.

AND WHY IT SHOULD BE CONSIDERED BY THE POLITICAL ECONOMIST

FROM what has so far been shown it is evident that the failure of labor-saving machinery to bring about a vast change for the better in the condition of labor is due to the fact that such improvements increase rent without increasing wages. It is also equally clear that one of the reasons, if not the reason, why men willing to work are so often out of work, is because individuals can profitably withhold valuable land from use entirely, as well as from the use to which it is best adapted. Having ascertained the cause, the remedy is obvious. It consists in a simple change in the application of the taxing power of government. The question to be first determined, in this connection, however, is not whether the change could be justly made, but whether it would have the effect intended. Should this be decided in the affirmative, it will then be in order to show, if possible, how all who own land and who have invested the fruits of honest toil in its purchase can be suitably compensated for the loss of the privileges which its ownership now confers. But whether this be shown or not, the discussion of the remedy which must ultimately be adopted will, in any event, bring out more clearly the underlying cause which accounts for low wages and involuntary idleness.

When industrial conditions shall have been regulated in harmony with natural laws, everything which increases the ability of man to produce wealth will necessarily increase the wages of the laborer. Mechanical inventions will then lighten the toil of the working man and add to his happiness and independence. He will no longer look upon them with doubt and trembling, for his wages will keep pace with the increase in the wealth-producing power which labor-saving processes confer. Nor will he dread the competition of his fellow laborers, for no obstacle will then prevent the use of the unused natural opportunities for employment abounding on every hand. Until such conditions prevail, labor will never be satisfied, for neither the moral nor the natural law can be fulfilled so long as progress in the arts and sciences fails to benefit directly all who toil.

Socialists insist that the only way in which the laborer can retain the wealth which he produces is through control by the government of all the factors of production, including capital and labor as well as land. Failing to realize that liberty is the dearest of human possessions, the socialist dreams of substituting the benevolent tyranny of a bureaucracy for the selfish tyranny of individual employers. Failing to appreciate the fundamental distinction between ownership of land and the ownership of things produced by human labor, or between the values created by the individual and those created by the community, he confuses capital with privilege and assumes that justice will only be reached when individual ownership of both is abolished.

The teachings of the political economists of the new school, however, differing from those of the socialists, may be summed up as follows:

• FIRST. Every individual can, without injury to others, and in harmony with natural law, appropriate to himself all the wealth which he produces, be it ten times or a hundred times greater than that produced by another.
  
• SECOND. The natural law demands equality, not in the enjoyment of the rewards of effort, but in the opportunities for applying effort, it being the concern of the State, as Ida M. Tarbell says, to see that men have equal opportunities to carry on enterprises rather than to conduct enterprises for them.
  
• THIRD. Land-the earth-is in effect a great storehouse, filled to overflowing with treasures provided by nature for the equal use and enjoyment of all mankind, and human laws which permit some men to extort tribute from other men for the privilege of access to these treasures violate natural law; hence the confusion, waste and distress which at present characterize industrial conditions.
  
• FOURTH. Obedience to the natural law, with respect to the bounties of nature, can be secured by requiring all who enjoy the privilege of the exclusive possession of any portion of the earth to pay, in the form of a tax for the support of government, approximately what such privilege is worth.

Political freedom does not in itself prevent industrial slavery. Whatever the form of government, material progress under present conditions only increases the dependency of the employee upon the employer, while with the spread of intelligence the employee becomes more and more discontented with the slave-like conditions under which he is compelled to toil. To escape the tyranny of the employer, the employee submits to the tyranny of the labor union.

The struggle for freedom, however, will not down. From the turmoil and suffering in which the labor situation is now involved, peace must finally be evolved; that it will be the peace of freedom, and not of slavery, is the conviction of all who believe in the ultimate triumph of righteousness.

