What Rate?

see also: what percentage?, annual value, ground rent

That is, what percentage of the value of land is it appropriate to apply to that value to say what tax an individual landholder should pay each year?

In part, this is a function of a related question — what percentage of Rent should we collect? But let's accept that we should be collecting roughly 95% of Rent and leaving the other 5% to the landholder.

Estimates generally fall in the 5% to 7% range; that is, that to move from our current approach of taxing land just a little to taking something approaching 95% of rent would mean collecting, initially, about 5% to 7% of what the site would sell for. (Collecting the right amount would reduce the selling price of the land to almost nothing, so the calculation of rent would be handled differently in following years. The value of the land, though, would not be reduced.)

Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894)

II. THE SINGLE TAX AS A FISCAL REFORM

1. DIRECT AND INDIRECT TAXATION

Taxes are either direct or indirect; or, as they have been aptly described, "straight" or "crooked." Indirect taxes are those that may be shifted by the first payer from himself to others; direct taxes are those that cannot be shifted.5

5. "Taxes are either direct or indirect. A direct tax is one which is demanded from the very persons who, it is intended or desired, should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another." — John Stuart Mill's Prin. of Pol. Ec., book v, ch. iii, sec. I.

"Direct taxes are those which are levied on the very persons who it is intended or desired should pay them, and which they cannot put off upon others by raising the prices of the taxed article.. . . Indirect taxes on the other hand are those which are levied on persons who expect to get back the amount of the tax by raising the price of the taxed article." — Laughlin's Elements, par. 249.

Taxes are direct "when the payment is made by the person who is intended to bear the sacrifice." Indirect taxes are recovered from final purchasers. — Jevons's Primer, sec. 96.

"Indirect taxes are so called because they are not paid into the treasury by the person who really bears the burden. The payer adds the amount of the tax to the price of the commodity taxed, and thus the taxation is concealed under the increased price of some article of luxury or convenience." — Thompson's Pol. Ec., sec. 175.

The shifting of indirect taxes is accomplished by means of their tendency to increase the prices of commodities on which they fall. Their magnitude and incidence 6 are thereby disguised. It was for this reason that a great French economist of the last century denounced them as "a scheme for so plucking geese as to get the most feathers with the least squawking."7

6. Jevons defines the incidence of a tax as "the manner in which it falls upon different classes of the population." — Jevons's Primer, sec. 96.
Sometimes called "repercussion," and refers "to the real as opposed to the nominal payment of taxes." — Ely's Taxation, p. 64.

7. Though his language was blunt, the sentiment does not essentially differ from that of "statesmen" of our day who meet all the moral and economic objections to indirect taxation with the one reply that the people would not consent to pay enough or the support of government if public revenues were collected from them directly. This means nothing but that the people are actually hoodwinked by indirect taxation into sustaining a government that they would not support if they knew it was maintained at their expense; and instead of being a reason for continuing indirect taxation, would, if true, be one of the strongest of reasons for abolishing it. It is consistent neither with the plainest principles of democracy nor the simplest conceptions of morality.

Indirect taxation costs the real tax-payers much more than the government receives, partly because the middlemen through whose hands taxed commodities pass are able to exact compound profits upon the tax,8 and partly on account of extraordinary expenses of original collection;9 it favors corruption in government by concealing from the people the fact that they contribute to the support of government; and it tends, by obstructing production, to crush legitimate industry and establish monopolies.10 The questions it raises are of vastly more concern than is indicated by the sum total of public expenditures.

8. A tax upon shoes, paid in the first instance by shoe manufacturers, enters into manufacturers' prices, and, together with the usual rate of profit upon that amount of investment, is recovered from wholesalers. The tax and the manufacturers' profit upon it then constitute part of the wholesale price and are collected from retailers. The retailers in turn collect the tax with all intermediate profits upon it, together with their :usual rate of profit upon the whole, from final purchasers -- the consumers of shoes. Thus what appears on the surface to be a tax upon shoe manufacturers proves upon examination to be an indirect tax upon shoe consumers, who pay in an accumulation of profits upon the tax considerably more than the government receives.

The effect would be the same if a tax upon their leather output were imposed upon tanners. Tanners would add to the price of leather the amount of the tax, plus their usual rate of profit upon a like investment, and collect the whole, together with the cost of hides, of transportation, of tanning and of selling, from shoe manufacturers, who would collect with their profit from retailers, who would collect with their profit from shoe consumers. The principle applies also when taxes are levied upon the stock or the sales of merchants, or the money or credits of bankers; merchants add the tax with the usual profit to the prices of their goods, and bankers add it to their interest and discounts.

