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Ability to Pay
We frequently talk about "ability to pay" as one of
the criteria for judging a tax. But this page makes the
case that it is an imprecise criterion, and that it is
not as good a criterion as we are used to considering it
to be.
Louis Post: Outlines of Louis F. Post's
Lectures, with Illustrative Notes and Charts (1894)
2. THE TWO KINDS OF DIRECT
TAXATION
Direct taxes fall into two general classes: (1) Taxes
that are levied upon men in proportion to their
ability to pay, and (2) taxes that are levied in
proportion to the benefits received by the
tax-payer from the public. Income taxes are the principal
ones of the first class, though probate and inheritance
taxes would rank high. The single tax is the only
important one of the second class.
There should be no difficulty in choosing between the
two. To tax in proportion to ability to pay, regardless
of benefits received, is in accord with no principle of
just government; it is a device of piracy. The single
tax, therefore, as the only important tax in proportion
to benefits, is the ideal tax.
But here we encounter two plausible objections. One
arises from the mistaken but common notion that men are
not taxed in proportion to benefits unless they pay taxes
upon every kind of property they own that comes under the
protection of government; the other is founded in the
assumption that it is impossible to measure the value of
the public benefits that each individual enjoys. Though
the first of these objections ostensibly accepts the
doctrine of taxation according to benefits,12 yet, as it
leads to attempts at taxation in proportion to wealth,
it, like the other, is really a plea for the piratical
doctrine of taxation according to ability to pay. The two
objections stand or fall together.
12. It is often said, for instance, by
its advocates, that house owners should in justice
contribute to the support of the fire departments that
protect them and it is even gravely argued that houses
are more appropriate subjects of taxation than land;
because they need protection, whereas land needs none.
Read note 8.
Let it once be perceived that the value of the service
which government renders to each individual would be
justly measured by the single tax, and neither objection
would any longer have weight. We should then no more
think of taxing people in proportion to their wealth or
ability to pay, regardless of the benefits they receive
from government than an honest merchant would think of
charging his customers in proportion to their wealth or
ability to pay, regardless of the value of the goods they
bought of him." 13
13. Following is an interesting
computation of the cost and loss to the city of Boston
of the present mixed system of taxation as compared
with the single tax; The computation was made by James
R. Carret, Esq., the leading conveyancer of Boston:
Valuation of Boston, May 1,
1892
Land... ... . .. ...
.. ... .. $399,170,175
Buildings ... ... ... ... ..$281,109,700
Total assessed value of real estate
$680,279,875
Assessed
value of personal estate $213,695,829
.... .... ... ... ... ... ...
... .... .... .... ... .... ...
$893,975,704
Rate of
taxation, $12.90 per $1000
Total tax levy, May 1, 1892 $11,805,036
Amount of taxes levied in respect of the
different subjects of taxation and percentages of the
same:
Land .... .... .... .... $5,149,295 43.62%
Buildings .... .... .. $3,626,295 30.72%
Personal estate .. $2,756,676 23.35%
Polls ... .... ... .... .... ...272,750
2.31%
But to ascertain the total cost to the
people of Boston of the present system of taxation for
the taxable year, beginning May 1, 1892, there should
be added to the taxes assessed upon them what it cost
them to pay the owners of the land of Boston for the
use of the land, being the net ground rent, which I
estimate at four per cent on the land value.
Total tax levy, May 1, 1892 ... ...
... ... .... .... .... .... .... ..... .... .... ....
.... .... .... ..$11,805,036
Net ground rent, four percent, on the land value
($399,170,175)..... ... ... ...$15,966,807
Total cost of the present system to
the people of Boston for that year ...
$27,771,843
To contrast this with what the single tax
system would have cost the people of Boston for that
year, take the gross ground rent, found by adding to
the net ground rent the taxation on land values for
that year, being $12.90 per $1000, or 1.29 per cent
added to 4 per cent = 5.29 per cent.
Total cost of present system as
above .. .... .... .... .... .... .... .... ....
....$27,771,843
Single
tax, or gross ground rent, 5.29 per cent on
$399,170,175 ... ..$21,116,102
Excess cost of present system, which
is the sum of
taxes in
respect of buildings, personal property, and polls ....
...... .. $6,655,741
But the present system not only costs the
people more than the single tax would, but produces
less revenue:
Proceeds of single tax ... ... ...
... ..... .... .... ..... .... .... .... ..... .....
.... $21,116,102
Present
tax levy ... ... ... ... ... .... .... .... ..... ....
.... .... .... .... .... ....
....$11,805,036
Loss to
public treasury by present system ... .... .... ....
.... .. ..... ..$9,311,066
This, however, is not a complete contrast
between the present system and the single tax, for
large amounts of real estate are exempt from taxation,
being held by the United States, the Commonwealth, by
the city itself, by religious societies and
corporations, and by charitable, literary, and
scientific institutions. The total amount of the value
of land so held as returned by the assessors for the
year 1892 is $60,626,171.