Let us, therefore, postponing consideration of the method of its accomplishment, which perhaps cannot be predicted with certainty, imagine conditions which would prevail when the inalienable right of every man in the use of the gifts of nature, including land as well as air and water, is at last recognized by law and custom. Land will then in effect be nationalized, but individuals will continue to own it. The people, while enjoying the benefits of government ownership, will escape the evil connected with such ownership. There will then be no such thing as taxation. The words "tax" and "taxation" will remain, but taxes and the burden of taxation will in reality have been abolished. The rent which individuals now appropriate will then be appropriated by the government, and collected in the form of a direct tax on land alone, according to its value, regardless of improvements. Rent, or in other words privilege, only will be taxed. The revenues thus derived from the rent of land will be sufficient to enable the government to dispense with every species of taxation now practiced. All who then pay taxes will in effect simply pay the government rent for the land on which the taxes are levied. While individuals will continue to hold the legal title to land, the beneficial ownership will be in the people at large. The values created by the community will then go to the community; now, individuals appropriate these values which others create. No change in the machinery in use at the present time for collecting direct taxes will be necessary. The tax will be so adjusted as to take neither more nor less, approximately, than the economic rent of land; therefore, there will be no profit in the mere ownership of land. As land increases in value the tax will increase, and the unearned increment will go to the government, as it now goes to individuals; hence unused land will be free land, and there will then be no profit in owning land without devoting it, by means of appropriate improvements, to the use to which it is best adapted. Land will continue to be bought and sold, and it will descend to heirs and devisees just as it does at present; but the selling price will not exceed, approximately, the value of the improvements on it. Private property in things produced by human toil will be even better safeguarded than at present, for no man will be permitted to take a portion of another man's earnings for merely assenting to the other's employment.[1] Equality in the use of the bounties of nature will thus be attained. For those who enjoy the privilege of the exclusive possession of any portion of the earth will then pay in the form of a tax what the privilege is worth, while those who do not enjoy such privileges will pay no taxes; hence the burden of taxation will no longer fall upon industry and enterprise.

An illustration of what might be made universal is seen in the section of school land formerly belonging to the State of Illinois, on which a portion of the City of Chicago is now located. The small remnant of this land still owned by the State has for many years been leased to private parties on terms providing for perpetual renewals and with no restrictions against subleasing. The lessee was required to pay as rent six per cent of the value of the land, exclusive of improvements on it, the land to be re-appraised every five years. As the land increased in value the rent increased, and the ground rent collected by the government in this way amounted approximately to the economic rent of the land, according to the definition of economic rent heretofore given. The lease being perpetual, the lessee is as secure in the ownership and enjoyment of the improvements on the land as he would be if he owned the land in fee simple. The government as a landlord took approximately the entire economic rent and used it for the support of the public schools. The situation was the same, however, as if the State in the first instance had deeded the land outright to the original lessees, reserving as a condition to its continuous enjoyment the payment of an annual tax of six per cent on its value as unimproved land.

The lot occupied by the Chicago Tribune building is a part of this school section, and until recently was leased in this manner to the Chicago Tribune Publishing Company. When last appraised, it was valued at $789,600. Six per cent of this amount, or $47,000, would have been the annual ground rental under such appraisement for the ensuing five years, had not the tenure been changed. The building on the land is worth a million dollars, and its owners would thus have paid the State $47,000 a year for the privilege of the exclusive possession of the land which the building occupied. It would not have occurred to them, however, that they were paying any tax in this connection, since they were receiving the use of land worth $780,000, which the people of the State of Illinois owned. But had the land been granted by the State to the Tribune Company, and its successors and assigns forever, with a reservation to the effect that it should be perpetually subject to the payment of a direct tax sufficient to absorb the entire economic rent, the same thing would have been accomplished. The use of the word "tax" instead of the word "rent," and the omission of all reference to leasing, would have made no difference. No one holding land under such a grant would feel that he was paying anything more than rent when he paid in the form of a tax the equivalent of rent. And so it will be when all are permitted to use the bounties of nature on equal terms.

As already shown, when the values produced by society at large are thus appropriated for governmental purposes, land, exclusive of improvements, will have no selling value. The value of the ground itself will add nothing to the purchase price of real estate. Since land will have cost its owner nothing, the so-called tax which he will pay for the privilege of its exclusive possession will, in fact, be no tax at all; it will simply be rent collected as taxes are now collected. It will be a tax in name only.