For example; a tax of $100,000 upon the output of manufacturers or importers would, at 10 per cent as the manufacturing profit, cost wholesalers $110,000; at a profit of 10 per cent to wholesalers it would cost retailers $121,000, and at 20 percent profit to retailers it would finally impose a tax burden of $145,200 — being 45 per cent more than the government would get. Upon most commodities the number of profits exceeds three, so that indirect taxes may frequently cost as much as 100 per cent, even when imposed only upon what are commercially known as finished goods; when imposed upon materials also, the cost of collection might well run far above 200 percent in addition to the first cost of maintaining the machinery of taxation.

It must not be supposed, however, that the recovery of indirect taxes from the ultimate consumers of taxed goods is arbitrary. When shoe manufacturers, or tanners, or merchants add taxes to prices, or bankers add them to interest, it is not because they might do otherwise but choose to do this; it is because the exigencies of trade compel them. Manufacturers, merchants, and other tradesmen who carry on competitive businesses must on the average sell their goods at cost plus the ordinary rate of profit, or go out of business. It follows that any increase in cost of production tends to increase the price of products. Now, a tax upon the output of business men, which they must pay as a condition of doing their business, is as truly part of the cost of their output as is the price of the materials they buy or the wages of the men they hire. Therefore, such a tax upon business men tends to increase the price of their products. And this tendency is more or less marked as the tax is more or less great and competition more or less keen.

It is true that a moderate tax upon monopolized products, such as trade-mark goods, proprietary medicines, patented articles and copyright publications is not necessarily shifted to consumers. The monopoly manufacturer whose prices are not checked by cost of production, and are therefore as a rule higher than competitive prices would be, may find it more profitable to bear the burden of a tax that leaves him some profit, by preserving his entire custom, than to drive off part of his custom by adding the tax to his usual prices. This is true also of a moderate import tax to the extent it falls upon goods that are more cheaply transported from the place of production to a foreign market where the import tax is imposed than to a home market where the goods would be free of such a tax — products, for instance, of a farm in Canada near to a New York town, but far away from any Canadian town. If the tax be less than the difference in the cost of transportation the producer will bear the burden of it; otherwise he will not. The ultimate effect would be a reduction in the value of the Canadian land. Examples which may be cited in opposition to the principle that import taxes are indirect, will upon examination prove to be of the character here described. Business cannot be carried on at a loss — not for long.

9. "To collect taxes, to prevent and punish evasions, to check and countercheck revenue drawn from so many distinct sources, now make up probably three-fourths, perhaps seven-eighths, of the business of government outside of the preservation of order, the maintenance of the military arm, and the administration of justice." — Progress and Poverty, book iv, ch: v

10. For a brief and thorough exposition of indirect taxation read George's "Protection or Free Trade," ch. viii, on " Tariffs for Revenue."

Whoever calmly reflects and candidly decides upon the merits of indirect taxation must reject it in all its forms. But to do that is to make a great stride toward accepting the single tax. For the single tax is a form of direct taxation; it cannot be shifted.11

11. This is usually a stumbling block to those who, without much experience in economic thought, consider the single tax for the first time. As soon as they grasp the idea that taxes upon commodities shift to consumers they jump to the conclusion that similarly taxes upon land values would shift to the users. But this is a mistake, and the explanation is simple. Taxes upon what men produce make production more difficult and so tend toward scarcity in the supply, which stimulates prices; but taxes upon land, provided the taxes be levied in proportion to value, tend toward plenty in supply (meaning market supply of course), because they make it more difficult to hold valuable land idle, and so depress prices.

"A tax on rent falls wholly on the landlord. There are no means by which he can shift the burden upon anyone else. . . A tax on rent, therefore, has no effect other than its obvious one. It merely takes so much from the landlord and transfers it to the state." — John Stuart Mill's Prin. of Pol. Ec., book v, ch. iii, sec. 1.

"A tax laid upon rent is borne solely by the owner of land." — Bascom's Tr., p.159.

"Taxes which are levied on land . . . really fall on the owner of the land." — Mrs. Fawcett's Pol. Ec. for Beginners, pp.209, 210.

"A land tax levied in proportion to the rent of land, and varying with every variation of rents, . . . will fall wholly on the landlords." — Walker's Pol. Ec., ed. of 1887, p. 413, quoting Ricardo.

"The power of transferring a tax from the person who actually pays it to some other person varies with the object taxed. A tax on rents cannot be transferred. A tax on commodities is always transferred to the consumer." — Thorold Rogers's Pol. Ec., ch. xxi, 2d ed., p. 285.

