Spencer Heath Archive

Item 972

This article was scheduled for publication in The Appraisal Journal, following a first article, “Why Does ‘Valuable’ Land Lie Idle?,” which appeared in Vol.7, No.3, July 1939. But when this follow-up article was submitted, it was rejected for being too controversial.

 

Original is in item 968.

 

WHY LAND VALUE SHOULD NOT BE TAXED

Spencer Heath

 

In a former article it was explained why ‘valuable’ land lies idle. It was there explained that taxation and its derivative political obstacles to the carrying on of business, and thereby making use of valuable resources and desirable locations, is what keeps productive business so restricted in its profits and operations that it cannot utilize any more land or other real estate than it at any time does use, and that this limitation of demand for it is what keeps otherwise valuable land out of use. The idea that “high prices” asked for idle land is what keeps it out of use was shown to be fallacious. And it was demonstrated that heavier taxation of idle land, so far from “forcing it into use,” could only have the ultimate effect of throwing still more land out of use; for the additional taxation would necessarily be a further burden beyond that already borne by the productive business of the community and would thus still further reduce its ability to utilize land.

The question arises, however, of the effect of heavier taxation of the land that is already under occupancy and in productive use — that is, upon land that is rented and yielding ground rent or that, being occupied or utilized by the owner himself, yields to him an equivalent value in its use. A tax on such land is, either actually or in effect, a tax on ground rent. It is often supposed that such a tax cannot be shifted but must be borne out of the income to the landowner himself and that it cannot impair any other interest or value.

It cannot be doubted that such taxation does reduce the selling value of the land. The land owner does suffer a loss of the value proportionate to his loss of income, for no purchaser will take it except at the lower valuation set by the discount of the tax. An example should make this clear:

A tenant pays voluntarily the ground rent that the open market sets as the value of the services that the landlord supplies in merchandising to him the use of the land, and the tenant gets this full value so ascertained. Other tenants also pay the market rate for land value received and thus all are on equal terms and in democratic equality one with another in respect of the occupancy and use of the land. Now let us suppose in a given case the ground rent paid is one thousand dollars and the current rate of funds five per cent. This would set the capital value at twenty thousand dollars. When the policy of taxing land values has advanced until the rate has become say thirty per cent of the rent, the direct effect must be to reduce the net rent of the landlord to seven hundred dollars and the capital ground value from twenty thousand to fourteen thousand dollars. This beyond a doubt would injure the landlord. But it remains to be seen whether this would be an advantage to the tenant, as is so often claimed.

The tenant now can indeed get land cheaply by reason of the reduced capital value at which he can purchase it. He thus becomes his own landlord with the thought of saving his former outlay of rent. It now costs him as owner a carrying charge of five per cent on his purchase — only seven hundred dollars instead of one thousand dollars in rent. But he has also through becoming an owner brought himself under a tax charge upon the reduced valuation which even at a lower rate amounts to at least the three hundred difference between his former rent payment of one thousand dollars and his present carrying charge of seven hundred dollars. And this tax charge, even if his whole outgo should be no greater than before, is laid upon him by a power with whom he does not contract but whom he must obey. He has no free option of a new or altered contract or a new location, and his default will not only jeopardize his possession and capital investment but may deprive him of all his other property as well. This is the situation under which the tenant is brought by the enforcement of tax measures directed against the so-called “unearned income” of the land owner and supposedly for the relief or advantage of the tenant. From a condition of freedom under a voluntarily assumed contractual relationship with the land owner, he has now come into a state of compulsion under tribute to political authority, in which state he suffers grievous wrongs and discriminations unless, being among the favored few, he enjoys special privileges and exemptions to the detriment of the many.

To the extent to which voluntary and contractual rent has been degraded into compulsive taxation or tribute and the non-occupying or absentee land owner thereby eliminated — to that extent the now supposedly independent owner-user has lost his democratic equality with other land owners who may be more favored than he. He has become degraded in his position, dependent upon political intrigue and authority and subjected to despotic power. Let this process continue; let this tax movement against the property and income of land owners go on, as some reformers propose, and then all voluntary payment of rent, all rent itself as such must disappear and the occupancy or non-occupancy of land and the terms and conditions thereof become a matter of purely political and arbitrary determination and inevitable discrimination. Security of possession under respected contracts will then be displaced by privileged adverse possessions and arbitrary exclusions maintained either by entrenched dictatorial authority or by the transient and tenuous political powers that are set up under so-called democratic or popular self-rule.

Notwithstanding that it has been overlooked for so long by the learned and the wise, it is still not possible to maintain any condition of permanent freedom while holding or occupying land under the dispensations of a political authority or in any other wise than under free contractual relationships. Such relationships cannot even begin unless or until there exists a proprietary interest or authority such as private ownership and property in land affords. Public ownership, so called, implies a compulsive single authority over all the sites and resources within its jurisdiction and, therefore, an exclusive and complete monopoly control. The land user, desiring to use some of the community resources and seeking the necessary security of possession, must make his application to a single source, without alternative, and abide by the consent or favor that it grants or by its compulsory decree.

Under the dictatorial state without private property in land, those natural resources or advantages of location most highly desired, with all their natural and economic advantages, would be at the disposal of none but favored persons and groups who would flourish as monopolies against the interest of the popular mass and in the hollow of the dictatorial hand. And under popular governmental forms, the choice locations and resources would go to those interests or groups who, at the particular time, had most corrupted the dominant political power or could most intimidate it by the voting strength of their organized rank and file.