Had all of the 640-acre school section been conveyed gratuitously to private owners in the first instance, on terms requiring the payment of the economic rent to the State in the form of a tax, the people of Illinois would now be enjoying an income from it of over $20,000,000 a year. The improvements on this section of land would have not been any less extensive or less valuable, nor would the city have grown less rapidly. The buildings on the remnant of the land held under leases of this character are fully up to average of those in the same neighborhood on privately owned land. The Chicago Savings Bank, recently completed at a cost of $650,000, stands on school land thus leased in this way to that institution. The State now collects as taxes a portion of the economic rent; why should the possession of land be less secure if the State collected all of it? And if improvements were not taxed, why would not men be even more inclined to improve land, especially since no capital would then be sunk in its purchase?

Under the present system, if the owner of land fails to pay the taxes levied against it, he loses his improvements as well as his land; this would not be the case, however, under the system which must ultimately prevail. When ground rent only is taxed, it will be practicable to provide for fully compensating the previous owner for all improvements on land sold for taxes. And not only so, but an automatic check will always guard against the levy of taxes in excess of economic rent. All of this is clearly explained in "Natural Taxation," by the late Thomas G. Shearman, in the following paragraphs, which are quoted in full:

"When taxation is levied exclusively upon ground rent every man will have, for the first time in human history, an absolute and indefeasible title to all of his property which is the production of human skill and industry, subject only to the right of the State to take it, upon making full compensation for its value. Such compensation would enable the owner to replace the property thus taken with other property of the same description and value. This general right of the State is practically no limitation upon the absolute right to individual property.

"It is perfectly plain that no one has any such right at present, and that no one can have it, under any existing system of taxation. For, so long as the State assumes the right to tax anything besides rent, it is impossible for any man to retain the entire fruits of his own industry. Every year the State will deduct something from those fruits, under the name of taxation; and no one can ever foresee precisely how much will be taken in this manner. The fluctuations, both in the amounts and methods of such taxes, are so great and incalculable that no one can have any reasonable certainty as to the extent to which his earnings will be secure against the demands of the State.

"But if taxes were once confined strictly to ground rent, all this would be changed. Chattels of every description would of course be absolutely secure; since the only remedy which would be allowed to the State for the collection of taxes would be the sale of some exclusive privilege on land. But buildings and all other improvements on land would be equally secure against all taking without compensation. This is not at first sight so clear; and it needs, therefore, fuller explanation.

"The exclusive tax upon ground rent would lose its entire character if the State were allowed, under any pretense, to collect it from personal property or improvements. It is a fundamental condition of such a tax that it be collected only out of rent. It must, therefore, when payment is refused, be collected only by selling the control of the taxed land to some person who will not only pay the tax, but will also pay the land holder, thus sold out, the full value of all of his improvements. If no one will pay the tax, subject to those conditions, that is conclusive proof that the tax is too high, and that it is in reality based upon an assessment including other values than the mere value of the land. The purchaser in such case would, of course, take the land, subject to the annual liability for taxes; but he would also acquire the same absolute title to improvements which the previous possessor had; so that he, in turn, could not be sold out for taxes without full compensation for improvements. Thus no one would ever pay taxes upon the value of any other property than the bare land.

"Universal experience has demonstrated that there would not be the slightest difficulty in carrying such a system into practical operation. This system has long been in operation, upon a great scale, both in public and private affairs. Wherever ferry franchises belong to a municipality, as in the city of New York, such franchises are sold at auction, at intervals of five or ten years, always subject to two conditions: first, the payment of rent to the municipality ; and second, the payment of full compensation to the former holder of the franchises, for boats, piers, houses, and all other structures and materials used in operating the ferry. Street railroad franchises are sold in the same manner, for terms of years, by every honest municipal body having control of the subject.[2] So landlords constantly lease their land for terms of years, to men who erect expensive buildings thereon; the landlords covenanting to pay the value of such improvements upon the expiration of the lease. There is no more difficulty in providing for an annual sale of land, if necessary, subject to these conditions, than there is in providing for a sale in every five, ten or twenty years. A ferry franchise is just as much a title to 'land,' within the meaning of the law, science and common sense, as is any other land title whatever.[3] "Of course, the valuation of improvements would be made upon a common sense basis. The landowner, upon making default in taxes, would be entitled to just as much compensation for his buildings as those buildings really added to the market value of the land on which they were built, but not more. If, as often happens, an expensive building had been put up in a district where it could never be of any use, nothing should be allowed for it beyond the value of its materials, after it had been pulled down. But for any really useful building, compensation would be allowed, sufficient to enable the owner to put up a similar building, in similar condition, upon an adjoining tract of land. In short, whatever loss the owner of the building incurred, by reason of his own mistakes or extravagance, he would be left to bear; but whatever value belonged to the building, exclusive of the land underneath it, he would invariably be allowed to retain."

