* To be sure this does not take into account the underdeveloped land held by them.
§ 14. Another evil which speculation in land is known to foster concerns the investor. Of course it will be said that speculation of any kind is a game in which the investor consciously takes a risk, and must bear his losses. In land speculation, however, it is not a mistaken judgment in the investment so much as the system of mortgage which most often ruins him. The heavy indebtedness incurred by the purchaser results often in foreclosure, by which the mortgagee profits by more than the value of the mortgage. According to Professor Eberstadt,* six and one-half thousand million of the seven and one-half thousand million marks, the estimated value of the occupied land in Greater Berlin, were mortgaged. The general phenomenon of indebtedness and land speculation is described as follows by Professor Adolf Wagner:* “The factors which enter into this tendency are the fluctuations in the current rate of interest and of the rent. With the fall in the rate of interest and with the increase in rent, the capitalized value of land tends to rise. This induces the people, even with borrowed money, to invest in land. If the market price continues to rise as expected, the realization of profits is sought by continuing the sales, and this by means of more borrowed capital. The gratifying terms of credit which the banks offer at such times only draw more men on to such transactions. Then the market value changes, a higher rate of interest ensues, and, in consequence of the improved transportation facilities, the rent falls, tending further to decrease land values. The value of the land no longer covers the capital invested, there ensues a crisis in real estate, and mortgages falling due, the land is sold at auction, and once more the moneyed interests profit from the transactions.” Occurrences of enormous gains in this country which have accrued to individuals as a result of such foreclosures could be readily cited. One example must here suffice. Mr. Hurd* tells of a piece of land 89 feet by 99 feet in Denver, Colo., which had been bought on a tax title many years ago for $500. In 1890 it was leased for $14,000 annual net ground rent for a period of ninety-nine years. That made the land value $280,000 capitalized at five per cent. Every front foot of ground was thus worth $3150. A nine-story building was erected upon it in 1890 costing $325,000. In 1894 the net rents were about $17,500. The leasehold was mortgaged for about $75,000, and when the rent dropped, the building was surrendered to the mortgagee and then to the ground-owner, who thus acquired the building and the land, worth together $330,000, for an original outlay of $500.
Such losses, however, are attributable to miscalculations and short-sightedness such as appear in all speculation. Speculation in land cannot be condemned on account of this evil alone. And yet, when, as in Germany, mortgage indebtedness has proved a means of exploiting the farmer or peasant class, and a means also of concentrating farm land in the hands of the few, speculation in land which facilitates and creates indebtedness among the less wary owners should be subject to regulation.*
§ 15. Conclusions: Land speculation may prove socially injurious in four ways: (1) by preventing the best utilization of agricultural, mineral, and forest land; (2) by keeping land ripe for building out of use; (3) by controlling building operations; (4) by overcapitalizing the land.
It is evident that agricultural land no longer offers such a fertile field for speculative operations as formerly. The immense wealth amassed by individuals as a result of the generous land grants and speculative operations will not be duplicated anywhere soon, but should serve as a lesson to statesmen in their land policies of the future. Even yet, however, when this country has been almost all appropriated, agricultural land speculation in the United States has not ceased. Thus the hope of reclaiming some of our western prairies by means of irrigation has given rise to more speculation, resulting in the appreciation of from one hundred per cent to one thousand per cent in the value of some of our western farm land. Sites unsalable at $2 per acre ten or twelve years ago now command $10 to $15 per acre.* In general, nevertheless, it cannot be claimed that speculation has led to monopolization in agricultural land. For particular countries and localities, however, the appropriation and withholding of vacant land may entail social losses. The following illustration from Australia will show how this can happen:* “In every one of these colonies millions of acres of the richest agricultural land, with ample rainfall and near to markets and ports of shipment are used for mere grazing purposes. As a consequence most of the farmers were forced to settle on poorer land, farther from markets and ports, and where the rainfall is less abundant. Land fit only for grazing is thus used for agriculture, while the land fittest for agriculture is used for grazing only.”
Enough has been said about the practice of keeping land vacant or partially utilized in the heart of large cities. It will be noted that several factors determine the extent and effect of this kind of speculation. While high carrying charges and taxation on capital value make the withholding of land unprofitable, they do not foster its best utilization. Nevertheless, the conditions of congestion are so various in this country, that there are comparatively few cities where the withholding of urban land is as yet a social menace. Only a careful study of the housing problem could decide in each case the harmful effect of uncontrolled building operations.
Although on the whole our American cities may be said to suffer from the laissez-faire housing system that prevails, attention must also be called to a species of controlled building to be equally deprecated. We refer to the laying-out of towns by “development” companies. Gary, Indiana, is an illustration. The Gary Land Company not only graded, laid out, and subdivided the land and undertook the house building, but to this day it withholds the deed of sale from the purchasers of the lots until they shall have complied with the agreement to build within a certain time and on plans approved by the company.* However praiseworthy the intentions of certain of such undertakings, abuses of the power which such operations involve can easily be imagined.*
Overcapitalization of land, though a common phenomenon, varies in degree and extent. It is commonly known that suburban land is largely in the hands of speculators. Land near cities, the normal value of which for farming is from $50 to $100 per acre, and for gardening from $300 to $1000, may be held at $500 to $5000 per acre by speculators, who estimate values in accordance with the anticipated earnings of the land when it shall have secured the expected utilization.* As to the evil of inflated values, it would seem that this would affect only the less shrewd investor, who when values declined to the actual earning capacity of the land might be ruined. From his standpoint we might see nothing unusual in land speculation as compared with speculation in general. But just as overcapitalization in other industries indirectly may enhance prices; so to a greater degree as concerns dwellings, the choice of which involves so many factors besides rental, rents may very likely be affected. To take, for example, the value of land in Chicago; are we to believe that the landlords who bought their property on the 1889 basis, to which we are told the value of real estate is only now approaching, have been on the whole recipients of less than the expected interest on their investment until the present? Or, in spite of the law of competition,* did the landlord in many cases not find ample excuse for charging a higher rental because he had overpaid?
