CHAPTER VIII

METHODS OF REFORMING OUR LAND SYSTEM

In economic and social discussion the word reform is commonly opposed

to the word revolution. It implies modification rather than abolition,

gradual rather than violent change. Hence reforms of the system of

land tenure do not include such radical proposals as those of land

nationalisation or the Single Tax. On the other hand, some extension

of State ownership of land, and some increase in the proportion of

taxes imposed upon land, may quite properly be placed under the head

of reform, inasmuch as they are changes in rather than a destruction

of the existing system.

In general, the reform measures needed are such as will meet the

defects described in the last chapter; namely, monopoly, excessive

gains, and exclusion from the land. Obviously they can be provided

only by legislation; and they may all be included under two heads,

ownership and taxation.

By far the greater part of the more valuable lands of the country are

no longer under the ownership of the State. Urban land is practically

all in the hands of private proprietors. While many millions of acres

of land suitable for agriculture are still under public ownership,

almost all of this area requires a considerable outlay for irrigation,

clearing, and draining before it can become productive. Forty years

ago, three-fourths of the timber now standing was public property; at

present about four-fifths of it is owned by private persons or

corporations.[84] The bulk of our mineral deposits, coal, copper,

gold, silver, etc., have likewise fallen under private ownership, with

the exception of those of Alaska. The undeveloped water power

remaining under government ownership has been roughly estimated at

fourteen million horse power in the national forests, and considerably

less than that amount in other parts of the public domain.[85] This is

a gratifying proportion of the whole supply, developed and

undeveloped, of this national resource, which is said to be somewhere

between 27 and 60 millions horse power.[86] Only about seven million

horse power has yet been developed, almost all of which is privately

owned.

_The Leasing System_

In many countries of Europe it has long been the policy of governments

to retain ownership of all lands containing timber, minerals, oil,

natural gas, phosphate, and water power. The products of these lands

are extracted and put upon the market through a leasing system. That

is; the user of the land pays to the State a rental according to the

amount and quality of raw material which he takes from the storehouse

of nature. Theoretically, the State could sell such lands at prices

that would bring in as much revenue as does the leasing system;

practically, this result has never been attained. The principal

advantages of the leasing arrangement are: to prevent the premature

destruction of forests, the private monopolisation of limited natural

resources (which has happened in the case of the anthracite coal

fields of Pennsylvania) and the private acquisition of exceptionally

valuable land at ridiculously low prices; and to enable the State to

secure just treatment for the consumer and the labourer by

stipulating that the former shall obtain the product at fair prices,

and that the latter shall receive fair wages.

This example should be followed by the United States. All timber,

mineral, gas, oil, and water power lands which have not been alienated

to private persons should remain under government ownership, and be

brought into use through a leasing arrangement which would enable the

private operators to obtain the rates of profit and interest which are

ordinarily yielded by enterprises subject to the same degree of risk.

Happily this policy now seems likely to be adopted. In 1913 a law was

passed by the United States providing for the operation of the coal

mines of Alaska on leases. The amount that can be leased by any person

or corporation is limited to 2560 acres, and the penalty for

attempting to monopolise the product is forfeiture of tenure. The

Secretary of the Interior has urged a similar arrangement for the

development and extraction of water power, coal, oil, gas, phosphate,

sodium, and potassium on the public domain of Continental United

States, and his recommendation will probably be adopted by Congress.

Thus the rent of these lands will go to the whole people instead of to

a comparatively small number of individuals, monopoly of the products

will be made impossible, and our remaining public resources will be

protected from rapid and ruinous exploitation.

To the objection that capitalists will not invest their money in nor

carry on extractive enterprises on a leasing basis, the sufficient

answer is that they are doing it now. In 1909, 24.5 per cent. of all

the lands producing minerals, precious metals, and stone; 94.6 per

cent. of the lands producing petroleum and gas; and 61.2 per cent. of

the two groups of lands combined, were operated under leases from

private owners or from the government.[87] If the rental or royalty

demanded is not unreasonably high capitalists will be quite as

willing to produce raw materials of these kinds from leased land as

they are to manufacture or sell goods in a rented building. Not the

leasing system, but the terms of the particular lease are the

important consideration.

Public grazing lands should remain government property until such time

as they become available for agriculture. Cattle owners could lease

the land from the State on equitable terms, and receive ample

protection for money invested in improvements.

_Public Agricultural Lands_

The leasing system cannot well be applied to agricultural lands. In

order that they may be continuously improved and protected against

deterioration, they must be owned by the cultivators. The temptation

to wear out a piece of land quickly, and then move to another piece,

and all the other obstacles that stand in the way of the Single Tax as

applied to agricultural land, show that the government cannot with

advantage assume the function of landlord in this domain. In the great

majority of cases the State would do better to sell the land in small

parcels to genuine settlers. There are, indeed, many situations,

especially in connection with government projects of irrigation,

clearing, and drainage, in which the leasing arrangement could be

adopted temporarily. It should not be continued longer than is

necessary to enable the tenants to become owners. With this end in

view the State should make loans to cultivators at moderate rates of

interest, as is done in New Zealand and Australia.

Whether the State ought to purchase undeveloped land from private

owners in order to sell it to settlers, may well be doubted. The only

lands to which such a scheme would be at all applicable are large

estates which are held out of use by their proprietors. Even here the

transfer of the land to cultivators could be accomplished indirectly,

through an extra heavy tax. This method has been adopted with success

by Australia and New Zealand. The only other action by the State that

seems necessary or wise in order to place settlers upon privately

owned agricultural land, is the establishment of a comprehensive

system of rural credits. The need of cheaper food products, and the

desirability of checking the abnormal growth of our urban populations,

are powerful additional reasons for the adoption of this policy. The

Hollis Rural Credits Bill recently enacted into law by Congress goes a

considerable way toward meeting these needs.

_Public Ownership of Urban Land_

No city should part with the ownership of any land that it now

possesses. Since capitalists are willing to erect costly buildings on

sites leased from private owners, there is no good reason why any one

should refuse to put up or purchase any sort of structure on land

owned by the municipality. The situation differs from that presented

by agricultural land; for the value of the land can easily be

distinguished from that of improvements, the owner of the latter can

sell them even if he is not the owner of the land, and he cannot be

deprived of them without full compensation. While the lessee paid his

annual rent, his control of the land would be as complete and certain

as that of the landowner who continues to pay his taxes. On the other

hand, the leaseholder could not permit or cause the land to

deteriorate if he would; for the nature of the land renders this

impossible. Finally, the official activities involved in the

collection of the rent and the periodical revaluation of the land,

would not differ essentially from those now required to make

assessments and gather taxes.

The benefits of this system would be great and manifest. Persons who

were unable to own a home because of their inability to purchase land,

could get secure possession of the necessary land through a lease from

the city. Instead of spending all their lives in rented houses,

thousands upon thousands of families could become the owners and

occupiers of homes. The greater the amount of land thus owned and

leased by the city, the less would be the power of private owners to

hold land for exorbitant prices. Competition with the city would

compel them to sell the land at its revenue-producing value instead of

at its speculative value. Finally, the city would obtain the benefit

of every increase in the value of its land by means of periodical

revaluation, and periodical readjustment of rent.

Unfortunately the amount of municipal land available for such an

arrangement in our American cities is negligible. If they are to

establish the system they must first purchase the land from private

owners. Undoubtedly this ought to be done by all large cities in which

the housing problem has become acute, and the value of land is

constantly rising. This policy has been adopted with happy results by

many of the municipalities of France and Germany.[88] At the state

election of 1915 the voters of Massachusetts adopted by an

overwhelming majority a constitutional amendment authorising the

cities of the commonwealth to acquire land for prospective home

builders. In Savannah, Georgia, no extension of the municipal limits

is made until the land to be embraced has passed into the ownership of

the city. Another method is to refrain from opening a new street in a

suburban district until the city has become the proprietor of the

abutting land. Whatever be the particular means adopted, the objects

of municipal purchase and ownership of land are definite and obvious:

to check the congestion of population in the great urban centres, to

provide homes for the homeless, and to secure for the whole community

the socially occasioned increases in land values. Indeed, it is

probable that no comprehensive scheme of housing reform can be

realised without a considerable amount of land purchase by the

municipalities. Cities must be in a position to provide sites for

those home builders who cannot obtain land on fair conditions from

private proprietors.[89]

Turning now from the direct method of public ownership to the indirect

method of reform through taxation, we reject the thoroughgoing

proposals of the Single Taxers. To appropriate all economic rent for

the public treasury would be to transfer all the value of land without

compensation from the private owner to the State. For example: a piece

of land that brought to the owner an annual revenue of one hundred

dollars would be taxed exactly that amount; if the prevailing rate of

interest were five per cent. the proprietor would be deprived of

wealth to the amount of two thousand dollars; for the value of all

productive goods is determined by the revenue that they yield, and

benefits the person who receives the revenue. Thus the State would

become the beneficiary and the virtual owner of the land. Inasmuch as

we do not admit that the so-called social creation of land values

gives the State a moral right to these values, we must regard the

complete appropriation of economic rent through taxation as an act of

pure and simple confiscation.[90]

_Appropriating Future Increases of Land Value_

Let us examine, then, the milder suggestion of John Stuart Mill, that

the State should impose a tax upon land sufficient to absorb all

future increases in its value.[91] This scheme is commonly known as

the appropriation of future unearned increment. Either in whole or in

part it is at least plausible, and is to-day within the range of

practical discussion. It is expected to obtain for the whole

community all future increases in land values, and to wipe out the

speculative, as distinguished from the revenue-producing value of

land. Consequently it would make land cheaper and more accessible than

would be the case if the present system of land taxation were

continued. Before discussing its moral character, let us see briefly

whether the ends that it seeks may properly be sought by the method of

taxation. For these ends are mainly social rather than fiscal.

To use the taxing power for a social purpose is neither unusual nor

unreasonable. "All governments," says Professor Seligman, "have

allowed social considerations in the wider sense to influence their

revenue policy. The whole system of productive duties has been framed

not merely with reference to revenue considerations, but in order to

produce results which should directly affect social and national

prosperity. Taxes on luxuries have often been mere sumptuary laws

designed as much to check consumption as to yield revenue. Excise

taxes have as frequently been levied from a wide social, as from a

narrow fiscal, standpoint. From the very beginning of all tax systems

these social reasons have often been present."[92] Our Federal taxes

on imports, on intoxicating liquors, on oleo-margarine, and on white

phosphorus matches, and many of the license taxes in our

municipalities, as on pedlars, saloon keepers, and dog owners, are in

large part intended to meet social as well as fiscal ends. They are in

the interest of domestic production, public health, and public safety.

The reasonableness of effecting social reforms through taxation cannot

be seriously questioned. While the maintenance of government is the

primary object of taxation, its ultimate end, the ultimate end of

government itself, is the welfare of the people. Now if the public

welfare can be promoted by certain social changes, and if these in

turn can be effected through taxation, this use of the taxing power

will be quite as normal and legitimate as though it were employed for

the upkeep of government. Hence the morality of taxing land for

purposes of social reform will depend entirely upon the nature of the

particular tax that is imposed.