No difficulty will be experienced in so fixing the amount of the tax as to take approximately the whole of the economic rent of any tract of land. A few illustrations will make this plain: My neighbor owns a single lot, which, with the dwelling house improvements on it, rents for $400 a year. The improvements are appropriate to the location, and are worth $3,000. The prevailing rate of interest in this community, when the security is ample, is 5%. Allowing 5% interest on the value of the improvements, and say, $125 a year to cover insurance, repairs, renewals and the expense of collecting rents from tenants, etc., and the economic rent of this lot is, approximately, $125 a year. It is $150+$125=$275; $400-$275=$125. The tax on it therefore would be fixed at about $125. Adjoining these premises there are four lots on which there are dwelling house improvements also of the value of $3,000. These lots and improvements belong to another neighbor who can afford the luxury of spacious grounds, but each lot being equally as valuable as the one first mentioned, his taxes would be four times as much, or $500 a year. As when a man goes to the theatre, if he chooses to appropriate four seats instead of one, he must pay accordingly, whether he uses all of them or not.

Again, the building in which I have an office brings its owner a total net rental of, say, $13,000 a year, after all deductions for insurance, renewals, cost of collecting rents, etc., have been made. It can be duplicated for $100,000, interest on which is $5,000 a year; hence the economic rent of the land which it occupies is approximately the difference between $13,000 and $5,000, or $8,000, which would be about the amount of the tax levied against the land if the rent were appropriated by the government. On one of the opposite corners is a building worth $40,000, which brings its owner a net rent of $10,000 a year. Making the calculation as shown above, and it is found that the economic rent of the lot on which it stands is also $8,000. But on another corner is a tumble-down one story building which rents for only $6,000. The lot on which it rests is not less valuable than those on the other corners, and if appropriately improved it would yield the same amount of rent; hence the tax assessed against it would be the same. In other words, the owner of the legal title to this last lot would pay the State the same amount of rent, whether he properly improved it or not.

Sales of improved real estate would also furnish the tax assessor data from which the economic rent of land could be ascertained. Just as the thermometer tells whether the temperature is above or below normal, so would prices paid for improved landed property tell whether the taxes assessed against it were too high or too low. Thus, if real estate in any locality should sell for decidedly more than the value of the improvements -- if people were willing to pay much more for a tract of land than the improvements on it were worth -- this would be a certain indication that the tax levied against it should be raised. If, on the contrary, real estate were sold for taxes, under the provision heretofore explained, which would require the purchaser to fully compensate the previous owner for the value of the improvements, this would usually indicate that the taxes should be lowered.

It is not claimed that taxes will ever be assessed with mathematical accuracy, or that it is desirable even for the government to take literally all of the theoretical economic rent of land. Those who occupy land will directly or indirectly pay the tax, but those who own the land will often act as tax gatherers, and for this service compensation will be provided by the laws of supply and demand. Thus, a man having $20,000 contemplates erecting, say, ten dwellings costing $2,000 each. To make the investment profitable it will be necessary to collect from his tenants, in addition to interest, a sufficient amount to cover the tax paid on the land occupied, as well as the cost of insurance, repairs and renewals. He must, therefore, become in effect a tax collector for the government, and not only so, but to a certain extent a guarantor of the payment of the tax. And so when any one puts improvements on land, either for a home for himself or for any other purpose, there is always an element of risk in the investment which the renter does not incur. Increase or decrease of population in the neighborhood, as well as other circumstances, may render improvements unsuitable to changed conditions, and impair if not destroy the value of them altogether. Men will not make investments involving such risks, and often requiring them to act as tax collectors, unless paid for it. Therefore, it is not likely that the government can ever collect more than 80 or 90 per cent of the theoretical economic rent. The remainder of it will be retained by land owners to cover the risk involved in improving land and the labor involved in collecting from those who actually use land what the use of it is worth. But competition, which will then be free with respect to land, will always so fix the amount of the tax as to give land owners no more, approximately, than they will be equitably entitled to for such service.