On the whole, therefore, as we contemplate the importance of the commodity which is made the object of speculative operations, when we consider that the speculator is guided by the possibilities of greatest gain to himself, a motive not always in accord with social welfare, when we recall that the problems of suitable housing and of the conservation of natural resources are involved, speculation in land is not an unmixed good.* On the other hand, considering that the complete suppression of speculation involves practically the abolition of private property, and considering the difficulties in the way of such abolition, even if found expedient, this solution is problematical. Government restriction, however, has been, and will undoubtedly continue to be employed in checking the abuses of speculation in land as they arise, and when and where they become a menace to the public welfare. The efficacy and expediency of the land tax in suppressing speculation will be considered in connection with the housing problem.
CHAPTER IX—THE TAX AS A SOCIAL REFORM (CONCLUDED)
§ 1. The growth of cities in the nineteenth century has given rise to numerous social problems, among which there is none more vital than the housing problem. It is unnecessary to point out that shelter constitutes one of the indispensable conditions of existence, nor that land is requisite for the provision of dwelling places. The latter fact shows the relation between housing and land values, for any influences that affect the value of land in any community will be reflected in the housing system of that community. Shelter, it need scarcely be pointed out, means more than protection from the physical elements; it implies all that we to-day regard as essential for the physical, moral and intellectual development of the individual. The home is the basis of the “sacred” family relationships, of physical efficiency, of sociability, of profitable leisure, and of character unfolding.
Social workers especially are well aware how the economic, moral, and social welfare of the greater part of the urban population, if not of the entire population, is affected by the housing facilities. We need only reflect that from twenty to thirty per cent of the income of the major portion of urban dwellers is expended for rent, and that the industrial development of a community, moreover, is dependent upon the accessibility to suitable locations, to understand how the economic interests of the population are rooted in the housing problem. How the social wellbeing of a community is hampered by such evils as congestion and overcrowding within the home, insanitary buildings, dark and poorly ventilated rooms, the lack of open spaces, has recently been shown in numerous treatises, in the reports of commissions and congresses, and in various hygienic and social exhibits.* It has been well established by statistical reports that health is greatly undermined and the death-rate enhanced by insanitation and overcrowding. The high death rate of infants has been attributed to these causes.* “It was the opinion of physicians who appeared before the commission that if the occupancy of the dark rooms now legally occupied is permitted, we shall continue to have in the city about 28,000 new cases of consumption, and 10,000 deaths from consumption every year.”* When we consider that sickness means unemployment and means greater expenditure for medical treatment, the seriousness of the housing problem becomes more obvious. Of no less vital importance are the moral influences of insanitary, improper home conditions. It is claimed that the lack of suitable surroundings in and about the home where the child may play is responsible for much of the delinquency found in large cities. Crime too has been traced to a lack of proper home conditions. This was recognized by the eminent jurist, Liszt, who is credited with saying,* “A reasonable reform in housing is worth more than a dozen penal laws.” Another grave evil due to overcrowding is the violation of the recognized standards of decency. In short as Damaschke puts it, “Schlafstellenunwesen, Prostitution, Alkoholmissbrauch, Zunehmen des jugendlichen Verbrechertums — das alles ist in seinem engen Zusammenhang mit Wohnungsnot und Wohnungselend heute in allen ernsten Kreisen bekannt!”*
§ 2. If these be some of the serious effects of bad housing upon health and social efficiency, we must ask where and why this evil has arisen. The “slum” constitutes to-day a definite section of most of the populous cities, but displays its worst features in London, Dublin, and in about half a dozen cities in the United States. The housing problem is, however, by no means limited to these cities. We may affirm that not only urban but also rural communities suffer from insanitary dwellings. In Berlin and the other German cities, for example, you look in vain for districts resembling Whitechapel, or the East Side (New York), yet investigations in German cities, some scarcely urban, have revealed startling conditions of overcrowding. A large percentage of families occupied but one or two rooms, while many homes were found in which more than six persons were living in a single room.* According to reports and statistics conditions are not better in English cities. To give a few examples: In Glasgow 100,000 persons, or one-fifth of the whole population, are reported as living in one-room dwellings. In Liverpool thousands of basements and alley houses in dilapidated and intolerable condition, without air and sun, are utilized as homes.* As regards overcrowding, conditions are nowhere comparable to those in Berlin and New York. In both cities the “skyscraper” predominates. But while it is claimed that three-fourths of the population of New York live in tenements, we find that of all the houses in Berlin 93.79 per cent are occupied by tenants, 2.57 per cent by proprietors, and 3.64 per cent by servants. The extent of congestion in Berlin is furthermore proved by the following fact: In London there were found to be 7.93 persons to a building site, in Berlin, 76.9 persons.*
§ 3 The causes of these intolerable conditions are chiefly economic and social. Few cities have originally been laid out deliberately. For the most part their growth has been haphazard. Building permits and sanitation laws were later developments.* Contractors and owners had houses constructed without regard to artistic design, or uniform height, but after their own sweet will and with the sole purpose of personal gain. It is this laissez-faire policy which is responsible in part for the “slum” conditions.
A more fundamental cause is the economic factor as it touches the tenant. If we study the population of the “slum,” we find that the south European immigrant predominates.* We know that his standard of living is much lower than that of the country to which he emigrates, such as the United States or England, and that his intention in leaving his native country is to earn and save as much money as possible, often with a view to returning to his native country. Hence we should expect him to settle where rent is the lowest. And so he does. If, now we inquire where rent is lowest, we find that it is generally in the oldest part of the city, which on account of social changes and of the industrial development has been abandoned by the native population for uptown residential sections. Here, where encroachments of all kinds are tolerated and where houses have become unfit for habitation, the immigrant makes his abode. If these insanitary structures are condemned by the building inspector, they are superseded by tenements. The large capital invested in these new structures and the great demand for houses in the “slum” district, cause rents to rise above the level in the suburbs or on the periphery of the town. Then the immigrant is compelled to take in more lodgers, to resort to the most insanitary, ill-equipped houses (unless the law condemns them all), and to make dwelling-places out of basements, garrets, and dilapidated rear houses. Viewed from another standpoint the low wages of the immigrant may be said to be responsible for the congested and otherwise insanitary conditions. It will be remembered that it is in the “slums” where the sweat shops are to be found. In those sweated industries the insufficient wage forces a lower standard of existence upon the worker.