"Though the landlord is in all cases the real contributor, the tax is commonly advanced by the tenant, to whom the landlord is obliged to allow it in payment of the rent." — Adam Smith's Wealth of Nations, book v, ch. ii, part ii, art. i.

"The way taxes raise prices is by increasing the cost of production and checking supply. But land is not a thing of human production, and taxes upon rent cannot check supply. Therefore, though a tax upon rent compels land-owners to pay more, it gives them no power to obtain more for the use of their land, as it in no way tends to reduce the supply of land. On the contrary, by compelling those who hold land on speculation to sell or let for what they can get, a tax on land values tends to increase the competition between owners, and thus to reduce the price of land." — Progress and Poverty, book viii, ch. iii, subd. i.

Sometimes this point is raised as a question of shifting the tax in higher rent to the tenant, and at others as a question of shifting it to the consumers of goods in higher prices. The principle is the same. Merchants cannot charge higher prices for goods than their competitors do, merely because they pay higher ground rents. A country storekeeper whose business lot is worth but few dollars charges as much for sugar, probably more, than a city grocer whose lot is worth thousands. Quality for quality and quantity for quantity, goods sell for about the same price everywhere. Differences in price are altogether in favor of places where land has a high value. This is due to the fact that the cost of getting goods to places of low land value, distant villages for example, is greater than to centers, which are places of high land value. Sometimes it is true that prices for some things are higher where land values are high. Tiffany's goods, for instance, may be more expensive than goods of the same quality at a store on a less expensive site. But that is not due to the higher land value; it is because the dealer has a reputation for technical knowledge and honesty (or has become a fad among rich people), for which his customers are willing to pay whether his store is on a high priced-lot or a low-priced one.

Though land value has no effect upon the price of good, it is easier to sell goods in some locations than in others. Therefore, though the price and the profit of each sale be the same, or even less, in good locations than in poorer ones, aggregate receipts and aggregate profits are much greater at the good location. And it is out of his aggregate, and not out of each profit, that rent is paid, For example: A cigar store on a thoroughfare supplies a certain quality of cigar for fifteen cents. On a side street the same quality of cigar can be bought no cheaper. Indeed, the cigars there are likely to be poorer, and therefore really dearer. Yet ground rent on the thoroughfare is very high compared with ground rent on the sidestreet. How, then, can the first dealer, he who pays the high ground rent, afford to sell as good or better cigars for fifteen cents than his competitor of the low priced location? Simply because he is able to make so many more sales with a given outlay of labor and capital in a given time that his aggregate profit is greater. This is due to the advantage of his location, and for that advantage he pays a premium in higher ground rent. But that premium is not charged to smokers; the competing dealer of the side street protects them. It represents the greater ease, the lower cost, of doing a given volume of business upon the site for which it is paid; add if the state should take any of it, even the whole of it, in taxation, the loss would be finally borne by the owner of the advantage which attaches to that site — by the landlord. Any attempt to shift it to tenant or buyer would be promptly checked by the competition of neighboring but cheaper land.

"A land-tax, levied in proportion to the rent of land, and varying with every variation of rent, is in effect a tax on rent; and as such a tax will not apply to that land which yields no rent, nor to the produce of that capital which is employed on the land with a view to profit merely, and which never pays rent; it will not in any way affect the price of raw produce, but will fall wholly on the landlords." — McCulloch's Ricardo (3d ed.), p. 207

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 ... read the book

Charles B. Fillebrown: A Catechism of Natural Taxation, from Principles of Natural Taxation (1917)

Q10. What is the distinction between the taxation of land and the taxation of rent?
A. Taxing land means, in the ordinary use of the words, to tax the land upon its capital value, or selling value, at a given rate per $100 or $1,000 of that value. Taxing rent means taxing the annual value, or ground rent, at a given percentage of that rent. It is in one case a tax on rent; in the other is a tax on capitalized rent.

Q15. What should be the limit of revenue under the single tax?
A. The same as under any other system of taxation, the cost of government economically administered.

Q16. Did not Henry George hold that the full ground rent of land should be taken in taxation?
A. No! Not only did he concede a margin of rent to the landlord, but as a matter of fact, as Thomas G. Shearman said, "not all the power of all governments" could collect in taxation all of ground rent.

Q40. What is meant by a capitalized tax?
A. It is a sum, the interest of which would pay the tax.

Q62.  Would it be wise to take gradually in taxation, say, 1/4, one half, or 3/4 of the future increase in economic rent?
A. One hundred and one professors of political economy have answered "Yes." Twenty-nine have answered "No."