_Some Objections to the Increment Tax_

The tax that we are now considering can be condemned as unjust on only

two possible grounds: first, that it would be injurious to society;

and, second, that it would wrong the private landowner. If it were

fairly adjusted and efficiently administered it could not prove

harmful to the community. In the first place, landowners could not

shift the tax to the consumer. All the authorities on the subject

admit that taxes on land stay where they are put, and are paid by

those upon whom they are levied in the first instance.[93] The only

way in which the owners of a commodity can shift a tax to the users or

consumers of it, is by limiting the supply until the price rises

sufficiently to cover the tax. By the simple device of refusing to

erect more buildings until those in existence have become scarce

enough to command an increase in rent equivalent to the new tax, the

actual and prospective owners of buildings can pass the tax on to the

tenants thereof. By refusing to put their money into, say, shoe

factories, investors can limit the supply of shoes until any new tax

on this commodity is shifted upon the wearers of shoes in the form of

higher prices. Until these rises take place in the rent of buildings

and the price of shoes, investors will put their money into

enterprises which are not burdened with equivalent taxes. But nothing

of this sort can follow the imposition of a new tax upon land. The

supply of land is fixed, and cannot be affected by any action of

landowners or would-be landowners. The users of land and the consumers

of its products are at present paying all that competition can compel

them to pay. They would not pay more merely because they were

requested to do so by landowners who were labouring under the burden

of a new tax. If all landowners were to carry out an agreement to

refrain from producing, and to withhold their land from others until

rents and prices had gone up sufficiently to offset the tax, they

could, indeed, shift the latter to the renters of land and the

consumers of its products. Such a monopoly, however, is not within the

range of practical achievement. In its absence, individual landowners

are not likely to withhold land nor to discontinue production in

sufficient numbers to raise rents or prices. Indeed, the tendency will

be all the other way; for all landowners, including the proprietors of

land now vacant, will be anxious to put their land to the best use in

order to have the means of paying the tax. Owing to this increased

production, and the increased willingness to sell and let land, rents

and prices must fall. It is axiomatic that new taxes upon land always

make it cheaper than it would have been otherwise, and are beneficial

to the community as against the present owners.

In the second place, the tax in question could not injure the

community on account of discouraging investment in land. Once men

could no longer hope to sell land at an advance in price, they would

not seek it to the extent that they now do as a field of investment.

For the same reason many of the present owners would sell their

holdings sooner than they would have sold them if the tax had not been

levied. From the viewpoint of the public the outcome of this situation

would be wholly good. Land would be cheaper and more easy of access to

all who desired to buy or use it for the sake of production, rather

than for the sake of speculation. Investments in land which have as

their main object a rise in value are an injury rather than a benefit

to the community; for they do not increase the products of land, while

they do advance its price, thereby keeping it out of use. Hence the

State should discourage instead of encouraging mere speculators in

land. Whether it is or is not bought and sold, the supply of land

remains the same. The supreme interest of the community is that it

should be put to use, and made to supply the wants of the people.

Consequently the only land investments that help the community are

those that tend to make the land productive. Under a tax on future

increases in value, such investments would increase for the simple

reason that land would be cheaper than it would have been without the

tax. Men who desired land for the sake of its rent or its product

would continue as now to pay such prices for it as would enable them

to obtain the prevailing rate of interest on their investment after

all charges, including taxes, had been paid. Men who wanted to rent

land would continue as now to get it at a rental that would give them

the usual return for their capital and labour.

So much for the effect of the tax upon the community. Would it not,

however, be unjust to the landowners? Does not private ownership of

its very nature demand that increases in the value of the property

should go to the owners thereof? "Res fructificat domino:" a thing

fructifies to its owner; and value-increases may be classed as a kind

of fruit.

In the first place, this formula was originally a dictum of the civil

law merely, the law of the Roman Empire. It was a legal rather than an

ethical maxim. Whatever validity it has in morals must be established

on moral grounds, by moral arguments. It cannot forthwith be assumed

to be morally sound on the mere authority of legal usage. In the

second place, it was for a long time applied only to natural products,

to the grain grown in a field, to the offspring of domestic animals.

It simply enunciated the policy of the law to defend the owner of the

land in his claim to such fruits, as against any outsider who should

attempt to set up an adverse title through mere appropriation or

possession. Thus far, the formula was evidently in conformity with

reason and justice. Later on it was extended, both by lawyers and

moralists, to cover commercial "fruits," such as, rent from lands and

houses, and interest from loans and investments. Its validity in this

field will be examined in connection with the justification of

interest. More recently the maxim has received the still wider

application which we are now considering. Obviously increases in value

are quite a different thing from the concrete fruit of the land, its

natural product. A right to the latter does not necessarily and

forthwith imply a right to the former. In the third place, the formula

in question is not a self evident, fundamental principle. It is merely

a summary conclusion drawn from the consideration of the facts and

principles of social and industrial life. Consequently its validity as

applied to any particular situation will depend on the correctness of

these premises, and on the soundness of the process by which it has

been deduced.

The increment tax is sometimes opposed on the ground that it is new,

in fact, revolutionary. In some degree the charge is true, but the

conditions which the proposal is intended to meet are likewise of

recent origin. The case for this legislation rests mainly on the fact

that, for the first time in the world's history, land values

everywhere show an unmistakable tendency to advance indefinitely. This

means that the landowning minority will be in a position to reap

unbought and continuous benefits at the expense of the landless

majority. This new fact, with its very important significance for

human welfare, may well require a new limitation on the right of

property in land.

It is also objected that to deprive men of the opportunity of

profiting by changes in the value of their land would be an unfair

discrimination against one class of proprietors. But there are good

reasons for making the distinction. Except in the case of monopoly,

increases in the value of goods other than land are almost always due

to expenditures of labour or money upon the goods themselves. The

value increases that can be specifically traced to external and social

influences are intermittent, uncertain, and temporary. Houses,

furniture, machinery, and every other important category of artificial

goods are perishable, and decline steadily in value. Land, however, is

substantially imperishable, becomes steadily scarcer relatively to the

demand, and its value-increases are on the whole constant, certain,

and permanent. Moreover, it is the settled policy of most enlightened

governments to appropriate or to prevent all notable increases in the

value of monopolistic goods, either through special taxation or

through regulation of prices and charges. Taking the increment values

of land is, therefore, not so discriminative as it appears at first

glance.[94]

Another objection is that the proposal would violate the canons of

just taxation, since it would impose a specially heavy burden upon one

form of property. The general doctrine of justice in taxation which is

held by substantially all economists to-day, and which has been taught

by Catholic moralists for centuries, is that known as the "faculty"

theory.[95] Men should be taxed in proportion to their ability to pay,

not in accordance with the benefits that they may be assumed to

receive from the State. And it is universally recognised that the

proper measure of "ability" is not a man's total possessions,

productive and unproductive, but his income, his annual revenue. Now,

the increment tax does seem to violate the rule of taxation according

to ability, inasmuch as it would take all of one species of revenue,

while all other incomes and properties pay only a certain percentage.

All the adherents of the faculty theory maintain, however, that it is

subject to certain modifications. Incomes from interest, rent, and

socially occasioned increases in the value of property should be taxed

at a higher rate than incomes that represent expenditures of labour;

for to give up a certain per cent. of the former involves less

sacrifice than to give up the same per cent. of the latter. Therefore,

increments of land-value may be fairly taxed at a higher rate than

salaries, personal property, or even rent and interest. When, however,

the law absorbs the whole of the value increments, it seems to be

something more than a tax. The essential nature of a tax is to take

only a portion of the particular class of income or property upon

which it is imposed. The nearest approach to the plan of taking all

future increases in land value is to be found in the special

assessments that are levied in many American cities. Thus, the owners

of urban lots are frequently compelled to defray the entire cost of

street improvements on the theory that their land is thereby and to

that extent increased in value. In such cases the contribution is

levied not on the basis of the faculty theory, but on that of the

benefit theory; that is, the owners are required to pay in proportion

to benefits received. All adherents of the faculty theory admit that

the benefit theory is justifiably applied in situations of this kind.

It might be argued that the latter theory can also be fairly applied

to increments of land value that are to arise in the future. In both

cases the owner returns to the State the equivalent of benefits which

have cost him nothing. There is, however, a difference. In the former

case the value increases are specifically due to expenditures made by

the State, while in the latter they are indirectly brought about by

the general activities of the community. We do not admit with the

Single Taxers that this "social production" of value increments

creates a right thereto on the part of either the community or the

civil body; but even if we did we should be compelled to admit that

the two situations are not exactly parallel; for the social production

of increases in the value of land involves no special expenditure of

labour or money. Hence it is very questionable whether the

appropriation of the whole of the future value increments can be

harmonised with the received conceptions and applications of the

canons of taxation.

_The Morality of the Proposal_

However, it is neither necessary nor desirable to justify the proposal

on the mere ground of taxation. Only in form and administration is it

a tax; primarily and in essence it is a method of distribution. It

resembles the action by which the State takes possession of a newly

discovered territory by the title of first occupancy. The future

increases of land value may be regarded as a sort of no man's property

which the State appropriates for the benefit of the community. And the

morality of this proceeding must be determined by the same criterion

that is applied to every other method or rule of distribution; namely,

social and individual consequences. No principle, title, or practice

of ownership, nor any canon of taxation, has intrinsic or metaphysical

value. All are to be evaluated with reference to human welfare. Since

the right of property is not an end in itself, but only a means of

human welfare, its just prerogatives and limitations are determined by

their conduciveness to the welfare of human beings. By human welfare

is meant not merely the good of society as a whole, but the good of

all individuals and classes of individuals. For society is made up of

individuals, all of whom are of equal worth and importance, and have

equal claims to consideration in the matter of livelihood, material

goods, and property. In general, then, any method of distribution, any

modification of property rights, any form of taxation, is morally

lawful which promotes the interests of the whole community, without

causing undue inconvenience to any individual. Whether a given rule of

ownership or method of distribution which is evidently conducive to

the public good is, nevertheless, unduly severe on a certain class of

individuals, is a question that is not always easily answered. Some of

the methods and practices appearing in history were clearly fair and

just, others clearly unfair and unjust, and still others of doubtful

morality. Frequently the State has compelled private persons to give

up their land at a lower price than they paid for it; in more than one

country freebooters and kingly favourites robbed the people of the

land, yet their heirs and successors are recognised by both moralists

and statesmen as the legitimate owners of that land; in Ireland

stubborn landlords are to-day compelled by the British government to

sell their holdings to the tenants at an appraised valuation; in many

countries men may become owners of their neighbours' lands by the

title of prescription, without the payment of a cent of compensation.

All these practices and titles inflict considerable hardship upon

individuals, but most of them are held to be justified on grounds of

social welfare.