Added to the economic is the social factor. The concentration of population is generally within the industrial center, where the workmen may be near their places of employment. This section corresponds to the oldest and most undesirable part for residential purposes. Now, when once settled, clannishness, that great social force, tends to keep the persons of one nationality and family together. The strength of this factor of sociability and family ties in engendering the “slum” district is seen in the unwillingness of tenement dwellers to move to cheaper and at the same time more desirable quarters in the city. That racial and social forces are responsible in part for the “slums” is further made evident by the fact that only where immigration has gathered a large number of foreigners does a Whitechapel or an East Side make its appearance.
§ 4. In view of these conditions it may well be asked, is it the high rent which creates a lower standard of living among the immigrants, or is it the immigrant and his clannishness that raise rent? The relation between them is reciprocal. As Hurd says, the cause of rent for residences is social as well as economic.* It will be agreed that not only in the slums but in the city as a whole rent and land value tend to increase with the growth of population, that is with the increase in the demand for houses. On the other hand, for the reasons already given, the congestion per acre, the overcrowding per room, and resultant evils are not likely to be relieved much by the development of transportation facilities or by other methods of extending the available residential area. The seriousness of these conditions in our largest cities can scarcely be exaggerated. How, then, shall the urban housing problem be solved?
Obviously, a reduction in rent will not only afford relief to the poorer classes materially, socially, and even ethically, but, together with legislation regulating building operations and stricter laws of sanitation, may help to eliminate the slums. Before discussing the possibility of lower rents, it is necessary to point out the inefficacy of building regulations when unaccompanied by rent reductions.
That building and sanitation laws are the first steps toward the solution of the housing problem cannot be questioned. No government, in modern opinion, should permit the individual, even if he so desires, to occupy a dwelling that falls below the recognized standard of sanitation, comfort and decency. Adequate regulations limiting the height and area to be covered by the building, requiring the installation of sanitary appliances, fixing the minimum width of staircases, the height of ceilings, the size of rooms and windows, and so forth, should not only be enacted, but should be strictly enforced by the building inspectors. Indeed, it might be expedient for all cities to follow the lead of German communities in promoting the “city beautiful” as well as the city hygienic. “German cities have taught us a valuable lesson in the matter of laying out suburbs. Improvement plans are furnished by the municipality, and architects are invited to compete in presenting designs. After it has been decided that a certain district shall be opened up, a jury is appointed to assess damages, terms are made with private owners, and the architect furnishing the most acceptable scheme is awarded the prize.”*
What, however, must be the effect of such legislation? Evidently the enhancement of rent because of the increase in the cost of construction. Such has been the result in German cities.* Indeed, the increased overcrowding there is attributable to the high rents which expensive buildings and improvements tend to create. To keep rents down recourse will be had by those of a lower standard of living especially to increase the number of lodgers. In short, “the poorer classes want cheap houses, must have them; they understand what a saving of a sixpence a week in the rent means, but they do not understand yet the advantages of concrete foundations, properly jointed drain pipes or wash down water-closets. They do not mind taking a few lodgers into an already well-filled house, because they understand the advantages of a few shillings a week, but they do not understand that each inhabitant of a sleeping-room should have at least 500 cubic feet of air space.”* Thus the method of solving the housing problem by restrictive building regulations may be rejected as futile.
In considering the possibility of reducing rents to relieve congestion, we may begin by analyzing the factors that enter into the determination of rent. And it will be convenient to classify these factors under ground rent and building rent. Ground rents are affected by the population, by transportation facilities, by the industrial development, including the kinds of industries carried on, by the system of land tenure and speculation, by racial ties and other social considerations. Some of these tend towards a reduction, others towards an advance in rentals. Friction from offsetting and opposing influences may therefore be expected. Thus, the tendency of improved facilities of transit to draw the population to the periphery of the town would be offset by the clannishness which has drawn the foreigners to a particular neighborhood, generally in the center of the town. The elements entering into building rents are chiefly the various expenses of operation, determined by the conditions of the labor market, especially in the building trades, the available capital for building, the cost of materials, taxes, condition of the mortgage loan market, etc. Under frictional influences may be classed the immobility of invested capital, the leasehold and contract system, and above all the strong force of custom. Relief of congestion through a reduction of rents may be of two kinds, reduced congestion per unit of ground space, e.g., per acre, and per room.
Viewing the housing problem thus from the economic standpoint, its relation to the tax on land value becomes clear. For the tax may be expected to affect a number of the elements enumerated which make up rent. We have now to examine the possible results on housing of the land tax, as they have been deduced theoretically by the adherents of the tax on the one hand, and the adversaries on the other.
§ 5. First, on the part of the advocates it is claimed that the land tax would affect congestion in the following manner: First, as the tax would make it expensive to keep property unoccupied, vacant land would be forced into the market. As a consequence, secondly, the market price of land would tend to be reduced and land values would become more stable. This result would also follow, thirdly, when the lure of the value increment is in part removed; that is, speculation would be curtailed, and overcapitalization discouraged. Fourthly, the incentive to improvement would be created both by the high carrying charges on unimproved land, and by the untaxing of buildings. The latter would attract more capital into the building trades and would result in a larger number of available houses. Fifthly, the remission of the tax on buildings would benefit, not the builder (except indirectly), but the tenant, upon whom the tax ultimately falls.
In the platform of the United Committee for the Tax on Land Values in England it is stated,* “If urban and suburban land were taxed on its true unimproved value, irrespective of the use to which it happens to be put or not to be put; the iron girdle of land monopoly which now confines every large town and industrial center, every village, and every hamlet, would be broken through, and we should have more and cheaper dwelling houses, shops, offices, warehouses, and factories.”