Reasons can be given why all lands within
the city should be assessed for taxation to secure a
just distribution of the public burdens, which I cannot
take the space to enter into here. There is good reason
to believe also that lands in the city of Boston are
assessed to quite an appreciable extent below their
fair market value. As an indication of this see an
editorial in the Boston Daily Advertiser for
October 3, 1893, under the title, "Their Own
Figures."
The vacant lands, marsh lands, and flats
in Boston were valued by the assessors in 1892 (page 3
of their annual report) at $52,712,600. I believe that
this represents not more than fifty per cent of their
true market value.
Taking this and the undervaluation of
improved property and the exemptions above mentioned
into consideration, I think $500,000,000 to be a fair
estimate of the land values of Boston. Making this the
basis of contrast, we have:
Proceeds of single tax 5.29 per
cent on $500,000,000 ... .... .... ....
$26,450,000
Present tax
levy ... .... ... .... .... .... .... .... ..... ....
.... .... .... ..... .... ....
..$11,805,036
Loss to
public treasury by present system ... ... ... ... ....
.... .... ....$14,644,974
3. THE SINGLE TAX FALLS IN
PROPORTION TO BENEFITS
To perceive that the single tax would justly measure the
value of government service we have only to realize that
the mass of individuals everywhere and now, in paying for
the land they use, actually pay for government service in
proportion to what they receive. He who would enjoy the
benefits of a government must use land within its
jurisdiction. He cannot carry land from where government
is poor to where it is good; neither can he carry it from
where the benefits of good government are few or enjoyed
with difficulty to where they are many and fully enjoyed.
He must rent or buy land where the benefits of government
are available, or forego them. And unless he buys or
rents where they are greatest and most available he must
forego them in degree. Consequently, if he would work or
live where the benefits of government are available, and
does not already own land there, he will be compelled to
rent or buy at a valuation which, other things being
equal, will depend upon the value of the government
service that the site he selects enables him to enjoy. 14
Thus does he pay for the service of government in
proportion to its value to him. But he does not pay the
public which provides the service; he is required to pay
land-owners.
14. Land values are lower in all
countries of poor government than in any country of
better government, other things being equal. They are
lower in cities of poor government, other things being
equal, than in cities of better government. Land values
are lower, for example, in Juarez, on the Mexican side
of the Rio Grande, where government is bad, than in El
Paso, the neighboring city on the American side, where
government is better. They are lower in the same city
under bad government than under improved government.
When Seth Low, after a reform campaign, was elected
mayor of Brooklyn, N.Y., rents advanced before he took
the oath of office, upon the bare expectation that he
would eradicate municipal abuses. Let the city
authorities anywhere pave a street, put water through
it and sewer it, or do any of these things, and lots in
the neighborhood rise in value. Everywhere that the
"good roads" agitation of wheel men has borne fruit in
better highways, the value of adjacent land has
increased. Instances of this effect as results of
public improvements might be collected in abundance.
Every man must be able to recall some within his own
experience.
And it is perfectly reasonable that it
should be so. Land and not other property must rise in
value with desired improvements in government, because,
while any tendency on the part of other kinds of
property to rise in value is checked by greater
production, land can not be reproduced.
Imagine an utterly lawless place, where
life and property are constantly threatened by
desperadoes. He must be either a very bold man or a
very avaricious one who will build a store in such a
community and stock it with goods; but suppose such a
man should appear. His store costs him more than the
same building would cost in a civilized community;
mechanics are not plentiful in such a place, and
materials are hard to get. The building is finally
erected, however, and stocked. And now what about this
merchant's prices for goods? Competition is weak,
because there are few men who will take the chances he
has taken, and he charges all that his customers will
pay. A hundred per cent, five hundred per cent, perhaps
one or two thousand per cent profit rewards him for his
pains and risk. His goods are dear, enormously dear
— dear enough to satisfy the most contemptuous
enemy of cheapness; and if any one should wish to buy
his store that would be dear too, for the difficulties
in the way of building continue. But land is
cheap! This is the type of community in which may
be found that land, so often mentioned and so seldom
seen, which "the owners actually can't give away, you
know!"
But suppose that government improves. An
efficient administration of justice rids the place of
desperadoes, and life and property are safe. What about
prices then? It would no longer require a bold or
desperately avaricious man to engage in selling goods
in that community, and competition would set in. High
profits would soon come down. Goods would be cheap
— as cheap as anywhere in the world, the cost of
transportation considered. Builders and building
materials could be had without difficulty, and stores
would be cheap, too. But land would be dear!
Improvement in government increases the value of that,
and of that alone.