Now the public appropriation of all future increments of land value

would evidently be beneficial to the community as a whole. It would

enable all the people to profit by gains that now go to a minority,

and it would enable the landless majority to acquire land more easily

and more cheaply. We have in mind, of course, only those value

increases that are not due to improvements in or on the land, and we

assume that these could be distinguished in practice from the

increments of value that represent improvements. Would the measure in

question inflict undue hardship upon individuals? Here we must make a

distinction between those persons who own land at the time that, and

those who buy land after, the law is enacted.

The only inconvenience falling upon the latter class would be

deprivation of the power to obtain future increases in value. The law

would not cause the value of the land to decline below their purchase

price. Other forces might, indeed, bring about such a result; but, as

a rule, such depreciation would be relatively insignificant, for the

simple reason that it would already have been "discounted" in the

reduction of value which followed the law at the outset. The very

knowledge that they could not hope to profit by future increases in

the value of the land would impel purchasers to lower their price

accordingly. While taking away the possibility of gaining, the law

enables the buyers to take the ordinary precautions against losing.

Therefore, it does not, as sometimes objected, lessen the so called

"gambler's chances." On the other hand, the tax does not deprive the

owners of any value that they may add to the land through the

expenditure of labour or money, nor in any way discourage productive

effort. Now it is, as a rule, better for individuals as well as for

society that men's incomes should represent labour, expenditure, and

saving instead of being the result of "windfalls," or other fortuitous

and conjunctural circumstances. And the power to take future value

increments is not an intrinsically essential element of private

property in land. Like every other condition of ownership, its

morality is determined by its effects upon human welfare. But we have

seen in the last paragraph that human welfare in the sense of the

social good is better promoted by a system of landownership which does

not include this element; and we have just shown that such a system

causes no undue hardship to the individual who buys land after its

establishment. Such is the answer to the contention, noticed a few

pages back, that the landowner has a right to future increments of

value because they are a kind of fruit of his property. It is more

reasonable that he should not enjoy this particular and peculiar

"fruit." Were the increment tax introduced into a new community before

any one had purchased land, it would clearly be a fair and valid

limitation on the right of ownership. Those who should become owners

after the regulation went into effect in an old community would be in

exactly the same moral and economic position. Finally, there exists

some kind of legal precedent for the proposal in the present policy of

efficient governments with regard to the only important increases that

occur in the value of goods other than land; namely, increases due to

the possession of monopoly power. By various devices these are either

prevented or appropriated by the State.

Those persons who are landowners when the increment tax goes into

effect are in a very different situation from those that we have just

been considering. Many of them would undoubtedly suffer injury through

the operation of the measure, inasmuch as their land would reach and

maintain a level of value below the price that they had paid for it.

The immediate effect of the increment tax would be a decline in the

value of all land, caused by men's increased desire to sell and

decreased desire to buy. In all growing communities a part of the

present value of land is speculative; that is, it is due to demand for

the land by persons who want it mainly to sell at an expected rise,

and also to the disinclination of present owners to sell until this

expectation is realised. The practical result of the attitude of these

two classes of persons is that the demand for, and therefore the value

of land is considerably enhanced. Let a law be enacted depriving them

of all hope of securing the anticipated increases in value, and the

one group will cease to buy, while the other will hasten to sell, thus

causing a decline in demand relatively to supply, and therefore a

decline in value and price.

All persons who had paid more for their land than the value which it

came to have as a result of the increment tax law, would lose the

difference. For, no matter how much the land might rise in value

subsequently, the increase would all be taken by the State. And all

owners of vacant land the value of which after the law was passed did

not remain sufficiently high to provide accumulated interest on the

purchase price, would also lose accordingly. To be sure, both these

kinds of losses would exist even if the law should cause no decline in

the value of land, but they would not be so great either in number or

in volume.

Landowners who should suffer either of these sorts of losses would

have a valid moral claim against the State for compensation. Through

its silence on the subject of increment-tax legislation, the State

virtually promised them at the time of their purchases that it would

not thus interfere with the ordinary course of values. Had it given

any intimation that it would enact such a law at a future time, these

persons would not have paid as much for their land as they actually

did pay. When the State passes the law, it violates its implicit

promise, and consequently is under obligation to make good the

resulting losses.

Is it not obliged to go further, and pay for the positive gains that

many of the owners would have reaped in the absence of the law? For

example: a piece of land is worth one thousand dollars the day after

the tax goes into effect, and that was exactly the price paid for it

by the present owner; another piece has the same value, but was bought

by the present owner for eight hundred dollars. While neither of these

men suffer any loss on their investments, they are deprived of

possible gains; for had the law not been enacted their holdings would

be worth, say, eleven hundred dollars. Nevertheless, they are no worse

off in this respect than those persons who buy land after the

increment tax goes into effect, and have no greater claim to

compensation for abolished opportunities of positive gain. As we have

seen above, the certain advantages of the measure to the community,

the doubtful advantages to individuals of profiting by changes in

price which do not represent labour, expense, or saving, show that the

owners have no strict right to compensation. And it is still clearer

that no landowner has a valid claim on account of value increases that

would have taken place subsequent to the time that the measure was

enacted. There is no way by which owners who would have held their

land long enough to profit by these increments can be distinguished

from owners who would not have availed themselves of this conjectural

opportunity, nor any method by which the amount of such gains can be

determined.

On the other hand, it might be objected that, in reimbursing all

owners who suffer the positive losses above described, the State is

unduly generous; for if the law had not been enacted many of the

reimbursed persons would have sold their holdings at a price

insufficient to cover their losses. But these cannot be distinguished

from those who would have sold at a remunerative price. Hence the

State must compensate all or none. The former alternative is not only

the more just all round, but in the long run the more expedient.

In view of the social benefits of the increment tax, especially the

removal of many of the inequities of the present taxing system, the

State might sometimes be justified in making good only a part of the

losses that we have been discussing. But this could probably occur

only for administrative reasons, such as the difficulty of determining

the persons entitled to and the amounts of compensation. It would not

be justified merely to enable the State to profit at the expense of

individuals. And, in any case, there seems to be no good reason why

the unpaid losses should amount to more than a small fraction of the

whole.

In the foregoing pages we have been considering a law which would from

the beginning of its operation take _all_ the future increments of

land value. There is, however, no likelihood that any such measure

will soon be enacted in any country, least of all, in the United

States. What we shall probably see is the spread of legislation

designed to take a part, and a gradual growing part, of value

increases, after the example of Germany and Great Britain. Let us

glance at the laws in force in these two countries.

_The German and British Increment Taxes_

The first increment tax (Werthzuwachssteuer) was established in the

year 1898 in the German colony of Kiautschou, China. In 1904 the

principle of the tax was adopted by Frankfort-am-Main, and in 1905 by

Cologne. By April, 1910, it had already been enacted in 457 cities and

towns of Germany, some twenty of which had a population of more than

100,000 each, in 652 communes, several districts, one principality,

and one grand duchy. In 1911 it was inserted in the imperial fiscal

system, and thus extended over the whole German Empire. While these

laws are all alike in certain essentials, they vary greatly in

details. They agree in taking only a per cent. of the value increases,

and in imposing a higher rate on the more rapid increases. The rates

of the imperial law vary from ten per cent. on increases of ten per

cent. or less to thirty per cent. on increases of 290 per cent. or

over. In Dortmund the scale progresses from one to 12-1/2 per cent.

Inasmuch as the highest rate in the imperial law is 30 per cent., and

in any municipal law (Cologne and Frankfort) 25 per cent.; inasmuch as

all the laws allow deductions from the tax to cover the interest that

was not obtained while the land was unproductive; and inasmuch as only

those increases are taxed which are measured from the value that the

land had when it came into the possession of the present owner,--it is

clear that landowners are not obliged to undergo any positive loss,

and that they are permitted to retain the lion's share of the

"unearned increment."[96]

It is to be noted that most of the German laws are retroactive, since

they apply not merely to future value increases, but to some of those

that occurred before the law was enacted. Thus, the Hamburg ordinance

measures the increases from the last sale, no matter how long ago that

transaction took place. The imperial law uses the same starting point,

except in cases where the last sale occurred before 1885. Accordingly,

a man who had in 1880 paid 2500 marks for a piece of land which in

1885 was worth only 2000 marks, and who sold it for 3000 marks after

the law went into effect, would pay the increment tax on 1000

marks,--unless he could prove that his purchase price was 2500 marks.

In all such cases the burden of proof is on the owner to show that the

value of the land in 1885 was lower than when he had bought it at the

earlier date. Obviously this retroactive feature of the German

legislation inflicts no wrong on the owner, since it does not touch

value increases that he has paid for. Indeed, the value of the land

when it came into the present owner's possession seems to be a fairer

and more easily ascertained basis from which to reckon increases than

any date subsequent to the enactment of the law. On the one hand,

persons whose lands had fallen in value during their ownership would

be automatically excluded from the operation of the law until such

time as the acquisition value was again reached; on the other hand,

those owners whose lands had increased in value before the law went

into effect would be taxed as well as those whose gains began after

that event; thus the law would reach a greater proportion of the

existing beneficiaries of "unearned increment." Moreover, it would

bring in a larger amount of revenue.

The British law formed a part of the famous Lloyd-George budget of

1909. It taxes only those increments that occur after its enactment.

These are subject to a tax of twenty per cent. on the occasion of the

next transfer of the land, by sale, bequest, or otherwise.[97] In some

cases this arrangement will undoubtedly cause hardship. For example:

if land which was bought for 1,000 pounds in 1900 had fallen to 800

pounds in 1909, and were sold for 1,000 pounds in 1915, the owner

would have to pay a tax of twenty per cent. on 200 pounds. This would

mean a net loss of forty pounds, to say nothing of the loss of

interest in case the land was unproductive. It would seem that some

compensation ought to be given here; yet the rarity of such

instances, the administrative difficulties, and the general advantages

of this sort of legislation quite conceivably might forbid the

conclusion that the owner was made to suffer certain injustice. The

compensating social advantages of the increment tax as well as of

other special taxes on land, will receive adequate discussion

presently.

_Transferring Other Taxes to Land_

Another taxation plan for reducing the evils of our land system

consists in the imposition of special taxes on the _present_ value of

land. As a rule, these imply, not an addition to the total tax levy,

but a transfer of taxes from other forms of property. The usual

practice is to begin by exempting either partly or wholly buildings

and other kinds of improvements from taxation, and then to apply the

same measure to certain kinds of personal property. In most cases the

transfer of such taxes to land is gradual, extending over a period of

five, ten, or fifteen years. The plan is in operation in Canada and

Australasia, and to a slight extent in the United States.

It has received its greatest development in the western provinces of

Canada; namely, British Columbia, Alberta, Saskatchewan, and Manitoba.