The reasoning by which the above deduction was derived needs no further elucidation. It is noteworthy, however, that the argument rests merely on the expediency of the tax on capital value versus that on rental value. Disregarding the assumption of monopoly in urban land, many will agree that the English rating system on annual value tends to encourage the withholding of land from use.* The passage quoted above, though it contains a grain of truth, is far too sweeping. Obviously, the degree to which the tax will be effective, even if the salutary influence be admitted, will depend upon the rate of tax, the prospects of its being increased, the amount of available vacant and undeveloped land, the counteracting forces, e.g., the increase in population, local improvements, and all other conditions that enter into building rents.
With regard to the stimulation of building operations the following passages are illustrative of the trend of thought: “Yet another argument which may be adduced in favor of the rating of site values, is that in consequence of urban land coming more freely into the market and building enterprises being stimulated, rent would be materially relieved; and this relief would come where rent is now at its maximum, i.e., in our large industrial centers. … Every opportunity given to the freer growth of the city in the suburbs will tend to reduce this congestion at the center.”*
This quotation refers to the first method of creating an impetus to building, namely, by making the holding of vacant land “for a rise” unprofitable. In the following passage emphasis is laid on the effect of the untaxing of buildings:* “Again, we should be freeing buildings from the burden of rates. By levying rates on buildings, we make buildings dearer, and the inevitable consequence is that fewer are built. Under our present system of rating, builders cannot afford to build, because occupiers cannot afford to occupy so many or such good houses as they could if buildings were not liable to be rated. If we cease to levy rates on the value of buildings, we shall remove the first of the two main causes of the dearness and scarcity of houses.”
Here, too, whatever truth the above claims may contain, they are vitiated by too general assumptions. For instance, they take it for granted that the demand for houses is elastic, that there are no limits to the available capital for building purposes, that mortgage loans will remain unaffected, that the effect of the overbuilding stimulus will not increase the cost of labor and materials, etc. To be sure, when these frictional forces are pointed out to the proponents of the tax they defend their position by more general statements. For example, they maintain that where rent consumes more than one-fifth of a family’s income, crowding is the inevitable result. The reduction in rental, through the greater number of available dwellings would increase the demand for newer, larger accommodations, and would enable some of the large “lodging” population to establish homes of their own. As to the question of available capital, they point to the present excessive tax on buildings in comparison with that on other forms of capital. They urge further that under the present system of taxation, the cost of building is prohibitive except to meet the urgent demand for housing. That the effect on mortgage loans should be wholesome is deduced from the doctrine of capitalization. The value of the land under the tax would not fall below the capitalized net rental, either accruing or prospective. Land and buildings would, therefore, be safer securities than to-day, when the tendency is to overcapitalize the value of the land. With these important doctrines of the defenders before us, we shall next epitomize the arguments of the opponents of the tax system.
§6. The chief criticism of the theories concerning the consequences of the tax on land value, namely, that the numerous and offsetting elements that compose rents are lost sight of, as well as the frictional forces at work in social phenomena, gives the clue to the contentions of the opposition. First, consider the questions of vacant land and speculation. The prevalence of vacant land ripe for building is denied by some, while others even hold that building operations depend upon this speculative feature in realty holdings.* So long as there is a large number of vacant houses, it cannot be said that land is held vacant for speculative purposes; especially does this apply where the tax rates are high. The land must sometimes be kept in an unimproved or under-improved condition because of the possibility of change in the character of the neighborhood, and for other sound reasons. The validity of this position, however, cannot be decided theoretically. And yet, in studying the facts, the difficulty arises of fixing the standards of underdeveloped and appropriately improved land. These terms will probably have different meanings in different localities and countries, and the prevalence of such underdevelopment will probably vary from place to place.*
Secondly, granting that the imposition of the tax will cause a decline in land value, and that it will induce the owner to build upon his land, might not this incentive and the un-taxing of buildings lead to a more intensive use of the land? The dangers of an overutilization of the land from the standpoint of the housing problem are generally admitted. Not the congestion per room, but the greater congestion per acre is threatened thereby. If the improvement of the suburban districts only were stimulated by the tax, a general reduction of congestion in the city would be conceivable. But it is reasonable to expect that the more expensive the land, i.e., in the heart of the city, the greater would be the incentive to improve it. It is feared, therefore, that an overdevelopment might ensue, that the skyscraper would become more prevalent than the need of the community would warrant. The possibility of compact building, moreover, carries with it the utilization of the now available open spaces and even of garden space. The adherents of the new system admit the gravity of the charge with respect to lofty and compact building; they are less ready to admit the deleterious effect on garden space. To the first charge answer is usually made, that the intensive utilization of the land is a tendency which will continue irrespective of the tax. Indeed, the trend toward compact building may have been caused and furthered by the withholding of land from use. To overcome the dangers to good housing, the government will be compelled sooner or later to restrict and control building operations according to a well-laid-out town-planning scheme. It would seem, therefore, that legislation, at least restricting the height of buildings, would have to precede the introduction of the tax.
On the other hand, by opening up the suburbs, and by relieving the tenant in the center of the city, the necessity for tall buildings would be removed and the tendency toward more intensive utilization would be checked. Logically, it might even be reasoned that with the greater competition for tenants, the desires of the dwellers would be consulted in building more than at present. Furthermore, every one is aware that houses with gardens and open spaces are more desirable and valuable; and if the owner is looking forward to an increase in the value of his property in the future, he will prefer to keep it in a more desirable condition, fronting on a lawn or open space. It should be remembered, moreover, that the decline in the value of the land is expected to enable and encourage more persons to own their homes, especially in the suburbs. It is likewise expected that the reduced value of land will counteract the movement towards the more intensive use of the site.
Thirdly, the efficacy of the tax to promote building operations has also been questioned on various grounds. We are familiar with the theory that the curtailment of speculation, i.e., the reduction in prospective value increment, will tend to discourage building.* Another reason given to deny that a building “boom” will ensue is that the demand for houses is inelastic, that overbuilding could not go on indefinitely. While, therefore, a decrease in rent might have the effect of temporarily stimulating the erection of new buildings, and of providing larger and better accommodations, the tendency would check itself. For, granted that modern types of buildings will tend to supersede the older and inappropriate structures, and that the latter will be torn down, the increased cost of constructing the new buildings will check the overbuilding trend. Moreover, the incentive for capital to be employed in building, which will at first ensue, will be checked when the rate of profit in that industry becomes the current rate in other industries. But, say the adherents, even these assumptions insure a decided improvement in housing conditions.