Q63.  How could the single tax be put into operation?
A. By gradually transferring to land all taxes not already on it.

Q64.  How might such a plan be worked out?
A. If fifty cents per thousand should be deducted yearly for 30 years from the rate on all property other than land, the reduction would finally amount to $15 per thousand, and it would then be practically exempt from all taxation.

Q65.  But how could it be worked out in case of the land?
A. Recognizing that a right thing may be done in a wrong way, it is insisted that a right way ought to be found to do a thing that ought to be done. The following is presented as a natural and convenient unit of calculation: To be exact, an average of about 20 percent of the gross ground rent of land is now taken in taxation, for instance, in Boston, as well as for the whole state of Massachusetts. If an additional one percent should be taken each year for 30 years, it would amount at the end of that period to 30 percent, which, added to 20 percent, would make 50 percent, or one half, which is about the average proportion that present taxes levied on all property bear to gross ground rent. Meantime few landowners would feel the change, much less be prejudiced by it.

The following variable illustrations, A, B, and C, make clear.

A "Modus Operandi"

A Increase of Present Tax

 

For instance, applied to the assessment of a specific lot of land for which the user pays a gross ground rent of say ......  $68.00
Of which amount there is taken in taxation, 1915 ..... $18.00

Leaving a net income to the owner of  .... $50.00
The selling value (presumably also the assessed valuation) would be at 5 per cent ... $1,000.00
Proceeding to take yearly from now on 1 per cent additional of the gross ground rent of $68 for a period of thirty years would amount in all to 30 per cent of $68, equal to   .... $20.40
Which, added to the tax already taken .... $18.00
Would give at the end of thirty years, from the $1,000 worth of land alone, everything else being exempted, a total tax of .... $38.40.
Which is not much more than one half of the gross ground rent of ... $68.00

The opening exhibit in detail would stand as follows:
In 1915 the tax on this $1,000 worth of land was $18.00
In 1916 the tax would be $18 plus 68 cents (1 per cent of the gross ground rent, $68); equal to .... $18.68
Reducing the owner's net rent from $50 to $49.32
In 1917 the tax would be $18 plus $1.36 (2 per cent of the $68), totaling .... $19.36
Reducing the owner's net rent from $50 to $48.64,
In 1918 the tax would be $18 plus $2.04 (3 per cent of the $68) or $20.45
Reducing the owner's net rent from $50 to $47.96
In 1945 the tax on the land would be $18 plus $20.40 (30 per cent of the $68) or  ... $38.40
With all improvements exempted.
Reducing the owner's net rent from $50 to $29.60.

B
For a Future Increment Tax

The taking in taxation of any desired proportion of the future increment could be accomplished simply by continuing the present valuation and present rate as constant factors, and making a separate individual assessment of the increment tax after the following or similar formula, according to the proportion to be taken.  For instance, to take in taxation 50 per cent of the future increase:

Year	Valuation	Increment	Rate Per M.	Tax for Each Year
1915	$1,000
1916	$1,040	$40	$25	Tax for year 1916, $1
1915	$1,000
1917	$1,080	$80	25	Tax for year 1917, $2
1915	$1,000
1918	$1,120	$120	25	Tax for year 1918, $3
1915	$1,000
1919	$1,160	$160	25	Tax for year 1919, $4
1915	$1,000
1920	$1,200	$200	25	Tax for year 1920, $5

In applying this formula it would be necessary after the first few years at least to increase the rate to correspond to the decrease in assessed valuation due to this new tax.  For computations upon this and related points, see the Report of the New York City Commission on New Sources of City Revenue (1913), p. 7 and Appendices X to XV.

C
The Assessment of Rent

It should be reiterated that inasmuchas gross ground rent, actual or potential, is the initial factor in getting at the value of land, it cannot be unprofitable to become familiar with a more correct formula as expressed in terms of rent.

Starting with the present unit of annual value for use to take in taxation in 25 years 50 per cent of the future increase in ground rent:

Year	Net Ground Rent	Increment	Percentage of Rent	Tax for Each Year
1915	$50
1916	$52	2	50	Tax for year 1916, $1
1915	$50
1917	54	4	50	Tax for year 1917, $2
1915	$50
1918	56	6	50	Tax for year 1918, $3
1915	$50
1919	58	8	50	Tax for year 1919, $4
1915	$50
1920	60	10	50	Tax for year 1920, $5
1915	$50
1940	100	50	50	Tax for year 1940, $25

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