The cities of Edmonton, Medicine Hat, and Red Deer; Vancouver,

Victoria, and thirteen others of the thirty-three cities of British

Columbia; all the towns of Alberta except two; all but one of the

villages of Alberta, and one-fourth of those in Saskatchewan; all the

rural municipalities and local improvements districts in Alberta,

Manitoba, and Saskatchewan, and 24 of the 28 in British

Columbia,--exempt improvements entirely from taxation. The three

cities in Alberta which retain some taxes on improvements; all the

cities and towns and three-fourths of the villages in Saskatchewan;

the four largest cities in Manitoba; and a considerable number of the

municipalities in Ontario (by the device of illegal under-assessment

in this instance),--tax improvements at less than full value, in some

cases as low as fifteen per cent. Land is invariably assessed at its

full value. It is to be observed that these special land taxes provide

only local revenues; they do not contribute anything to the

maintenance of either the provincial or the dominion governments. The

reason why the local jurisdictions have adopted these taxes so much

more extensively in Alberta than in the other provinces is to be found

in a provincial law enacted in 1912, which requires all towns,

villages, and rural areas to establish within seven years the practice

of exempting from taxation personal property and buildings.

Saskatchewan permits cities and towns to tax improvements up to sixty

per cent. of their value, while British Columbia and Manitoba leave

the matter entirely in the hands of the local authorities. The

provincial revenues are derived from many sources, chiefly real

estate, personal property, and incomes; but British Columbia,

Saskatchewan, and Alberta levy a special tax on unimproved and only

slightly improved rural land. The rate of this "wild lands tax" is in

British Columbia four per cent., and in the other two provinces one

per cent. Some of the municipalities of British Columbia and

Saskatchewan also impose a "wild lands tax." By a law passed in 1913

Alberta levies a provincial tax of five per cent. on the value

increases of non-agricultural lands. A movement for the reduction of

the tax on buildings has developed considerable strength in the

eastern provinces of Ontario, Nova Scotia, and New Brunswick.[98]

New Zealand and most of the states of Australia have for several years

levied special taxes on land, consisting mainly of general rates on

estates of moderate size, and a progressive super tax on large

estates. The Commonwealth of Australia also imposes a tax of one penny

in the pound on the value of land. A considerable proportion of the

cities and towns in both New Zealand and Australia derive practically

all their revenues from land, exempting improvements entirely. In both

countries, however, the bulk of the total revenue is obtained from

other sources than land taxes. In New Zealand they yield less than

thirteen per cent. of the national receipts.[99]

Pittsburgh and Scranton were required by a law enacted in 1913 to

reduce the local tax rate on buildings at such a pace that in 1925 and

thereafter it would be only one-half the highest rate on other forms

of property. Everett, Wash., and Pueblo, Col., within recent years

adopted by popular vote more sweeping measures of the same character,

but the Everett law has never gone into effect, and the Pueblo statute

was repealed two years after it had been passed. In many cities of the

United States, buildings are undervalued relatively to land by the

informal and illegal action of assessors. The most pronounced and best

known instance of this kind is Houston, Texas, where in 1914 land was

assessed at seventy per cent. of its value and buildings at only

twenty-five per cent. In 1915, however, the practice was forbidden by

the courts as contrary to the Texas constitution. At more than one

recent session of the New York legislature, bills have been introduced

providing for the gradual reduction of the tax on buildings in New

York City to a basis of fifty per cent. of their value. While none of

them has been passed, the sentiment in favour of some such measure is

probably increasing. A similar movement of opinion is apparent in many

other sections of the country.

On the whole, the special land taxes of Canada and Australasia are not

remarkably high. They seem to be as low or lower than the average

rates imposed on land, as well as on other forms of general property,

in the United States. In the provinces, the special land taxes provide

only a small portion of the total revenues; in the cities and towns,

there are, as a rule, other sources of revenue as well as land, and

the expenses of municipal government are probably not as high as in

this country. Hence the land taxes of Canada have not reached an

abnormally high level, and are probably lower than most persons who

have heard of them would be inclined to expect. The chief exceptions

to the foregoing statements are to be found in the "wild lands tax" of

British Columbia, and in the land taxes of some of the towns (not the

cities) of Alberta. A rate of four per cent. on unimproved and

slightly improved rural land is extraordinary in fiscal annals, and is

scarcely warranted by any received principle of taxation, although it

may possibly be justified by peculiar social and administrative

conditions in the province of British Columbia. Some of the smaller

towns of Alberta which adopted the land tax during the recent period

of depression have been compelled to impose even higher rates, the

maximum being reached by Castor in 1912, with a rate of 8-1/2 per

cent. As a natural consequence, a large proportion of the land in this

town was surrendered by its owners to the municipality. While this

amazing tax rate is probably temporary, and is likely to be lowered

after the return of the average conditions of prosperity, it inflicts

unfair hardship upon those owners whose circumstances are such that

they must give up their land, instead of awaiting the hoped for

decline in the rate of taxation.

_The Morality of the Plan_

The losses of various kinds that would result from the transfer of

other taxes to land may be thus summarised. Land would depreciate in

value by an amount equal to the capitalised tax. For example; if the

rate of interest were five per cent., an additional tax of one per

cent. would reduce land worth one hundred dollars an acre to eighty

dollars. This decline might, indeed, be partly, wholly, or more than

offset by a simultaneous rise due to economic forces. In any case,

however, the land would be worth twenty dollars less than it would

have been worth had the tax not been imposed. For some owners this

would mean a positive loss; for others it would signify mere failure

to gain. The latter would happen in the case of all those owners who

at any time after the imposition of the tax sold their land at as high

a price as they had paid for it. Not all of the owners whose land was

forced by the tax to a figure below their purchase price would suffer

positive loss; for the land might subsequently rise in value

sufficiently to wipe out the unfavourable difference. In this respect

a special tax on the present value of land has a different effect from

a tax that appropriates all the future value increases. Only those

owners who actually sold their land below their purchase price could

charge the former tax with inflicting upon them positive losses. In

the case of the land exemplified above, the owner who sold at ninety

dollars per acre could properly attribute to the tax a loss of ten

dollars; the owner who sold at eighty dollars would have a grievance

amounting to twenty dollars; and a loss would be suffered by any owner

who sold for less than eighty dollars. In the second place, all owners

of vacant land who sold at a price insufficient to provide for

accumulated interest on the purchase price, could justly hold the tax

responsible, so long as the deficiency did not exceed the

value-depreciation caused by the tax. Thirdly, all persons whose land

had an unusually high value relatively to the value of their exempted

property, would suffer losses as taxpayers. They would lose more

through the heavier land taxes than they would gain through the

lighter taxes, or the absence of taxes, on their other property.

To compensate all owners who underwent these three kinds of losses

would be practically impossible. The number of persons would be too

large, the difficulty of proving many of the claims would be too

expensive, and the compensation process would be too long drawn out,

since it would have to continue until the death of all persons who had

owned land when the last instalment of the increased land taxes went

into effect. Therefore, the losses in question must be counterbalanced

by other and indirect methods. These will be found mainly in the

following considerations: the amount of the new taxes; the gradual

method of imposing them; and their socially beneficial results.

_Amount of Taxes Practically Transferable_

According to Professor King's computations, the total rent of land in

the United States in 1910 was $2,673,900,000, while the total

expenditures of national, state, county and city governments were

$2,591,800,000.[100] In his opinion (p. 162) "the rent would have been

barely sufficient to pay off the various governmental budgets as at

present constituted, and with the growing concentration of activities

in the hands of the government, it appears that rent will soon be a

quantity far too small to meet the required changes. With increasing

pressure on our natural resources, however, it is probable that the

percentage of the total income paid for rent will gradually increase

and, since this is true, the lag behind the growing governmental

expenses will be considerably less than would otherwise be the case."

A change in our fiscal system providing for the immediate derivation

of all revenues from land taxes would, therefore, involve the

confiscation of all rent, and the destruction of all private land

values. Land would be worth nothing to the owners when its entire

annual return was taken by the State in the guise of taxes. Even if

the process of imposing the new taxes on land were extended over a

long term of years the same result would be reached in the end; for

whatever increase had taken place in the economic value of land during

the process would in all probability have been neutralised by the

increase in governmental expenditures. It is evident, therefore, that

the proposal to put _all_ taxes on land must be rejected on grounds of

both morals and expediency.

Let us suppose that all national revenues continued, as now, to be

raised from other sources than land, and that all state, county, and

city revenues remained as they are, except those derived from the

general property tax. This would mean that all the following taxes

would be unchanged: all federal taxes, the taxes on licenses of all

kinds, all taxes on business, incomes, and inheritances, and all

special property taxes. If, then, the whole of the general property

tax were concentrated on land; that is, if all the taxes on

improvements and on all forms of personal property were legally

shifted to land,--the entire revenue to be raised from land would in

1912 have amounted to $1,349,841,038.[101] This is slightly more than

one-half of Professor King's estimate of the total rent for 1910,

which was $2,673,900,000. But this figure equals four per cent. of the

land values of the country; hence the concentration of the general

property tax on land would mean a tax rate of two per cent. on the

full value of the land.

How much would this change increase the present rate of land taxes,

and decrease existing land values? While no accurate and definite

answer can be given to either of these questions, certain

approximations can be attempted which should be of considerable

service.

In 1912 the average tax rate on the assessed valuation of all goods

subject to the general property tax was .0194, or $19.40 per thousand

dollars.[102] The assessed valuation of taxed real property and

improvements (land, buildings, and other improvements) was nearly

fifty-two billion dollars, while the true value of the same property

was nearly ninety-eight and one-half billions.[103] Consequently, the

actual tax rate of .0194 on the assessed valuation was exactly one per

cent. on the true value of real estate. On the assumption that both

land and improvements were undervalued to the same extent, the land

tax was one per cent. of the full value of the land. If now we take

Thomas G. Shearman's estimate, that land values form sixty per cent.

of the total value of real estate, we find that the taxes derived from

land constituted only forty-four per cent. of the total revenues

raised by the general property tax. To concentrate the whole of the

general property tax on land, by transferring thereto the taxes on

improvements and on personal property, would, accordingly, cause the

land tax to be somewhat more than doubled. It would be slightly above

two per cent. on the full value of the land. This is the same estimate

that we obtained above by a different process; that is, by comparing

Professor King's estimate of land value and rent with the total

revenues derived from the general property tax.

However, it is not improbable that sixty per cent. is too low an

estimate of the ratio of land values to entire real estate values. In

1900, farm land and improvements, exclusive of buildings, formed 78.6

per cent. of the value of real estate, i.e., land, improvements, and

buildings. In 1910, the per cent. was a little less than 82. Now it is

quite unlikely that the value of non-building improvements on farms

amounted to the difference between sixty per cent. and seventy-eight

per cent. in 1900, or between sixty per cent. and eighty-two per cent.

in 1910. Hence the value of farm land is something more than sixty per

cent. of farm real estate. On the other hand, the value of factory

land in 1900 formed only 41.5 per cent. of the total value of factory

land and buildings, while the value of city and town lots in five

rural states varied from 34 to 62 per cent. of this species of real

estate.[104] In Greater New York land constitutes 61 per cent. of real

estate values.[105] Owing to the lack of data, the average ratio for

all kinds of real estate for the whole country is impossible of

determination. If the estimate of seventy per cent. be adopted, which

is probably the upper limit of the average proportion between land

values and real estate values throughout the country, the portion of

the general property tax now paid by land amounts to about fifty-two

per cent. Consequently the imposition of the whole general property

tax on land would not quite double the present rate on land. To the

first of the two questions raised above the answer can be given with a

fair amount of confidence that the transfer of improvement and

personal property taxes to land would cause land taxes to be about

twice what they are at present.