Fourthly, with respect to the doctrine that the remission of the tax on buildings would redound to the benefit of the tenant in the shape of reduced rents, no account is taken of the friction that may be expected to develop in the readjustment. Aside from the reputed immobility of the population, aside from custom which largely determines the possible expenditure for rent, aside from existing leaseholds, the tax on land value may itself set in motion various forces to enhance rents. Most important is the assertion that owners of improved property count upon the prospective increments in land value to counterbalance the deterioration of the building. Thus rents are assumed to be lower than if the owner had to provide a depreciation fund. With the heavier tax on land value, such a reserve fund would be necessitated, adding to the building cost. This would result in higher rents. Again, by the decline in land value, property would no longer be worth as much as security for mortgage loans. Moreover, since the mortgagee takes the prospective increment into account in making the loan, the effect of the tax would be either to reduce the amount of available capital for building, or to raise the interest rate,* in which cases rents would tend upward. These arguments assume, however, that building operations are a distinctive industry dependent upon landownership and land speculation. We have already pointed out how the widespread leasehold system in itself seems to contradict this theory.*
Lastly, in a dynamic society, further friction might be expected to arise to counteract the movement toward reduced rents. Assume the reduction of rent in one community, and would there not be an influx of outsiders to take advantage of the reduction? Moreover, the normal increase in population in a progressive community and the rise in the cost of materials and labor, if the stimulation in building becomes general, would tend to check the alleviating influences of the tax.
§ 7. Turning from the theoretical discussion of the effect of the tax on housing, we ask what are the facts? Our study has demonstrated the futility of attempting to determine precisely the influences of the tax in the presence of so many interacting social forces. Whether attributable to the fact that the growth of the community has offset the forces set in motion by the tax, or that the tax rate has been too slight’ to affect market values, or that the actual results of the tax on land and of the remission of the tax on improvements have not conformed with theory, the reports of the officials and the statistics for certain communities where the tax is in operation show that rent cannot have been materially affected by the tax.
On the other hand, the available data do reveal an activity in building operations in the Australian and Canadian municipalities which is generally attributed in part to the exemption of improvements. There was no evidence of overbuilding in Australasia; in Canada, on the other hand, the excess in vacant buildings in some of the towns in recent years has been charged to the operation of the tax. Whether this condition of overbuilding existed during the land “boom” period, when newcomers in some cities had to resort to tents for shelter,* has not been established. Nor is it possible to determine the effectiveness of the tax on value increment to influence notably the land market and building operations from the stagnant conditions in both fields after the imposition of the taxes in England and Germany. In the latter country, the unfavorable market conditions, traceable, however, to the general depression for which the tax legislation was not responsible, played a considerable r61e in the amendment of the law. The English duties on land value were likewise ineffective in preventing the temporary slump in the building trades of London in 1911, and failed to relieve the serious housing conditions there.* But, in judging the tax, aside from the unfavorable effect of the general industrial depression, it must be borne in mind that the stimulation of building in the case of the tax on value increment could not be expected to be the same as in the case of a general untaxing of buildings. While the influence of the tax on building operations is not traceable in the extraordinary increase in structures in western Canada before the depression, the general agreement among the Canadian builders themselves, as to the efficacy of the tax in stimulating building seems to substantiate the generally accepted theory, rather than that which holds that the tax will interfere with building operations. Difficult as it is to assert any positive effect of the tax on housing conditions, it is more difficult to discover its effect on speculation in land. We know that speculation is still rampant in the countries under the system of landvalue taxation. And in the circumstances existing in western Canada, it would seem that the tax was introduced in part to further the speculators’ interests.* In Australasia, the state land taxes, except in New Zealand, are not heavy. But in the latter colony, evidence of the disintegration of the large holdings exists, and the cause is generally found in the high graduated and absentee rates. On this question also, our conclusions in the absence of positive proof, must be qualified. We may assume that a tax levied on a commodity on the basis of its capital value will tend to discourage dealings in that commodity. Also that a tax on land, as is generally conceded, tends to encourage its utilization. Thus it would seem that the realty tax on capital value in American cities has made the withholding of land “for a rise” less profitable than in England. It follows, even, that were the tax high enough, as high as the transfer duties in Paris,* for example, realty operations would be greatly subdued. But where land rises rapidly in value, speculation will continue to thrive, irrespective of the tax. So much may therefore be assumed: since anything which lessens the anticipated income from a commodity will generally decrease the desirability of that commodity for speculative purposes, a discriminatory tax on land will put a damper on realty transactions and speculation. The degree of suppression will depend on the rate of tax and the trend of land-value increments.
§ 8. In the preceding chapter it was found that speculation in land had its function in society under private ownership, but like other social privileges it was capable of abuse. The time arrives when the government is called upon, or compelled, to check the abuses of social institutions. The proposals and the legislation already employed to remedy the evils arising from landed property are many, but chiefly ameliorative. The most radical proposal is the public appropriation of the land. The question of the expediency of land nationalization is, moreover, closely allied to that of the tax on land value. For the underlying motives of both proposals, as social reforms, are essentially the same. Without entering into the theoretical inquiry of the justice of private versus social property in land, the facts and arguments for and against the practicability of public appropriation will throw light upon the social expediency of the tax on land value.
Of the advocates of public ownership, there are those who, like the Single Taxers,* favor the nationalization of all the land; others who, like Professor Adolf Wagner,* have pointed out the need of the municipalization of urban land, not of the rural landed estates; others again, a more numerous class, who urge public ownership only of the national resources, mines and forests for conservation purposes. In examining the reasons advanced in defense of these positions the threefold classification of land of the preceding chapter will be of assistance. For it is evident that, if the conclusions with regard to the trend of value of the several kinds of land are valid, public ownership may be less expedient in one case than in another.
§ 9. From the standpoint of the appreciation of land value no reason exists, generally speaking, for the public appropriation of agricultural lands, which are characterized by decrements and fluctuating value, rather than by increments. Nevertheless, large land holdings prevent the best utilization of the land and tend to impoverish the peasant.* The data showing the extent and significance of this concentration of land lend weight to the argument.
