CONCENTRATION OF ECONOMIC POWER

State and local taxes, on the other hand, hover in the vicinity of 10 percent of the aggregate income of each income bracket except the lowest, where they amount to 14 percent of income.

Even if this study presents merely reasonable estimates, it does indicate with a high degree of probability the contemporary tax pattern. It may be regarded as a scouting expedition into unmapped territory in order to delimit known and unknown regions and thereby at least blaze a trail for more thorough expeditions. And the study indeed shows wide blank areas to be filled in.

A further problem of tax distribution inherent in the levy itself was in the analysis of general property taxes. These taxes are a conglomeration of imposts on real and personal, tangible and intangible property. Coverage, assessment methods, tax rates, and exemptions vary from community to community without fiscal logic, and data are most unsatisfactory, since they are either so comprehensive as to embrace all variants of property taxes, regardless of comparability, or else strictly limited, usually on a basis that does not permit extension of estimates.

The part of property taxes imposed oh residential real estate was treated as a specific tax on consumption, i.e., on housing. Therefore, an estimate had to be made of what part of the general property tax is derived from the taxation of residential housing. Preliminary to that, even the broad distinctions between personal and real property taxes, between the share of taxes paid by farmers, by home owners, and by business^ had to be made by way of approximation. For the purpose of the present study, the Department of Commerce, in cooperation with the National Association of Real Estate Boards, conducted a questionnaire survey in early 1940 to obtain data on the above problems, covering a representative sample of urban and a few rural communities.® Barely half the Boards completing these schedules were able to answer the question - and mostly on the basis of expert estimates - as to the relative proportions of general property taxes that were paid on real property generally, on residences owned and rented, and on all business real property. However, certain local studies of a thorough nature made under the auspices of the W P.A., and Census data combined in various ratios, all served as checks on the results derived from the sample study.

The Commerce survey bore out the surmise founded on the spot studies that the share of taxation on residential property to be imputed to the owner-tenant, to the owner who rents out his property (business), and to his tenant, depends largely on local circumstances and housing conditions. Data on farm homes and taxes are more complete, but their use is equally difficult because they show levies and not actual tax collections. Tax delinquencies in the "good" year 1939 still amounted to about 10 percent of taxes levied on general property and always vary sharply as between communities and types of property. (In 1936 delinquencies were near 14 percent.)

The total tax on residences was computed to be over $1,200,000,000, or 34.3 percent of all real-property taxes. This is a minimum figure and is lower than the median and average of the sample survey, which, however, contained a predominance of middle-sized and small cities, with only 2 big cities represented among the metropolises, at least as regards the completed schedules. In view of other calculations and spot studies, and the trend toward homestead exemption, the low value of farm homes, lowered assessments and, often, limitations on tax rates, it was felt inadvisable to select any higher percentage.

It may be mentioned here that regardless of the final disposition of the property-tax burden, it remains an annual outgo for the home owner, to be paid out of other income, and an increase in such taxes has the identical economic effect that any other tax payment by the same consumer unit might have, until a new owner acquires the property at a lower price.

The question of taxes passed on in rentals to low-income groups, and ignorance as to the aggregate proportions of homes owned and rented in such groups, further complicates the allocation. The results of the 1940 Housing Census will be invaluable in clarifying these matters, although some very interesting WPA studies have already shed light on this matter for particular localities.

Part III. - RESULTS

A. FINAL TAX PATTERNS

The tax pattern, despite apparently sharp changes of rate, shifts slowly, especially as regards the tax structure within national-income patterns. Generally speaking, the total American tax pattern is regressive at its lower end, nearly proportionate through all the middle brackets from $1,000 to $5,000, and increasingly progressive from there on.

1. Personal and consumer taxes. -- Personal taxes have become somewhat more important in the total American tax system, furnishing 28.2 percent of. all Federal, State, and local tax revenues in fiscal year 1939, as against 23.2 percent in the fiscal year 1936. As a percentage of consumer income, they rose from 4.3 percent in 1935-36 to 5.7 percent in 1938-39/ but consumption taxes, as defined in this study, did not decline; in' fact, their percentage also rose, although very slightly from 14.2 to 14.5 percent of consumer income. The increasing, reliance on personal taxes must be imputed primarily to the more important share of the Federal Government in taxation and to the higher revenues, especially from income taxes, resulting from business improvement. Federal receipts more than tripled in volume between 1932 and 1938. It is of interest to .note that even in 1935, two-fifths of all British taxes (including local rates) were direct, despite import and heavy excise duties, although the total tax yield (excluding social insurance payments) was well over such American receipts of 18.5 percent of consumer income.

The chief causes of the difference in the tax system of 1932 as applied in 1938-39 and the actual system of 1938-39 were the far greater role of State and local taxes, which are predominantly regressive, the absence of taxes on alcoholic beverages and of social-security taxes, and the very low level of manufacturers' excises. The imposition of these new taxes accounts for the difference in the average percentage of income taken by taxes (18.5 percent actually against 11,6 percent with the hypothetical application of 1932 rates).

Appendix UL -- TAX CAPITALIZATION

The possibility of tax capitalization was not considered in the computations but may notably affect tax and saving ratios. The property taxes imposed on land and buildings may be passed neither forward nor backward but result in a decrease in capital value obtainable by the owner when and if he sells such real property. Such capitalization is predicated upon the availability of other types of investments which become more attractive. The future expected taxes, thus capitalized, would depress real property values, being absorbed by wealth rather than income. When taxes are capitalized, their impact, by lowering the value of property, may lead to the need for reassessment and the raising of tax rates, or discovery of new sources of revenue - or else to increased tax delinquency and the coming into the hands of the tax authority and therefore on the market of large amounts of property, thus further depressing real-property values. Conversely, lowered tax rates may be capitalized into higher capital values, leading to windfall profits for sellers of such property.

The emphasis on real property in American property taxation fosters tax capitalization, since discrimination in favor of other types of property provides attractive alternative investment opportunities. The extent of such capitalization is perhaps evidenced by the 14 percent decline in assessed property valuations between 1932 and 1937, although assessment practices and lags in reassessment may explain it in part. However, this theoretical and actual effect assumes, first, the prospective transfer of property after a change in tax rates; second, the impossibility of shifting the tax to tenants; third, the absence of any compensating factors which over a period of time might restore the old relationship.

In other words, assuming that the property tax on a residence rented out is lowered, it is not inevitable that the rent will be likewise lowered, proportionately or at all. Instead, the land value might rise because of the lessened carrying charge. In this case, the tax reduction would mean a capital gain for the former owner but no advantage for the tenant. Conversely, a tax increase need not necessarily mean a compensatory rise in rents.

Of course, these considerations apply mainly to the value of old property or only the land where new construction takes place. The possibility of tax capitalization has been discarded in the preceding study, which represents simultaneous income and tax outgo, while tax capitalization is effective only over time and sporadically as individuals dispose of and acquire property. (A rapid ownership turn-over in America contributes to quick capitalization and the need of annual reassessment.)

But the inclusion of mortgage extinction and real-estate acquisition as increases in assets in the consumer studies means that realized capital gains affect the final aggregate saving figures. Whatever role taxes play in affecting capital values is reflected in the saving and dissaving shown.