To the second question, concerning the extent to which land values

would fall in consequence of the heavier taxes, the answer must be

somewhat less definite. The added land taxes would be about one-half

the present general property taxes, or $675,000,000. This is about one

per cent. the total land values of the country. One per cent. of land

values capitalised at five per cent. represents a depreciation of

twenty per cent. in the value of land; capitalised at four per cent.,

it represents a depreciation of twenty-five per cent. For example; if

land worth one hundred dollars an acre returns to its owner a net

income of five dollars annually, the appropriation of one dollar by a

new tax will leave a net revenue of only four dollars; capitalised at

the current rate of five per cent., this represents only eighty

dollars of land value, or a depreciation of twenty per cent. If the

land has the same value of one hundred dollars, and still yields only

four dollars revenue, a deduction of one dollar in new taxes will

leave only three dollars net; capitalised at the current rate of four

per cent., this represents only seventy-five dollars of land value, or

a depreciation of twenty-five per cent. Using the other method of

calculation, which estimated the present tax rate on the full value of

land at one per cent., we get exactly the same results; namely, the

new tax is one per cent., which is equivalent to a depreciation of

twenty per cent. or of twenty-five per cent., according as we assume

an interest rate of five per cent. or of four per cent. Suppose,

however, that the assessors do not undervalue land to the extent that

we have been assuming; suppose that the present rate of .0194 on

assessed valuation is equivalent to, not merely one per cent., but one

and one-half per cent. of the full value of land. In that hypothesis

the additional tax would likewise be one and one-half per cent., which

capitalised at five per cent, would represent a depreciation of thirty

per cent., and at four per cent. a depreciation of thirty-seven and

one-half per cent. Combining in one generalisation the various

suppositions made in this paragraph, we estimate the depreciation of

land values resulting from the proposed tax transfer as somewhere

between twenty and forty per cent.

We have considered two hypothetical transfers of taxes to land. The

first we found to be out of the question because it would appropriate

the whole of the rent and destroy all private land values. The second

would apparently amount to two per cent. of the value of land, and

cause land values to depreciate from twenty to forty per cent. It is

unnecessary to consider the probable effects of any plan that would

involve heavier land taxes than the second; that is, the scheme of

imposing all the general property tax on land; for it represents the

extreme feasible and fair limit of the movement within, at any rate,

the next fifteen or twenty years.

Even this degree of tax transference would be unjust to the landowners

if it were brought about at once. No social or other considerations

exist that would justify a depreciation in land values of from twenty

to forty per cent. If, however, the process were extended over a

period of, say, twenty years, the decline would be only one or two per

cent. annually, which is considerably less than the rate at which farm

lands and the land in large cities have risen in value during recent

years. Under such an arrangement the great majority of owners would

probably find that the depreciation caused by the heavier land taxes,

had been more than offset by the upward tendency resulting from the

increased demand for land.

Nevertheless, there would still be positive losses of the three kinds

described a few pages back; namely, to owners who sold land below the

price that they had paid for it; to owners who sold vacant land at a

price insufficient to cover accumulated interest on the investment;

and to owners whose aggregate tax burdens were increased. Some degree

of each of these sorts of losses would be due specifically to the new

land taxes. As noted above, public compensation in all such cases

would be impracticable. Consequently the justification of a law that

inflicts such losses must be found, if it exists, in social

considerations.

_The Social Benefits of the Plan_

These may be summed up under three heads: making land easier to

acquire; cheapening the products and rent of land; and reducing the

burdens of taxation borne by the poorer and middle classes. An

increase in the tax on land would reduce its value and price, or at

least cause the price to be lower than it would have been in the

absence of the tax. This does not mean that land would be more

profitable to the purchaser, since he is enabled to buy it at a lower

price only because it yields him less net revenue, or because it is

less likely to increase in value. The value of land is always

determined by its revenue-producing power, and by its probabilities of

price-appreciation. Consequently, what the purchasers would gain by

the lower price resulting from the new tax, they would lose when they

came to pay the tax itself, and when they found the chances of value

increases diminished. If a piece of land which brings a return of five

dollars a year costs one hundred dollars before the new tax of one per

cent. is imposed, and can be bought for eighty dollars afterward, the

net interest on the purchase price has not changed. It is still five

per cent. Hence the only advantage to the prospective purchaser of

land in getting it cheaper consists in the fact that he can obtain it

with a smaller outlay of capital. For persons in moderate

circumstances this is a very important consideration.

In the second place, higher taxes would cause many existing owners

either to improve their land, in order to have the means of meeting

the added fiscal charges, or to sell it to persons who would be

willing to make improvements. And the desire to erect buildings and

other forms of improvements would be reinforced by the reduction or

abolition of taxes on those kinds of personal property which consist

of building materials. An increase in the rapidity of improvements on

land would mean an increase in the rate at which land was brought into

use, and therefore an unusual increase in the volume of products. This

virtual increase in the supply of land, and actual increase in the

supply of products, would cause a fall in three kinds of prices: the

price of products, the rent of land, and the price of land. The last

named reduction would be distinct from the reduction of land value

caused in the first instance by the imposition of the tax.

In the third place, the reduction, and finally the abolition, of taxes

on improvements and personal property would be especially beneficial

to the poorer and middle classes because they now pay a

disproportionate share of these charges. Lower taxes on dwellings

would mean lower rents for all persons who did not own their homes,

and lower taxes for all owners whose residence values were unusually

large relatively to their land values. And the tendency to lower rents

on dwellings would be reinforced by the lower cost of building

materials resulting, as noted above, from the increased supply and the

lower tax on this form of personal property. Lower taxes on that

species of personal property which consists of consumers' goods, such

as household furniture and wearing apparel, would lessen the present

inequity of taxation because this class of goods is reached to a much

greater extent in the case of the poor than in the case of the rich.

It is not easy to conceal or to undervalue a relatively small number

of simple and standard articles; but diamonds, costly furniture, and

luxurious wardrobes can be either hidden, or certified to the assessor

at a low valuation. As for those forms of personal property which are

of the nature of capital and other profit producing goods, such as

machinery and tools of all kinds, productive animals, money,

mortgages, securities, the stocks of goods held by manufacturers and

merchants, and likewise buildings which are used for productive

purposes,--the taxes on all these kinds of property are for the most

part shifted to the consumer. The latter ultimately pays the tax in

the form of higher prices for food, clothing, shelter, and the other

necessaries and comforts of life.[106] Now a tax on consumption is

notoriously unfair to the poorer and middle classes because it affects

a greater portion of their total expenditures, and takes a larger per

cent. of their income than in the case of the rich. Hence the removal

of the taxes specified in this paragraph would be at once the

abolition of a fiscal injustice, and a considerable assistance to the

less fortunate classes.

All those landowners who occupied rented dwellings would benefit by

the reduction in house rent, and all landowners without exception

would reap some advantage from the reduction or abolition of the taxes

on consumers' goods and on the various forms of producers' goods. It

is not improbable that a considerable proportion of them would gain as

much in these respects as they would lose in the capacity of

landowners.

Would the social benefits summarily described in the foregoing

paragraphs be sufficient to justify the increased land taxes in the

face of the losses that would be undergone by some landowners in the

three ways already specified? In view of our ignorance concerning the

probable amount of benefits on the one hand and losses on the other,

it is impossible to give a dogmatic answer. However, when we reflect

on the manifold social evils that are threatened by a rapid and

continuous increase in land values, and the resulting decrease in the

proportion of the population that can hope to participate in the

ownership of land, we are forced to conclude that some means of

checking both tendencies is urgently necessary for the sake of social

justice and social peace. The project that we have been considering;

namely, the transfer of taxes on improvements and on personal property

to land by a process extending over twenty years, seems to involve a

sufficiently large amount of advantage and a sufficiently small amount

of disadvantage to justify systematic and careful experiment.

_A Supertax on Large Holdings_

Every estate containing more than a maximum number of acres, say, ten

thousand, whether composed of a single tract or of several tracts,

could be compelled to pay a special tax in addition to the ordinary

tax levied on land of the same value. The rate of this supertax

should increase with the size of the estate above the fixed maximum.

Through this device large holdings could be broken up, and divided

among many owners and occupiers. For several years it has been

successfully applied for this purpose in New Zealand and

Australia.[107] Inasmuch as this tax exemplifies the principle of

progression, it is in accord with the principles of justice; for

relative ability to pay is closely connected with relative sacrifice.

Other things being equal, the less the sacrifice involved, the greater

is the ability of the individual to pay the tax. Thus, the man with an

income of ten thousand dollars a year makes a smaller sacrifice in

giving up two per cent. of it than the man whose income is only one

thousand dollars; for the latter case the twenty dollars surrendered

represent a privation of the necessaries or the elementary comforts of

life, while the two hundred dollars taken from the rich man would have

been expended for luxuries or converted into capital. While the

incomes of both are reduced in the same proportion, their

satisfactions are not diminished to the same degree. The wants that

are deprived of satisfaction are much less important in the case of

the richer than in that of the poorer man. Hence the only way to bring

about anything like equality of sacrifice between them is to increase

the proportion of income taken from the former. This means that the

rate of taxation would be progressive.[108]

It is in order to object that the principle of progression should not

be applied to the taxation of great landed estates, since a

considerable part of them is unproductive, and consequently does not

directly affect sacrifice. But the same objection can be urged against

any taxation of unoccupied land. The obvious reply is that the equal

taxation of unproductive with productive land is justified by social

reasons, chiefly, the unwisdom of permitting land to be held out of

use. The same social reasons apply to the question of levying an

exceptionally high tax on large estates, even though they may at

present produce no revenue.

While the tax is sound in principle, it is probably not much needed in

America in connection with agricultural or urban land. Its main sphere

of usefulness would seem to be certain great holdings of mineral,

timber, and water power lands. "There are many great combinations in

other industries whose formation is complete. In the lumber industry,

on the other hand, the Bureau now finds in the making a combination

caused, fundamentally, by a long standing public policy. The

concentration already existing is sufficiently impressive. Still more

impressive are the possibilities for the future. In the last forty

years concentration has so proceeded that 195 holders, many

interrelated, now have practically one-half of the privately owned

timber in the investigation area (which contains eighty per cent. of

the whole). This formidable process of concentration, in timber and in

land, clearly involves grave future possibilities of impregnable

monopolistic conditions, whose far reaching consequences to society it

is now difficult to anticipate fully or to overestimate."[109] In

January, 1916, the Secretary of Agriculture called the attention of

Congress to the fact that a small number of corporations closely

associated in a policy of community of interest were threatening to

secure and exercise a monopoly over the developed water power of the

country. Ninety per cent. of the anthracite coal lands of Pennsylvania

are owned or controlled by some nine railroads acting as a unit in all

important matters. For situations of this kind a supertax on large

estates would seem to hold the promise of a large measure of relief.