The experience of Australasia* with absenteeism and large landed estates is not peculiar. The conditions in most European countries (France and part of Germany excepted) are similar. The concentration of land holdings in England is notorious. From statistics of England and Wales in 1872-73,* it has been shown that 4917 owners (.5 per cent of the whole number) occupied each from 1000 to 10,000 acres, altogether 42.3 per cent of the whole area, and 21.8 per cent of the product. Of the whole area of England and Wales (London not included) 10,207 persons owned two-thirds; of 18,950,000 acres in Scotland, one person owned 1,376,000, while 1700 persons possessed nine-tenths of the whole area. In Ireland, 1942 persons (“these owners cannot even be counted among the inhabitants, for they are mostly absentee landlords!”) owned out of the 20,160,000 acres, two-thirds of the whole.”* “Two-thirds of England, nine-tenths of Ireland, and nineteen-twentieths of Scotland,” says Mulhall,”* “are held in ownership by a small group of persons.” The following more recent statistics show clearly the concentration of English land in the hands of comparatively few individuals. Thus, while in France, of the 7,200,000 of the population engaged in agriculture, 1,638,000 were owners of land; in the United Kingdom out of an agricultural population of 2,530,000 only 19,275 were land owners.* But the difference in the size of the estates is equally noteworthy; in France the average estate was 56 acres, in the United Kingdom it was 3003 acres.
In Austria-Hungary the two largest landholders were said to be the Crown and the Rothschild family, the latter owning eight times as much as the royal family.* The following data appeared in “Vorwärts,”* the Socialist German daily: Fifty-two per cent of all the landlords owned somewhat less than three-fifths of the land in Hungary, while only .09 per cent of the proprietors owned 31.19 per cent, nearly one-third of the land. Or take Bohemia as an illustration of the concentration of the land. Here sixteen persons were said to own ten per cent of all the land.*
Serious as this charge against private land ownership is, it is highly questionable whether from the standpoint of production state ownership would be advantageous. To utilize rural land most efficiently private ownership is regarded as essential. It is an undisputed fact that where the cultivator is the owner under the existing system, the state of husbandry is most favorable. Whether under a leasing system by the state a sufficiently secure tenure could be assured the tenant to induce him to invest the same amount of capital as if he owned in fee simple is a matter of speculation. Not only from the standpoint of production, but also from that of administration state ownership would be a precarious undertaking. Added to these considerations the method of appropriation must be inquired into. The impossibility of purchasing all the land leaves only one course clear, namely confiscation, a measure justified in extreme exigencies only. In judging of the expediency of the nationalization of the soil, therefore, the evils of absenteeism, of large holdings, of peasant exploitation and pauperization in some countries must be weighed on the one hand; on the other, the responsibility that ownership would impose upon the state, the efficiency of public versus individual enterprise, the security of tenure under private ownership, the trend of depreciating and fluctuating agricultural values, and the revolutionary, confiscatory means to be employed. Nor must it be forgotten (1) that the concentration of agricultural holdings is characteristic only of certain countries,* and (2) that other legislative action has been proposed to disintegrate the large estates.*
The effectiveness of the tax on land value to overcome the deficiencies of private landownership, will depend chiefly upon the vigor with which the screw is tightened. The low tax rate which now prevails has had little effect in disintegrating large estates, for the expectation of a future value increment conduces to the payment of the tax rather than to relinquishment of the holding. But if made too discriminatory, the same objections apply as to public appropriation and confiscation with which it may become identical. To be most effective, the tax should be levied (1) according to a progressive scale of rates to strike hardest at the large and absentee landlord, (2) with a minimum exemption embracing most of the land under cultivation, and (3) by the state or central authority, that alone should retain the power to use the tax as a weapon of social reform. Thus far only New Zealand has found it expedient to apply the weapon vigorously. But at all events, by the levy of the wild land, the increment and graduated taxes, the government shares the value increment without imposing a very great burden upon the large holder, while exempting the small owner and cultivator altogether.
For local revenue, the expediency of a tax on land value in rural districts will depend upon other conditions. Levied in conjunction with the state or county rate, the imposition may put an extra burden upon the rural district, while it relieves the owners of urban property. For local purposes, on the other hand, with local autonomy, or with apportionment according to expenditure,* the tax on land value, provided it is sufficiently productive, would be a decided improvement over the present widely current general property tax, which taxes stock and agricultural implements. The exemption of all improvements, such as buildings, would occasion but a slight increase in rate because their value is small in comparison with that of the land. An additional rate on vacant and absentee holdings, as is practiced in Canadian rural municipalities, might in some cases more than recompense the loss in revenue through the exemption of improvements.
§ 10. In so far as professional land speculation is combined with speculative building operations, and in so far as speculative, overcapitalized values may, though indirectly, drive up rent (especially likely because so many factors enter into the choice of dwellings), the expediency of checking speculation in urban land may become urgent. But these abuses of private property rights have played only minor roles in producing the acute housing problem which it is sought to solve. It is not to be wondered that the improvement in housing considered “as part of the great work of national regeneration with a view to secure the health, safeguard the pockets, and raise the housing standard of the working classes,”* should be regarded by many as dependent primarily upon government control of building operations and ownership of the land. The advantages of municipal land ownership have been enumerated as follows:*
(1) More economical grouping of buildings instead of the odd and scattered houses of the “jerry builder” would ensue.
(2) Non-speculative land values would cheapen building sites.
(3) Buildings on a large scale erected by the municipality would reduce the expenses of construction.
(4) Or, if the land were leased to companies of working men or builders, and capital advanced to them by the public loan association at low rates of interest, a saving would result.
(5) The municipality would be satisfied with a smaller profit than the individual owner.
(6) The management of a large number of dwellings would reduce expenses.
(7) Capital could be borrowed at lower rates of interest.
It will be noted that this assumes the municipality to be not only the landowner, but the contractor, builder, and loan agency as well. In view of the radical change which is here involved, we may ask to what extent the above advantages of municipalization may be expected to materialize. In the absence of any experience with municipal land ownership as a whole, it may nevertheless be of value to review the results of minor municipal housing operations.