Now, the economic principle pursuant to which
land-owners are thus able to charge their fellow-citizens
for the common benefits of their common government points
to the true method of taxation. With the exception of
such other monopoly property as is analogous to land
titles, and which in the purview of the single tax is
included with land for purposes of taxation, 15 land is
the only kind of property that is increased in value by
government; and the increase of value is in proportion,
other influences aside, to the public service which its
possession secures to the occupant. Therefore, by taxing
land in proportion to its value, and exempting all other
property, kindred monopolies excepted — that is to
say, by adopting the single tax — we should be
levying taxes according to benefits.16
15. Railroad franchises, for example, are
not usually thought of as land titles, but that is what
they are. By an act of sovereign authority they confer
rights of control for transportation purposes over
narrow strips of land between terminals and along
trading points. The value of this right of way is a
land value.
16. Each occupant would pay to his
landlord the value of the public benefits in the way of
highways, schools, courts, police and fire protection,
etc., that his site enabled him to enjoy. The landlord
would pay a tax proportioned to the pecuniary benefits
conferred upon him by the public in raising and
maintaining the value of his holding. And if occupant
and owner were the same, he would pay directly
according to the value of his land for all the public
benefits he enjoyed, both intangible and pecuniary.
And in no sense would this be class taxation. Indeed,
the cry of class taxation is a rather impudent one for
owners of valuable land to raise against the single tax,
when it is considered that under existing systems of
taxation they are exempt. 17 Even the poorest and the
most degraded classes in the community, besides paying
land-owners for such public benefits as come their way,
are compelled by indirect taxation to contribute to the
support of government. But landowners as a class go free.
They enjoy the protection of the courts, and of police
and fire departments, and they have the use of schools
and the benefit of highways and other public
improvements, all in common with the most favored, and
upon the same specific terms; yet, though they go through
the form of paying taxes, and if their holdings are of
considerable value pose as "the tax-payers" on
all important occasions, they, in effect and considered
as a class, pay no taxes, because government, by
increasing the value of their land, enables them to
recover back in higher rents and higher prices more than
their taxes amount to. Enjoying the same tangible
benefits of government that others do, many of them as
individuals and all of them as a class receive in
addition a tangible pecuniary benefit which government
confers upon no other property-owners. The value of their
property is enhanced in proportion to the benefits of
government which its occupants enjoy. To tax them alone,
therefore, is not to discriminate against them; it is to
charge them for what they get.18
17. While the landholders of the City of
Washington were paying something less than two per cent
annually in taxes, a Congressional Committee
(Report of the Select Committee to Investigate Tax
Assessments in the District of Columbia, composed of
Messrs. Johnson, of Ohio, Chairman, Wadsworth, of New
York, and Washington, of Tennessee. Made to the House
of Representatives, May 24, 1892. Report No.
1469), brought out the fact that the value of
their land had been increasing at a minimum rate of ten
per cent per annum. The Washington land-owners as a
class thus appear to have received back in higher land
values, actually and potentially, about ten dollars for
every two dollars that as land-owners they paid in
taxes. If any one supposes that this condition is
peculiar to Washington let him make similar estimates
for any progressive locality, and see if the
land-owners there are not favored in like manner.
But the point is not dependent upon
increase in the capitalized value of land. If the land
yields or will yield to its owner an income in the
nature of actual or potential ground rent, then to the
extent that this actual or possible income is dependent
upon government the landlord is in effect exempt from
taxation. No matter what tax he pays on account of his
ownership of land, the public gives it back to him to
that extent.
18. Take for illustration two towns, one
of excellent government and the other of inefficient
government, but in all other respects alike. Suppose
you are hunting for a place of residence and find a
suitable site in the town of good government. For
simplicity of illustration let us suppose that the land
there is not sold outright but is let upon ground rent.
You meet the owner of the lot you have selected and ask
him his terms. He replies:
"Two hundred and fifty dollars a
year."
"Two hundred and fifty dollars a year! "
you exclaim. "Why, I can get just as good a site in
that other town for a hundred dollars a year."
"Certainly you can," he will say. "But if
you build a house there and it catches fire it will
burn down; they have no fire department. If you go out
after dark you will be 'held up' and robbed; they have
no police force. If you ride out in the spring, your
carriage will stick in the mud up to the hubs, and if
you walk you may break your legs and will be lucky if
you don t break your neck; they have no street
pavements and their sidewalks are dangerously out of
repair. When the moon doesn't shine the streets are in
darkness, for they have no street lights. The water you
need for your house you must get from a well; there is
no water supply there. Now in our town it is different.
We have a splendid fire department, and the best police
force in the world. Our streets are macadamized, and
lighted with electricity; our sidewalks are always in
first class repair; we have a water system that equals
that of New York; and in every way the public benefits
in this town are unsurpassed. It is the best governed
town in all this region. Isn't it worth a hundred and
fifty dollars a year more for a building site here than
over in that poorly governed town?"