To sum up the main conclusions of this very long chapter:

Exceptionally valuable lands, as those containing timber, minerals,

oil, gas, phosphate, and water power, which are still under public

ownership should remain there. Through a judicious system of loans,

deserving and efficient persons should be assisted to get possession

of some land. Municipalities should lease rather than sell their

lands, and should strive to increase their holdings. To take all the

future increases in the value of land would be morally lawful,

provided that compensation were given to owners who thereby suffered

positive losses of interest or principal. To take a small part of the

increase, and to transfer very gradually the taxes on improvements and

on personal property to land, would probably be just, owing to the

beneficial effects upon public welfare. A supertax on large holdings

of exceptionally valuable and scarce land would likewise be beneficial

and legitimate.[110]

REFERENCES ON SECTION I

ASHLEY: The Origin of Property in Land. London; 1892.

LAVELEYE: Primitive Property. London; 1878.

WHITTAKER: The Taxation, Tenure, and Ownership of Land.

London; 1914.

PREUSS: The Fundamental Fallacy of Socialism. St. Louis;

1908.

GEORGE: Progress and Poverty; and A Perplexed Philosopher.

MARSH: Land Value Taxation in American Cities. N. Y.; 1911.

FILLEBROWN: A Single Tax Handbook for 1913. Boston; 1912.

YOUNG: The Single Tax Movement in the United States.

Princeton; 1916.

SHEARMAN: Natural Taxation. N. Y.; 1898.

MATHEWS: Taxation and the Distribution of Wealth. N. Y.;

1914.

CATHREIN: Das Privatgrundeigenthum und seine Gegner.

Freiburg; 1909.

FALLON: Les Plus-Values et l'Impot. Paris; 1914.

NEARING: Anthracite. Philadelphia; 1916.

HAIG: Final Report of the Committee on Taxation of the City

of New York; 1916.

The exemption of Improvements from Taxation in Canada and U.

S.; 1915.

Some Probable Effects of Exemption in City of New York; 1915.

KELLEHER: Private Ownership. Dublin; 1911.

Proceedings of the 1913 Meeting of the American Economic

Association.

U. S. COMMISSIONER OF CORPORATIONS: Reports on the Lumber,

Petroleum, Steel, and Water Power of the United States.

SELIGMAN: Essays in Taxation; Shifting and Incidence of

Taxation; and Progressive Taxation in Theory and Practice.

Also the works of Taussig, Devas, Carver, Pesch, King,

Vermeersch, Willoughby, and the Commission on Industrial

Relations, all of which are cited at the end of the

introductory chapter.

FOOTNOTES:

[84] "Summary of Report of the Commissioner of Corporations on the

Timber Industry in the United States," p. 3.

[85] "Report of the Commissioner of Corporations on Water Power

Development in the United States," pp. 193-195.

[86] Idem, pp. 4, 5.

[87] "Abstract of the Thirteenth Census," p. 552.

[88] Cf. Marsh, "Land Value Taxation in American Cities," p. 95.

[89] Municipal purchase and ownership of land have been advocated by

such a conservative authority as the Rev. Heinrich Pesch, S.J.

"Lehrbuch der Nationaloekonomie," I, 203.

[90] As we shall see in a later chapter, the confiscation and

injustice would be smaller if the State should simultaneously abolish

interest. In any case, the decline in land value resulting from

complete confiscation of rent should be made up to the private owner

by public compensation.

[91] "Principles of Political Economy," book V, ch. 2, sect. v.

[92] "Progressive Taxation in Theory and Practice," 1908, p. 130.

[93] Cf. Taussig, "Principles of Economics," II, 516: Seligman, "The

Shifting and Incidence of Taxation," p. 223.

[94] The "discrimination" objection is put in a somewhat different

form by the Rev. Sydney F. Smith, S.J., in an article in _The Month_,

Sept., 1909, entitled "The Theory of Unearned Increment." His argument

is in substance that if the people of a city can claim the increases

in land values which their presence and activity have occasioned, the

purchasers of food, clothes, books, or concert tickets are equally

justified in claiming that, "having added to the value of the shops

and music halls, they had acquired a co-proprietary right in the

increased value of the owners' stock, and the owners' premises." While

this argument is specifically directed against those who maintain that

the "social production" of values confers a right thereto, it affects

to some extent our thesis that there is a vast difference between

value-increases in land and in other goods. Father Smith seems to

confuse the origination of value with the increase of value. The

presence of consumers is an obvious prerequisite to the existence of

any value at all in any kind of goods, but labour and financial outlay

on the part of the producers of the goods are an equally indispensable

prerequisite. The reason why the value is appropriated by the latter

rather than the former is that this is clearly the only rational

method of distribution. What we are concerned with here, however, is

not this initial or cost-of-production-value of artificial goods, but

the _increases_ in value above this level which are brought about by

external and social influences. Theoretically, the State could as

reasonably take these as the increases in the value of land;

practically, such a performance is out of the question, for the simple

reason that such increases are spasmodic and exceptional. If Father

Smith thinks that "food or clothes, or books, or concert tickets"

regularly advance above the cost-of-production-value, he is simply

mistaken. Since these and other artificial goods bring to their owners

as a rule no socially occasioned increments of value, they and their

owners are in quite a different situation from land and the owners of

land.

[95] Cf. Seligman, "Progressive Taxation in Theory and Practice," part

II, chs. ii and iii; also the classic refutation of the "benefit"

theory by John Stuart Mill in "Principles of Political Economy," book

V, ch. ii, sec. 2. The traditional Catholic teaching on the subject is

compactly stated by Cardinal de Lugo in "De Justitia et Jure," disp.

36; cf. Devas, "Political Economy," p. 594, 2d ed.

[96] Cf. Fallon, "Les Plus-Values et l'Impot," pp. 455, sq.; Paris,

1914; Fillebrown, "A Single Tax Handbook for 1913"; Boston, 1912;

Marsh, "Taxation of Land Values in American Cities," pp. 90-92; New

York, 1911; "The Quarterly Journal of Economics," vols. 22, 24, 25;

"The Single Tax Review," March-April, 1912; "Stimmen aus Maria-Laach,"

Oct., 1907.

[97] See the references in the second last paragraph.

[98] The most comprehensive and reliable account of the special land

taxes in Canada is contained in the report prepared for the Committee

on Taxation of the City of New York, by Robert Murray Haig, Ph.D.,

entitled, "The Exemption of Improvements from Taxation in Canada and

the United States"; New York, 1915. See also Fallon, op. cit., pp.

452-455.

[99] Cf. Fallon, op. cit., pp. 443-452.

[100] "The Wealth and Income of the People of the United States," pp.

158, 143.

[101] "Abstract of Bulletins on Wealth, Debt, and Taxation," p. 16; U.

S. Census, 1913.

[102] Idem, p. 15.

[103] Idem, p. 16; and Bulletin of the Census on "Estimated Valuation

of National Wealth," p. 15.

[104] "Special Report of the Twelfth Census on Wealth, Debt, and

Taxation," pp. 12, 13.

[105] Haig, "Probable Effects of Exemption of Improvements....", p.

23.

[106] Cf. Seligman, "The Shifting and Incidence of Taxation," pp. 187,

245, 272, and all of part II; N. Y., 1899; Taussig, "Principles of

Economics," II, 518-549, and chs. 67-69.

[107] Cf. Fallon, op. cit., pp. 442, sq.

[108] Cf. Vermeersch, "Quaestiones de Justitia," pp. 94-126; Seligman,

"Progressive Taxation in Theory and Practice," pp. 210, 211; Mill,

"Principles of Political Economy," book V, ch. ii, sec. 3.

[109] "Summary of Report of the Commissioner of Corporations on the

Lumber Industry in the United States," p. 8.

[110] Probably the most concrete and satisfactory discussion of the

increment tax and the project to transfer improvement taxes to land,

is that presented in the "Final Report of the Committee on Taxation of

the City of New York"; 1916. It contains brief, though complete,

statements of all phases of the subject, together with concise

arguments on both sides, majority and minority recommendations, a

great variety of dissenting individual opinions, and considerable

testimony by experts, authorities, and other interested persons.

SECTION II

THE MORALITY OF PRIVATE CAPITAL AND INTEREST

CHAPTER IX

THE NATURE AND THE RATE OF INTEREST

Interest denotes that part of the product of industry which goes to

the capitalist. As the ownership of land commands rent, so the

ownership of capital commands interest; as rent is a price paid for

the use of land, so interest is a price paid for the use of capital.

However, the term capital is less definite and unambiguous, both in

popular and in economic usage, than the word land. The farmer, the

merchant, and the manufacturer often speak of their land, buildings,

and chattels as their capital, and reckon the returns from all these

sources as equivalent to a certain per cent. of interest or profit.

This is not technically correct; when we use the terms capital and

interest we should exclude the notions of land and rent.

_Meaning of Capital and Capitalist_

Capital is ordinarily defined as, wealth employed directly for the

production of new wealth. According as it is considered in the

abstract or the concrete, it is capital-value or capital-instruments.

For example, the owner of a wagon factory may describe his capital as

having a value of 100,000 dollars, or as consisting of certain

buildings, machines, tools, office furniture, etc. In the former case

he thinks of his capital as so much abstract value which, through a

sale, he could take out of the factory, and put into other concrete

capital forms, such as a railroad or a jobbing house. In the latter

case he has in mind the particular instruments in which his capital is

at present embodied. The capital-value concept is the more convenient,

and is usually intended when the word capital is used without

qualification. It is also the basis upon which interest is reckoned;

for the capitalist does not measure his share of the product as so

many dollars of rent on his capital-instruments, but as so many per

cent. on his capital-value.

Capitalists are of two principal kinds: those who employ their own

money in their own enterprises; and those who lend their money to

others for use in industry. The former may be called active

capitalists, the latter loan-capitalists. Perhaps a majority of active

capitalists use some borrowed money in their business. To the lenders

of this borrowed money or capital they turn over a part of the product

in the form of interest. When, therefore, interest is defined as the

share of the product that goes to the capitalist, it is the owner of

capital-value rather than of capital-instruments that is meant. For

the man who has loaned 50,000 dollars at five per cent. to the wagon

manufacturer is not, except hypothetically, the owner of the buildings

which have been erected with that money. These are owned (subject

possibly to a mortgage) by the borrower, the active capitalist. But

the abstract value which has gone into them continues to be the

property of the lender. As owner thereof, he, instead of the active

capitalist, receives the interest that is assigned to this portion of

the total capital. Hence interest is the share of the product that is

taken by the owner of capital, whether he employs it himself or lends

it to some one else. While the fundamental reason of interest is the

fact that certain concrete instruments are necessary to the making of

the product, interest is always _reckoned_ on capital-value, and goes

to the owner of the capital-value. It goes to the man whose money has

been put into the instruments, whether or not he is the owner of the

instruments.