Germany and England furnish examples. The “Bodenpolitik” of German towns* is rapidly spreading. Many building experiments on town land have been tried. In Ulm, for example, where the government owns a large portion of the land, houses have been erected at public expense and the property sold to private individuals under restrictions, e.g., the government retaining the right to repurchase the property under certain conditions (Wiederkaufsrecht). Frankfurt a. M. and Leipzig, on the other hand, find it expedient to lease their land for building for a term of years, after which the property reverts to the cities (Erbbaurecht). Freiburg i. B. and Zürich, on the other hand, have experimented with the erection of houses on their town land which they rent directly to the occupiers.* As these undertakings have been in operation but a short time, and are of small scope, i.e., only a small percentage of the population have been accommodated, the evidences of success are inconclusive. According to Dr. Pohle* only a small proportion of the inhabitants have availed themselves of these houses and, generally speaking, no material reduction in rental has ensued.
Similar motives, the betterment of the housing conditions of the working classes, actuated the passage of the English Housing Acts of 1890 and 1900. Part III of the amended Act provides for the compulsory purchase by the local authority of land in the outskirts of the town to be built upon in any one of the following ways:*
(1) By the council.
(2) By leasing the land to companies, or builders, or to working men for the erection of workmen’s dwellings; or
(3) By “any company employing workmen, or established for constructing or improving workmen’s dwellings; or by any private person or persons entitled to a free-hold estate in land or to lease for an unexpired period of fifty-eight years who may borrow from the Public Works Loan Commissioners at low rates of interest for not more than forty years, half the amount required to erect dwellings for the working classes, and may supply water or gas to the tenants free of charge or on favorable terms.”
Many local authorities have already taken advantage of the provisions of this Act, among which are London, Glasgow, Liverpool, and Manchester.* The following summarizes the “commercial” success of “sixteen municipal housing schemes involving a capital outlay of about £1,300,000”:* “They show a gross return of about 61/3 per cent, and a profit of about 3½ per cent. … In eight cases the profits have been more than sufficient, not only to pay interest on the capital outlay, but also to provide the whole of the sinking fund contributions. In nine cases the profits have been more than sufficient to pay interest on capital, but have only provided part of the sinking fund. In only three cases, Liverpool (blocks) and Manchester (blocks and tenements), have the profits been insufficient to pay all the interest on capital. When it is remembered that the workmen tenants of those dwellings contribute £21,157 a year to the rates and taxes, and over £10,000 a year to a sinking fund for the purpose of buying property for the community at large, it must readily be admitted that more reasonable financial arrangements ought to be supported by Parliament so as to enable the rents to be reduced.”
When the dilapidated, insanitary housing conditions of a city become as threatening as in Glasgow and London, for example, unless other remedies can be found, the municipality* may be compelled to resort to public building operations, just as cities now operate other public utilities. In that case, however, the European experience tends to show that the anticipated economies of government ownership must be waived, for commercially speaking, such undertakings have seldom been remunerative.” With all the savings in the expenses of construction, the municipal building enterprises not only have not yielded a profit so high as that of the private landlords, but they have not even been instrumental in lowering the rental.* What they have accomplished is, nevertheless, of great importance, namely, the improvement of the standard of housing.
It must be admitted, however, that such partial experiments in municipal housing as have been attempted in Germany and England are far from conclusive evidence of the effect of total municipalization of land on rent and land value. Were this extreme reform practicable, it is readily conceivable how the public appropriation of land value might benefit the urban tenants, not alone in the better utilization of the land, so as to relieve the congestion of population, but also by expending the enormous value increment of urban property which now accrues to private individuals for public utilities and improvements. The question resolves itself into one of practicability.
What does the municipalization of the land involve? There are only two ways in which the community could get possession, first, acquisition by purchase, or secondly, confiscation. The first would unquestionably burden the community with a debt too enormous to contemplate, so that compensation for town land, except for new, recently settled communities, is not feasible. As for the second means, the confiscation of urban property, not only would it inflict a severe loss upon a single class of the population, but such a revolutionary measure would bring other consequences that might disrupt the entire social system. Moreover, society at present and for a long time to come will not tolerate such a course; nor should it be advocated in view of the present conceptions of justice and equality, except in the direst need of the state. For a long time to come, therefore, less drastic and more practicable measures must be found to help solve the urban problem which must be admitted to be grave and urgent.
From the tax on land value, however, little is to be hoped in the way of a solution of the housing problem, except as the supply of accommodations may be affected.*
Furthermore, the expediency of checking speculation in urban land by means of a tax might be doubted, if it were not for another consideration.