Thus taxation, which admittedly is a grave deterrent when laid on the properties and processes of economic production and exchange, when directed against the institution of private property in land becomes a threat and, if continued, becomes an utter menace against the first and last foundation on which alone it is possible to have any economic equality or for any free institutions to arise or continue to exist. Archaic as it may seem, it is still, as it ever was, profoundly true that the private ownership and allocation of land is the basis, as it is the historic bulwark against inequality or against arbitrary and despotic power.[1]

A civilized population is such only to the extent that its members practice contract and consent, as against the crude relationships of barbarism or of coercion and compulsion to a political power, whatever be the autocratic or however democratic the popular forms. Responsibility to an electorate, to a popular mass, does not secure to the individual any independence in his response to the demands of governmental or political persons. As an individual, his relation to them must be slavish and submissive; when he is organized in groups or special interests, especially when they command political favor and patronage, they become coercive and compulsive. It is only with and through the public proprietors, namely, land owners, that individuals can deal in equality with one another, as free contracting agents, with respect to community sites, resources and advantages and determine, without discrimination, the nature and the measure of the obligations they incur in privately possessing them. Thus by contract and consent, public services and benefits may be obtained upon terms open and equal to all, without prejudice to any private interest or any impairment of equality or public right.[2]

Such are the benefits flowing from the negotiated relationships of landlords and tenants with respect to all the community territory and its public benefits and advantages so far as it is possible for the inhabitants, under their seriously restricted economy, profitably to make use of them. All further inhibitions of production by increasing taxation, and by restrictions on business that taxes are expended to enforce, can only serve to contract the general economy and thus diminish demand for the community sites, resources and advantages no less than for the private capital and labor that would otherwise be employed.

But taxation laid upon land or sites that are in process of being utilized and from which, therefore, the owner receives or enjoys a current return is in reality a tax upon rent and is, in effect, a tax on the sales and purchases of the public security and benefits that make the sites and resources of the community desirable and are essential to their having either utility or value. The taxation of current rent or land-value as a going concern imposes an arbitrary and compulsive technique upon the basic civil and contractual relationship of land lords and free men — upon the natural process by which the community resources and advantages are socially distributed and justly enjoyed. It strikes directly at the foundation of all civil order, freedom and peace. Insidiously, it converts and degrades the voluntary rendering of rent for public values privately received into the compulsive extortion of tribute or taxation by superior crude force. More and more, it reduces the members of society from the state of free men in relationships of free contract to the status of industrial serfs, tax-enslaved and tributary to advancing despotic power, the end of which is the destruction of all land and other values until, as Gibbon, the historian, describes, the civil populations disband to join the barbarians and become even more barbarous than they. The obvious remedy is for real estate owners, and especially land and site owners, to unite upon a policy of providing tax relief for their present and prospective tenants or purchasers. An organized land-owning interest can certainly exert more influence on the public policies of a community than any other organized group. A determined campaign against wasteful and injurious public expenditures would be salutary in almost any community or larger political division. Doubtless, this lack of any strongly organized interest in opposition is what permits the ever-increasing public extravagance to go on unchecked.

Every other legitimate interest, business or profession is engaged in providing valuable services to its clients, patrons or customers. But the landed real estate interest has for its patrons all those whom it serves with the use of land and, thereby, with the permanent resources, public services and community advantages appertaining thereto, and this interest has no other business or function to perform. Upon them alone the population wholly depends for making the community economically inhabitable and for the policing of the so-called community servants to that end. And it is they who, in the consequently increased rents and selling prices, would reap their rich and immediate rewards. By giving first and immediate attention to those taxes that most undermine business profits and confidence, and those whose effects are cumulative and compound, there can be released an enormous demand, now only potential, for the active and productive use of real estate. And the new rents and values thus created by the owners will far exceed any possible cost of the service in procuring the relief to users necessary to generate them.

An active real-estate interest of this kind giving these services of relief will build business and values for itself precisely as the owners of a hotel would do if their occupants and tenants were being harassed into poverty and distress by depredations and extravagances on the part of the community servants of the hotel. And just as the proprietors of the hotel, for sound business reasons, would give their first and most zealous care to the protection of the properties and businesses of their tenants, so will the enlightened owners of real estate best serve themselves by first serving and protecting the interests of those who rent or purchase public services and advantages from them. In any case the vital interest of the proprietors is bound up with that of their tenants on whose prosperity they depend. Tax relief to tenants and occupants, by releasing business activity, extends far beyond the mere amount of the exemption itself, and raises rents and values correspondingly more.[3] Moreover, long before all other than land taxes are abolished, the new business released and the new rents and site values thus created will more than offset all previous taxation of land values. This will, of itself, abolish it as taxation and release it for voluntary application, under properly interested supervision, to the cost of the positive governmental services that raise values and yield rent.

The finally successful relief of real estate lies in constructive services and protection on behalf of its tenants and occupants and in the new revenues and values that will result. In these new revenues are to be found, ultimately, an ample source for the sound and profitable financing of public community services and affairs by the community owners themselves, without any taxation, the same as in any other service or enterprise of a community character that is properly administered under the supervision of those by whom it is consciously owned.