_Meaning of Interest_

Interest is the share of the capitalist as capitalist. The man who

employs his own capital in his own business receives therefrom in

addition to interest other returns. Let us suppose that some one has

invested 100,000 dollars of borrowed money and 100,000 dollars of his

own money in a wholesale grocery business. At the end of the year,

after defraying the cost of labour, materials, rent, repairs, and

replacement, his gross returns are 15,000 dollars. Out of this sum he

must pay five thousand dollars as interest on the money that he has

borrowed. This leaves him a total amount of ten thousand dollars, as

his share of the product of the industry. Since he could command a

salary of three thousand dollars if he worked for some one else, he

regards his labour of directing his own business as worth at least

this sum. Deducting it from ten thousand dollars, he has left seven

thousand dollars, which must in some sense be accredited as payment

for the use of his own capital. However, it is not all pure interest;

for he runs the risk of losing his capital, and also of failing to get

the normal rate of interest on it during future unprosperous years.

Hence he will require a part of the seven thousand dollars as

insurance against these two contingencies. Two per cent. of his

capital, or two thousand dollars, is not an excessive allowance. If

the business did not provide him with this amount of insurance he

would probably regard it as unsafe, and would sell it and invest his

money elsewhere. Subtracting two thousand dollars from seven thousand,

we have five thousand left as pure interest on the director's own

capital. This is equivalent to five per cent., which is the rate that

he is paying on the capital that he has borrowed. If he could not get

this rate on his own money he would probably prefer to become a lender

himself, a loan capitalist instead of an active capitalist. This part

of his total share, then, and only this part, is pure interest. The

other two sums that he receives, the three thousand dollars and the

two thousand dollars, are respectively wages for his labour and

insurance against his risks. Sometimes they are classified together

under the general name of profits.

Let us suppose, however, that the gross returns are not 15,000

dollars, but 17,000. How is the additional sum to be denominated? In

strict economic language it would probably be called net profits, as

distinguished from normal or necessary profits, which comprise wages

of direction and insurance against loss. Sometimes it is called

interest. In that case the owner of the store would receive seven

instead of five per cent, on his own capital. Whether the extra two

per cent. (2,000 dollars) be called net profits or surplus interest,

is mainly a matter of terminology. The important thing is to indicate

clearly that these terms designate the surplus which goes to the

active capitalist in addition to necessary profits and necessary

interest.

At the risk of wearisome repetition, one more example will be given to

illustrate the distinction between interest and the other returns that

are received in connection with capital. The annual income from a

railway bond is interest on lender's capital, and consequently pure

interest. Ordinarily the bondholder is adequately protected against

the loss of his capital by a mortgage on the railroad. On the other

hand, the holder of a share of railway stock is a part owner of the

railroad, and consequently incurs the risk of losing his property.

Hence the dividend that he receives on his stock comprises interest on

capital plus insurance against loss. It is usually one or two per

cent. higher than the rate on the bonds. Since the officers and

directors are the only shareholders who perform any labour in the

management of the railroad, only they receive wages of management.

Consequently the gross profits are divided into interest and dividends

at fixed rates, and fixed salaries. When a surplus exists above these

requirements it is not, as a rule, distributed among the stockholders

annually. In railroads, therefore, and many other corporations,

interest is easily distinguished from those other returns with which

it is frequently confused in partnerships and enterprises carried on

by individuals.

_The Rate of Interest_

Is there a single rate of interest throughout industry? At first sight

this question would seem to demand a negative answer. United States

bonds pay about two per cent.; banks about three per cent.; municipal

bonds about four per cent.; railway bonds about five per cent.; the

stocks of stable industrial corporations about six per cent. net; real

estate mortgages from five to seven per cent.; promissory notes

somewhat higher rates; and pawnbrokers' loans from twelve per cent.

upwards. Moreover, the same kind of loans brings different rates in

different places. For example, money lent on the security of farm

mortgages yields only about five per cent. in the states of the East,

but seven or eight per cent. on the Pacific coast.

These and similar variations are differences not so much of interest

as of security, cost of negotiation, and mental attitude. The farm

mortgage pays a higher rate than the government bond partly because it

is less secure, partly because it involves greater trouble of

investment, and partly because it does not run for so long a time. For

the same reasons a higher rate of interest is charged on a promissory

note than on a bank deposit certificate. Again, the lower rates on

government bonds and bank deposits are due in some degree to the

peculiar attitude of that class of investors whose savings are small

in amount, who are not well aware of the range of investment

opportunities, and to whom security and convenience are exceptionally

important considerations. If such persons did not exist the rates on

government bonds and savings deposits would be higher than they

actually are. The higher rates in a new country on, say, farm

mortgages are likewise due in part to psychical peculiarities. Where

men are more speculative and more eager to borrow money for industrial

purposes, the demand for loans is greater relatively to the supply

than in older and more conservative communities. Therefore, the price

of the loans, the rate of interest, is higher.

In one sense it would seem that the lowest of the rates cited above,

namely, that on United States bonds, represents pure interest, and

that all the other rates are interest plus something else.

Nevertheless, the sums invested in these bonds form but a very small

part of the whole amount of money and capital drawing interest, and

they come from persons who do not display the average degree either of

business ability or of willingness to take risks. Hence it is more

convenient and more correct to regard as the standard rate of interest

in any community that which is obtained on first class industrial

security, such as the bonds of railroads and other stable

corporations, and mortgages on real estate. Loans to these enterprises

are subject to what may properly be called the average or prevailing

industrial risks, are negotiated in average psychical conditions, and

embrace by far the greater part of all money drawing interest;

consequently the rate that they command may be looked upon as in a

very real and practical sense normal. While this conception of the

normal rate is in a measure conventional, it accords with popular

usage. It is what most men have in mind when they speak of the

prevailing rate of interest.

The prevailing or standard rate in any community can usually be stated

with a sufficient approach to precision to be satisfactory for all

practical purposes. In all the Eastern States it is now about five per

cent.; in the Middle West it is somewhere between five and six per

cent.; on the Pacific coast it is between six and seven per cent. The

supreme court of Minnesota decided in 1896 that, in view of the actual

rates of interest then obtaining, five per cent. on the reproduction

cost of railroads was a fairly liberal return, and could be adopted by

the state authorities in fixing charges for carrying freight and

passengers.[111] A few years later the Michigan tax commission allowed

the railroads four per cent. on the reproduction cost of their

property, on the ground that investments which yielded that rate in

addition to the usual tax of one per cent. (or five per cent. before

the deduction of the tax) stood at par on the stock market.[112] In

other words, the prevailing rate was five per cent. At the beginning

of the year 1907, the railroad commission of Wisconsin fixed six per

cent. as the return to which the stockholders of railroads were

entitled, because this was about the return which investors generally

were able to get on that kind of security. In the view of the

Commission, the current rate of interest on railroad _bonds_, and

similar investments, was about five per cent.[113] The significance of

these decisions by the public authorities of three states is found not

so much in the particular rates which they sanctioned as in the fact

that they were able to determine a standard or prevailing rate.

Therefore a standard rate exists. At the same time it is interesting

to note that in all three states the rate of industrial interest was

declared to be about the same, that is, five per cent. Perhaps it is

safe to say that, throughout the greater part of the industrial field

of America, five or six per cent. is the prevailing rate of interest.

What causes the rate to be five per cent., or six per cent., or any

other per cent.? Briefly stated, it is the interplay of supply and

demand. Since interest is a price paid for the use of a thing, i.e.,

capital, its rate or level is determined by the same general forces

that govern the price of wheat, or shoes, or hats, or any other

commodity that is bought and sold in the market. The rate is five or

six per cent. because at that rate the amount of money offered by

lenders equals the amount demanded by borrowers. Should the amount

offered at that rate increase without a corresponding increase in the

amount demanded, the rate would fall, just as it would rise under

opposite conditions.

Supply and demand, however, are merely the immediate forces. They are

themselves the outcome or resultant of factors more remote. On the

side of supply, the principal remote forces which regulate the rate of

interest are: the industrial resources of the community, and the

relative strength of its habits of saving and spending. On the side of

demand, the chief ultimate factors are: the productivity of

capital-instruments, the comparative intensity of the social desires

of investing and lending, and the supplies of land, business ability

and labour. Each of these factors exercises upon the rate of interest

an influence of its own, and each of them may be assisted or

counteracted by one or more of the others. Precisely what rate will

result from any given condition of the factors, cannot be stated

beforehand, for the factors cannot be measured in such a way as to

provide a basis for this kind of forecast. All that can be said is

that, when changes occur on the side of either demand or supply, there

will be a corresponding change in the rate of interest, provided that

no neutralising change takes place on the other side.

FOOTNOTES:

[111] "Final Report of the Industrial Commission," pp. 410, 411.

[112] "Report of the Industrial Commission," vol. IX, p. 380.

[113] "Publication No. 32 of the Railroad Commission of Wisconsin,"

pp. 165, 166.

CHAPTER X

THE ALLEGED RIGHT OF LABOUR TO THE ENTIRE PRODUCT OF INDUSTRY

In a preceding chapter we saw that Marxian Socialism is logically

debarred from passing _moral_ judgment upon any social institution or

practice.[114] If social institutions are produced necessarily by

socio-economic forces they are neither morally good nor morally bad.

They are quite as unmoral as rain and snow, verdure and decay,

tadpoles and elephants. Consistent Socialists cannot, therefore,

censure on purely ethical grounds the system of private capital and

interest.

This logical requirement of the theory of economic determinism is

exemplified in much of the rigidly scientific discussions of

Socialists. Marx maintained that the value of commodities is all

determined and created by labour, and that interest is the surplus

which the labourer produces above the cost of his keep; nevertheless

Marx did not formally assert that the labourer has a moral right to

the whole product, nor that interest is theft. He set forth his

theories of value and surplus value as positive explanations of

economic facts, not as an ethical evaluation of human actions. His

object was to show the causes and nature of value, wages, and

interest, not to estimate the moral claims of the agents of

production, or the morality of the distributive process. In his formal

discussion of the theory of value and of surplus value, Marx said

nothing that implied a belief in genuine moral responsibility, or

that contradicted the principles of philosophical materialism and

economic determinism. It is, therefore, quite erroneous to infer that,

since the Marxian theory attributes all value and products to the

action of labour, Marxian Socialists must condemn the interest-taker

as a robber.

Neither Marx nor any other Socialist authority, however, has always

held consistently to this purely positive method of economic

exposition. When they declare that the labourer is "exploited," that

surplus value is "filched" from him, that the capitalist is a

"parasite," etc., they are expressing and conveying distinct moral

judgments. In their more popular writings Socialist authors do not

seriously attempt to observe the logical requirements of their

necessitarian philosophy. They assume the same ethical postulates, and

give expression to the same ethical intuitions as the man who believes

in the human soul and free will.[115] And the great majority of their

followers likewise regard the question of distribution as a moral

question, as a question of justice. In their view the labourer not

only creates all value, but has a just claim to the whole product.