It may be asked, why will not landlords be able to retain more than ten or twenty per cent of the economic rent of land which tenants occupy? The answer is, that rents are regulated wholly by supply and demand, the desire of landlords having little to do with the matter. If the demand for houses in any locality exceeds the supply, rents (using the word in its popular sense) will rise; if the supply exceeds the demand, rents will fall. With no tax on buildings, and land owners being no longer fined for putting improvements on land, a demand for houses will be more easily supplied than under present conditions; it will, therefore, be impossible, except temporarily, to charge more for the use of real estate than the economic rent of land added to interest on the value of the improvements, together with allowances for insurance, repairs, etc.

The question asked, however, when put in the concrete answers itself. Thus, why could not that neighbor of mine, by raising the price charged for the use of his house and lot to $500 a year, obtain a gross income of $375 from the property, instead of $275, after payment of the tax of $125? Were he thus to increase the charge, and the tenant, finding it impossible to do better elsewhere, should submit to the advance, this would be conclusive proof that the economic rent of the land was more than $125 a year. It would show that the tax ought to be $225, or thereabouts, instead of $125, and so the tax assessor would soon raise taxes in the same proportion on all lands in that immediate vicinity. Hence the government, and not the landlords, would ultimately get the benefit of any crowding up of rents.

But this suggests another question: If landlords had nothing to gain by it, why would rents advance at all? And why would not the people at large be deprived of much of the benefit which ought to accrue to them from increase in the value of the use of land? The answer is, that competition among tenants, and the fact that a landlord here and there could always secure a temporary advantage by advancing rents, would cause rents to increase generally as the value of land increased. Landlords would simply be compelled to collect all the ground rent possible. Whenever, for instance, on account of increase in the demand for dwelling house improvements, tenants in any locality could be forced to pay more, some vigilant landlord would require his own tenants to do so, for it would always be to his individual interest to increase the gross income of his property. His example would soon be followed by others, and then by all, and thus a higher level of economic rent in that vicinity would be established, and taxes would be advanced accordingly.

Tax assessors, however, would not be compelled to rely wholly upon data obtained from rented property in ascertaining the economic rent of land. Improved real estate then, as now, would be constantly changing hands, and the prices paid for it, as already shown, would furnish indisputable evidence of true economic rental values.

The economy and absolute impartiality with which public revenues could then be collected, as compared with the present wasteful and demoralizing methods, also present a strong reason for favoring the system suggested.

All who are familiar with the subject must admit that if land were in effect nationalized, and the right of the people to its beneficial ownership established by law, no practical difficulty would stand in the way of the State appropriating economic rent with the present machinery of taxation. The question, however, which always tends to divert attention in this connection is, how can land be in effect nationalized? What reasonable hope can the political economist have that land owners will ever consent to relinquish the privileges which the mere ownership of land confers, or that any method by which the government can condemn the land and buy out the landlords will ever meet with popular approval? But this is a question which the political economist should not be required to answer. For his functions do not include those of the statesman. As a philosopher he points out the conflict between the human law and the natural law, and shows what change in the human law is necessary to make it conform to the natural law; while the statesman, as a politician, considers how the change can be accomplished. If the political economist has diagnosed the disease correctly, and prescribed the proper remedy, some time, and in some way, statesmen will finally secure the adoption of the remedy.

NOTES

1. See Chapter IV, on The Nature of Rent.

2. "The conception of a really Incorruptible city council will seem, to most American readers, too wildly improbable for the basis of even a theory. But effete Europe is so far behind us in the grand march of civilization, that such Utopian bodies are Quite common there; and the method of the text is common also."

3. Benson v. New York, 10 Harbour, 223, 233.

CHAPTER I: INTRODUCTORY