You recognize the advantages and agree to
the terms. But when your house is built and the
assessor visits you officially, what would be the
conversation if your sense of the fitness of things
were not warped by familiarity with false systems of
taxation? Would it not be something like what
follows?
"How much do you regard this house as
worth? " asks the assessor.
"What is that to you?" you inquire.
"I am the town assessor and am about to
appraise your property for taxation."
"Am I to be taxed by this town? What
for?"
"What for?" echoes the assessor in
surprise. "What for? Is not your house protected from
fire by our magnificent fire department? Are not you
protected from robbery by the best police force in the
world? Do not you have the use of macadamized
pavements, and good sidewalks, and electric street
lights, and a first class water supply? Don't you
suppose these things cost something? And don't you
think you ought to pay your share?"
"Yes," you answer, with more or less
calmness; "I do have the benefit of these things, and I
do think that I ought to pay my share toward supporting
them. But I have already paid my share for this year. I
have paid it to the owner of this lot. He charges me
two hundred and fifty dollars a year -- one hundred and
fifty dollars more than I should pay or he could get
but for those very benefits. He has collected
my share of this year's expense of maintaining town
improvements; you go and collect from him. If you do
not, but insist upon collecting from me, I shall be
paying twice for these things, once to him and once to
you; and he won't be paying at all, but will be making
money out of them, although he derives the same
benefits from them in all other respects that I do."
...
Q18. How would you reach the bondholder, or the
man with money alone?
A. Why should we wish to reach him if his bonds or his
money represent labor products to which he has honestly
acquired a just title? This question is a legitimate
offspring of the plundering theory that men should be
taxed according to their ability to pay, the merits of
which are considered on pages 7-9. It is a question which
may also have been suggested by the fact that
"bondholders" and "men of money" are so often men who
have special privileges which coin money for them. There
is a feeling that it would be unfair to allow such
special privileges to escape taxation. It would be. But
inquiry will show that the most important of these
privileges rest in the ownership of land, and that the
"bondholders" and "men of money" whom the questioner
probably has in mind, are in fact great landlords; that
is to say, that their fortunes are really based upon
land. When land values were taxed, the great source of
unearned incomes — land monopoly — would be
practically abolished, and bondholders and men of money
would be only those who earn what they have. Such
property no man of honest instincts should wish to
expropriate. ... read the book
Mason Gaffney: The Taxable Surplus of
Land: Measuring, Guarding and Gathering It
Taxable surplus is also what
you can tax without driving land into the wrong
use. It is not enough that the land supply is
fixed: a tax must not force underuse or other misuse of
the fixed supply.
A great advantage of taxing rent is
that it does not change the ranking of land uses in the
eyes of the landowner. Let me explain.
In a free market, the function of rent is to sort and
arrange land uses: landowners allocate land to those uses
yielding the most net product, or rent. Economists have
shown (and you can easily see) that this is socially
advantageous: the net product is the excess of revenue
over all costs, so land yielding the highest rent is
adding its utmost to the national product.
When you base your tax on the net product (or rent), the
ranking of rival land uses remains the same after-tax as
it was before-tax. That is, if use "A" yields 20% more
rent than use "B", and a tax takes 50% of the rent, then
use A still yields the owner 20% more after-tax than use
B, and the owner still prefers use A. We will see below,
(Section
D), that when you tax something other than rent (say
the Gross Revenue, G), you will drive the land into less
intensive uses, or out of use altogether.
A related advantage of taxing rent is
that you can often levy the tax on the land's
potential to yield rent,
regardless of what use the owner actually chooses.
This is, indeed, a standard way of taxing rent in most
capitalist nations. It is possible because buyers and
sellers trade land based on their careful estimates of
its maximum rent-yielding capability. The tax valuer
observes and records these value data, and uses them to
place a value on all comparable lands. Many books and
manuals and professional journals have been published on
the techniques used: it is a well established art, with
its own professional associations, of which our speaker
Mr. Gwartney is a leading member.
Such a tax is limited to the maximum
possible rent, and so will not exceed a landowner's
ability to pay - provided he uses the land in the most
economical manner (which is not always the most intensive
manner). It will surely not interfere with his using the
land in the best way, but will discourage using it any
other way. ...
When you base a tax on taxable
surplus, and keep the tax proportional to taxable
surplus, you levy taxes without twisting and inverting
the landowner's or land manager's ranking of land
uses. As noted before, the owner's preferred use
after tax remains the same as it would be without any
tax. On the other hand, if you tax on some other basis (Gross
Revenue, for example), you bias the
owner against uses more heavily taxed. To
keep the example simple, and generally realistic, we
assume here that the seller is a "price-taker," meaning
he sells on a world market and cannot raise the price,
and so has no choice but to bear the tax. ... read the whole
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