_The Labour Theory of Value_

This doctrine is sometimes formally based upon the Marxian theory of

value, and is sometimes defended independently of that theory. In the

former case its groundwork is about as follows: By eliminating the

factors of utility and scarcity, Marx found that the only element

common to all commodities is labour, and then concluded that labour is

the only possible explanation, creator, and determinant of value.[116]

Since capital, that is, concrete capital, is a commodity, its value is

likewise determined and created by labour. Since it cannot create

value, for only labour has that power, it can contribute to the

product of the productive process in which it is engaged only as much

value as it originally received. Since it is only a reservoir of

value, it cannot transfer more value than it holds and possesses. In

the words of Marx, "the means of production transfer value to the new

product, so far only as during the labour-process they lose value in

the shape of the old use-value. The maximum loss of value that they

can suffer in the process is plainly limited by the amount of the

original value with which they came into the process, or, in other

words, by the labour time necessary for their production. Therefore,

the means of production can ever add more value to the product than

they themselves possess independently of the process in which they

assist. However useful a given kind of raw material, or a machine, or

other means of production may be, though it may cost 150 pounds, or

say 500 days' labour, yet it cannot, under any circumstances, add to

the value of the product more than 150 pounds."[117]

To view the matter from another angle: capital contributes to the

product only sufficient value to pay for its own reproduction. When,

as is the normal usage, the undertaker has deducted from the product

sufficient value or money to replace the deteriorated or worn out

machine, or other concrete capital, all the remaining value in the

product is due specifically to labour.

When, therefore, the capitalist goes further, and appropriates from

the product interest and profits, he takes a part of the value that

labour has created. He seizes the surplus value which labour has

produced in excess of the wages that it receives. In ethical terms, he

robs the labourers of a part of their product.

It is not necessary to introduce any extended refutation of this

arbitrary, unreal, and fantastic argument. "The theory that labour is

the sole source of value has few defenders to-day. In the face of the

overwhelming criticism which has been directed against it, even good

Marxists are forced to abandon it, or to explain it away."[118] It

may, however, be useful to recount very briefly the facts which

disprove the theory. Labour creates some things which have no value,

as wooden shoes in a community that does not desire wooden shoes; some

things have value, exchange value, although no labour has been

expended upon them, as land and minerals; the value of things is

sometimes greater, sometimes less, proportionately, than the labour

embodied in them; for example, paintings by the old masters, and last

year's styles of millinery; and, finally, the true determinants of

value are utility and scarcity. If it be objected that Marx was aware

of these two factors, the reply is that he either restricted them to

the function of conditions rather than efficient causes of value, or

attributed to them an influence that is inconsistent with his main

theory that labour is the sole determinant of value. Indeed, the

contradictions into which Marx was led by the theory are its

sufficient refutation.[119]

With the destruction of the labour theory of value, the Marxian

contention that capital contributes only its own original value to the

product is likewise overthrown. The same conclusion is reached more

directly by recalling the obvious facts of experience that, since the

joint action of both capital and labour is required to bring into

being every atom of the product, each is in its own order the cause of

the whole product, and the proportion of the whole that is

specifically due to the casual influence of either is as incapable of

determination as the procreative contribution of either parent to

their common offspring. The productive process carried on by labour

and capital is virtually an organic process, in which the precise

amount contributed by either factor is unknown and unknowable.

In so far, therefore, as the alleged right of labour to the whole

product is based upon the Marxian theory of value, it has not a shadow

of validity.

_The Right of Productivity_

But the claim is not necessarily dependent upon this foundation. Those

Socialists who have abandoned the labour theory of value can argue

that the labourer (including the active director of industry) is the

only _human_ producer, that the capitalist as such produces nothing,

and consequently has no moral claim to any part of the product.

Whatever theory of value we may adopt, or whether we adopt any, we

cannot annul the fact that interest does not represent labour expended

upon the product by the capitalist.

Nevertheless, this fact does not compel the conclusion that the share

of the product now taken by the capitalist belongs of right to the

labourer. Productivity does not of itself create a right to the

product. It is not an intrinsic title. That is to say, a right to the

product is not inherent in the relation between product and producer.

It is determined by certain extrinsic relations. When Brown makes a

pair of shoes out of materials that he has stolen, he has not a right

to the whole product; when Jones turns out a similar product from

materials that he has bought, he becomes the exclusive owner of the

shoes. The intrinsic relation of productivity is the same in both

cases. It is the difference of extrinsic relation, namely, the

relation between the producer and the material, that begets the

difference between the moral claims of the two producers upon the

product.

The right of the producer is conditioned by certain other and more

fundamental relations. Why has Jones a right to the shoes that he has

made out of materials that he has bought? Not because he needs them;

he is not alone in this condition. The ultimate reason and basis of

his ownership is to be sought in the practical requirements of an

equitable social distribution. Unless men receive an adequate return

for their labour, they will not be able to satisfy their wants in a

regular and sufficient manner. If they are forced to labour for others

without compensation, they are deprived of the opportunity to develop

their personality. They are treated as mere instruments to the welfare

of beings who are not their superiors, but their moral and juridical

equals. Their intrinsic worth and sacredness of personality is

outraged, their essential equality with their fellows is disregarded,

and their indestructible rights are violated. On the other hand, when

a producer, such as Jones, gets possession of his product, he

subordinates no human being to himself, deprives no man of the

opportunity to perform remunerative labour, nor appropriates an

unreasonable share of the common bounty of the earth. He has a right

to his product because this is one of the reasonable methods of

distribution.

In fact, it is the exigencies of reasonable distribution that

constitute the fundamental justification of every title of ownership.

The title of purchase by which a man claims the hat that he wears; the

title of inheritance by which a son claims the house that once

belonged to his father; the title of contract through which a labourer

gets wages, a merchant prices, and a landlord rent,--are all valid

simply because they are reasonable devices for enabling men to obtain

the goods of the earth for the satisfaction of their wants. All titles

of property, productivity included, are conventional institutions

which reason and experience have shown to be conducive to human

welfare. None of them possesses intrinsic or metaphysical

validity.[120]

Therefore, the Socialist cannot establish the right of labour to the

full product of industry until he proves that this so-called right

could be reduced to practice consistently with individual and social

welfare. In other words, he must show that to give the entire product

to the labourer would be a reasonable method of distribution. Now the

arrangement by which the Socialist proposes to award the whole product

of labour is the collective ownership and operation of the means of

production, and the social distribution of the product. If this system

would not enable the labourer and the members of society generally to

satisfy their wants to better advantage than is possible under the

present system, the contention that the labourer has a right to the

entire product of industry falls to the ground. The question will be

considered in the following chapter.

FOOTNOTES:

[114] Cf. Engels, "Socialism: Utopian and Scientific," pp. 45, 46; and

Hillquit-Ryan, "Socialism: Promise or Menace," 103, 104, 143-145.

[115] Cf. Hillquit-Ryan, op. cit., pp. 75, 76.

[116] "Capital," pp. 1-9.

[117] Op. cit., p. 117; Humboldt Edition.

[118] Skelton, "Socialism: A Critical Analysis," pp. 121, 122.

[119] Cf. Skelton, loc. cit.

[120] The exaggerated claims made on behalf of social productivity in

the matter of land values have been examined in a previous chapter.

Similar exaggerations with regard to capital will be considered in

chapter xii.

CHAPTER XI

THE SOCIALIST SCHEME OF INDUSTRY

"Never has our party told the workingman about a 'State of the

future,' never in any way than as a mere utopia. If anybody says: 'I

picture to myself society after our programme has been realised, after

wage labour has been abolished, and the exploitation of men has

ceased, in such and such a manner,--' well and good; ideas are free,

and everybody may conceive the Socialist State as he pleases. Whoever

believes in it may do so; whoever does not, need not. These pictures

are but dreams, and Social Democracy has never understood them

otherwise."[121]

Such is the official attitude of Socialism toward descriptions of its

contemplated industrial organisation. The party has never drawn up nor

approved any of the various outlines of this sort which have been

defended by individual Socialists. It maintains that it cannot

anticipate even the essential factors in the operation of a social and

industrial system which will differ so widely from the one that we

have to-day, and which will be so profoundly determined by events that

are in the nature of the case impossible to prognosticate.

_Socialist Inconsistency_

From the viewpoint of all but convinced Socialists, this position is

indefensible. We are asked to believe that the collective ownership

and operation of the means of production would be more just and

beneficial than the present plan of private ownership and operation.

Yet the Socialist party refuses to tell us how the scheme would bring

about these results; refuses to give us, even in outline, a picture of

the machine at work. As reasonably might we be expected to turn the

direction of industry over to a Rockefeller or a Morgan, making an act

of faith in their efficiency and fairness. We are in the position of a

man who should be advised to demolish an unsatisfactory house, without

receiving any solid assurance that the proposed new one would be as

good. To our requests for specific information about the working of

the new industrial order the Socialists, as a rule, answer in terms of

prophesied results. They leave us in the dark concerning the causes by

which these wonderful results are to be produced.

From the viewpoint of the confirmed Socialist, however, this failure

to be specific is not at all unreasonable. He can have faith in the

Socialist system without knowing beforehand how it will work. He

believes in its efficacy because he believes that it is inevitable. In

the words of Kautsky, "what is proved to be inevitable is proved not

only to be possible, but to be the only possible outcome."[122] The

Socialist believes that his scheme is inevitable because he thinks

that it is necessarily included in the outcome of economic and social

evolution.

Neither the premises nor the conclusion of this reasoning is valid.

The doctrines of economic determinism, the class struggle, the

concentration of capital, the disappearance of the middle classes, the

progressive pauperisation of the working classes, and all the other

tenets of the Socialist philosophy, have been thoroughly discredited

by the facts of psychology, the experience of the last half century,

and the present trend of industrial and social forces.[123] Even if

the Socialist outcome were inevitable, it would not necessarily be an

improvement on the present system. It might illustrate the principle

of retrogression.

Since we cannot make an act of faith in either the inevitableness or

the efficacy of the Socialist industrial scheme, we are compelled to

submit it to the ordinary tests of examination and criticism. We must

try to see what would be the essential structure, elements, and

operation of a system in which the means of production were owned and

managed collectively, and the product socially distributed. In

attempting to describe the system, we shall be guided by what seems to

be inherently necessary to it, and by the prevalent conception of it

among present day Socialists. In this connection we have to observe

that some of the criticisms of the Socialist order attribute to it

elements that are not essential, nor any longer demanded by the

authoritative spokesmen of the movement; for example, complete

confiscation of capital, compulsory assignment of men to the different

industrial tasks, equality of remuneration, the use of labour checks

instead of money, the socialisation of all capital down to the

smallest tool, and collective ownership of homes.

_Expropriating the Capitalists_