We have seen the inevitable upward trend of the value of land in progressive cities. This tendency even public ownership cannot prevent, except in so far as the unsystematic, wasteful use of land under private ownership and the screwing up of speculative values might cease. But it has been asked, why should the increments due to social influences accrue to private individuals? The need for social and recreational centers, for parks and play grounds, and other public utilities is increasing and these in turn tend to increase the value of land. Why not set aside these socially created values to meet the increasing public expenditures? If the argument is advanced from the standpoint of right or justice, the counter-argument is equally valid, namely, that other value increments are socially created and should be likewise appropriated for the benefit of the whole community. From the standpoint of expediency, however, in view of the foregoing reasons for reform, an additional tax on land, which would give the community a share in the increments accruing from land, is winning adherents.*
§ 11. In the case of agricultural land we saw that government ownership of the land was not expedient; in the case of urban realty, the expediency of the method of municipalization was questionable. Now, we ask, does the need of conservation of natural resources necessitate their appropriation by the state? The need of conservation in the face of the wasting character of these resources has already been discussed.* The reports of the commissions on conservation all agree that most nations have not acted very expediently in disposing of their forest and mineral land. The following data show the percentage of forest area under government ownership:*
Table not reproduced
Recognizing the need of conserving at least the existent forest land, for “forests exercise an influence on the water supply, on agriculture and on the general health of the people,”* there is a general movement in European countries to add to the public forest reservations by purchase. Since 1870 France has not only made no sale of forest land, but has each year consigned more land to forestry. France has spent nearly 200,000,000 francs in reforesting dunes and devastated mountain sides. Germany likewise spent, in the years 1867-95, over 22,000,000 marks in increasing her forest domain.’ This policy is now being followed by Austria and Italy. The United States has only recently been aroused to the problem of conservation. Yet in this country, “in timber lands the tendency toward consolidation is strong and has gone far toward placing control of such lands in a few hands. It appears that the monopoly is partly in the interest of economy in logging, milling and manufacturing, but chiefly speculative.”* The wastefulness of our forestry system has already been pointed out.*
The policy with regard to mines is not different. While the German States and France find it profitable not only to own but also to operate the mines, England and the United States have disposed of most of their mineral land. Moreover, the tendency of concentration in mine holdings is evident in this country. Especially is this true of the iron mines which is explained by the greater economy of large operations. In oil lands this tendency toward concentration is said to be apparently slight, while in coal lands it is intermediate.*
Now that these important resources have been disposed of by the government, the question of the expediency of repurchasing them arises. To devote a certain sum annually to the repurchase of natural resources as the European countries are doing, is a far different matter than either purchasing or confiscating all the land. Moreover, the operation of mines and forests is different from agricultural production. Especially is this true of forests. The forests under state management in Germany are said to yield considerably greater returns than those under private ownership;* the protection against waste and fires can be better undertaken by publicly trained officials than by the absentee speculator. But while the nature of forest cultivation permits of public ownership, the efficiency of government operation of the mines as compared with private enterprise is doubtful. Yet a few government-owned mines operated whenever the private monopolist unwarrantably raises the price of the mineral, or always operated in competition with the privately owned mines, might be highly advantageous to the consumer. Again we say, unless a sufficient amount of government control can be exercised to prevent the enormous waste and to break up the monopoly (the tendency toward the monoply of natural resources is well established*, public ownership through the policy of repurchase might be found expedient and feasible.
In the case of forest and mineral land, the taxing authority must be governed by other considerations than the withholding of the land from use. To promote the conservation of forests, the levy should be such as to encourage reforestation, at the same time that it prevents a combination of owners of timber land from limiting and controlling the supply with the purpose of keeping prices high. A heavy annual tax on the value of the land only will not tend to encourage forest reserves; and yet, if assessed by expert valuers and uniformly, it would be an improvement over the present system which taxes the value of the trees under haphazard estimates of value. According to an authority on forest taxation. Professor Fairchild,^ the best tax is one based on the yield at the time the trees are cut. This he thinks will encourage the growth of forests, although his discussion discloses numerous difficulties which the proposal involves. Some states, it must be noted, have even subsidized the owners of forests in the interest of conservation, instead of taxing them. Which, then, is the most expedient method? There seems to be one system, which without injury to the lumber industry in any way, and while aiding the conservation of forests, would yet secure to the state a share of the landowner’s profits. That method is the taxation of the value increment at the time of transfer of the property. This is on the supposition that the value of the deforested land itself would show an increment over the purchase price.* Taxation, however, will not solve the question of forest conservation. Only by the efforts of the federal government in getting control of a sufficient area on which to grow forests as the European nations are doing, and in this way to compete with the private holders of forest land can we hope that the concentration and private control of timber land will be broken.
The case is somewhat different with mineral land. The value of the mine, as of all land, depends upon a variety of social causes; but it also depends upon the amount and quality of the minerals it contains. Mines are for the most part exhaustible, and the expense of mining increases the deeper the veins are. For this reason the capital value of mines is determined with difficulty. Because of this peculiarity the new English duty calculates the capital value of mines by capitalizing the rental on the basis of twelve and a half years instead of at twenty or more as in the case of other land. Nevertheless, an approximately accurate valuation could be made of a working mine by following the method of rental payments. In England it is customary for the most part to lease the mine to an entrepreneur who pays a “dead rent” for a certain amount of minerals brought to the surface, and a royalty for the excess over that quantity, allowing also for shortages. According to Professor Marshall,* “the royalty itself on a ton of coal, when accurately adjusted represents that diminution in the value of the mine, regarded as a source of wealth in the future, which is caused by taking the ton out of nature’s storehouse.” Granted that the economic rent could be thus computed, this value could be found only when the mine was being worked. To levy a tax on the value of mines, therefore, some plan like the English duty must be devised.* But a tax will not assure the conservation of this class of land. To prevent the monopolization and waste of mines, the opinion is current, only public ownership can be effective enough.
§ 12. Having shown the inadequacy of the tax on land value seriously to check speculation, reduce rents, and ameliorate housing conditions, it is needless to dwell long on the further social benefits which have been loudly proclaimed. Thus, the tax it was claimed would affect industry and the general distribution of wealth. For the exemption of improvements would encourage building operations, and this stimulation in building would promote not only the building trade, but other industries as well. Not only would the employment of capital be aided by the remission of the tax on improvements, but labor too would experience a “boom”; the wages of building employees would tend to rise, the demand for other commodities would be enhanced, production in general would be stimulated, leading to a cheapening of many commodities, whereby the laborer as consumer would again benefit.* In this way the simple reform of taxing the value of land would have within itself the possibility of materially influencing the distribution of wealth, not only diverting some of the value increment, now accruing to the landlord, to the relief of the public budget, but uplifting the working class through better housing, cheaper rents, higher wages, lower prices.
Judging from our study, these hopes appear vain, on the whole. The reason, perhaps, for the failure of the tax to become a reform of wide-reaching influence lies in the harmless nature of the change. It is unreasonable to expect that a two or even three per cent tax on the value of land, or that the remission of such a rate on improvements would, in our complex social system of interacting forces, bring forth the millennium. Nevertheless, as a fiscal measure, its influence towards reform, its tendency to check speculation in land, to relieve congestion, to appropriate some of the value increment for public purposes, and thus to relieve the burden to some extent from industry, outweigh the charge of discrimination against the landowning class, involved in the proposal to put a higher tax on them than they had anticipated at the time of their investment.* Not as a panacea, then, for all social evils and economic maladjustment, although its influence may be beneficial with regard to these, but as a tax must the expediency of the tax on land value be determined.