The German Imperial Tax
on the Unearned Increment

Robert C. Brooks

[Reprinted from The Quarterly Journal of Economics, Vol. XXV No. 4 (Aug. 1911)]

In an earlier issue of the Quarterly and elsewhere[1] may be found a discussion of the principles upon which the new German unearned-increment taxes are based, together with some account of the forms these taxes have assumed in a few of the larger municipalities of that country. A brief statement regarding the subsequent development of the movement, culminating in the passage of an imperial law on the subject, February 14, 1911,[2] may be of interest at this time.

A tax of this sort was introduced by the Naval Department of the German Imperial Government in Kiao Chau as early as 1898. First adopted at home by Cologne in 1905, the new tax promptly started upon a triumphal progress through the German municipalities. Before the end of 1907 it had been introduced by eleven cities, among which, besides Cologne, the more considerable were Dortmund, Essen, and Frankfurt-am-Main. Since that date the accessions have continued with increasing rapidity until by April 1, 1910, no fewer than 457 German cities and towns had adopted the unearned-increment tax.[3] In Prussia alone 159 cities (Stadte) and thirteen rural counties (Landkreise) had introduced it prior to 1910. As the new form of taxation found most favor in rapidly growing places of large or considerable population the true significance of the foregoing is greater than the bare figures might indicate. Of the Prussian cities and towns which had introduced the tax prior to April 1, 1910, twenty-seven had more than 100,000 inhabitants, seventy-two between 20,000 and 100,000, and sixty-four between 5000 and 20,000. Berlin (2,018,279 pop.), after rejecting the new principle in 1907, finally accepted it in March, 1910. Nearly all the hustling suburbs of the metropolis had anticipated it in this action. Among other large cities not already mentioned which have introduced the unearned-increment tax are Hamburg (874,878 pop.), Leipsic (503,672), Breslau (470,904), Kiel (163,772), and Wiesbaden (100,953). Altogether it is estimated that by April 1, 1910, the tax had been introduced into German cities and towns with an aggregate population of 15,000,000.

In 1909 the Reichstag devoted a great deal of attention to the reform of imperial finances. The possibility of employing the unearned-increment tax as one of the means to this end was first seriously considered by the Imperial Diet in that year. Every party faction in the Reichstag expressed itself favorably upon the general principle involved, - a remarkable tribute to the impression made by the municipal experiments and also to the thoroughness of the propaganda of the land reformers and economists on the subject. However, the Bundesrat postponed action on the ground that a thorough study of various kinds of real estate, and also of the interests of the municipalities which had already introduced the tax, should be made before a law on the subject could be properly drafted. Temporarily the place in the imperial budget to be occupied finally by an unearned increment tax was filled by a stamp tax (of 2/3 of 1 per cent) on the selling price in real-estate transactions, and the government was given until April 1, 1911, to bring in the proposed unearned increment tax.

Almost a year before the latter date, however, the imperial chancellor presented a bill on the subject to the Reichstag. The reason assigned for this prompt action was that it had become necessary to put an end to the uncertainty prevailing in the real-estate market and among the municipalities of the country. After thorough consideration and numerous amendments the bill finally passed the Reichstag on February 1,[4] and received the imperial signature on February 14 of the present year. Formally the law went into effect on April 1, but it contains retroactive features that will be discussed later.

As compared with the earlier municipal legislation on the subject the new imperial law is distinguished by its greater length and thoroughness. Hence any discussion of its text, even one so general as that attempted in the present article, must of necessity be somewhat detailed and mercilessly dry. Even so it must be understood that many of the following statements are subject to further qualification and definition. Those interested in the minutiae of the new law are referred to the accompanying translation of its text.

A small number of exemptions from the tax are allowed. The Empire itself, princes of the German states, the states themselves, and municipalities are on the free list. Associations for colonizing purposes, for the housing of the working classes, and similar semi-philanthropic purposes are also exempted, provided they limit themselves strictly to 4 per cent interest annually upon their investments. A number of carefully defined transactions connected with inheritances, marriage settlements, and the redrawing of boundary lines among scattered strips of real estate are freed from the tax. Sales of whole parcels of real estate nor to exceed 20,000 marks in value, or of unimproved real estate not to exceed 5000 marks, are exempt, provided that the income of the seller and his wife in the preceding year did not exceed 2000 marks, and provided further that neither of them is engaged in the real estate business. Unearned-increment taxes which amount to less than 20 marks are not collected.

The method of computing unearned increment is, of course, fundamental in all legislation of this sort. Three main items are involved. Stated in the simplest forms they are (a) the price paid for the property at the last purchase, (b) the cost of permanent improvements since made upon it, and (c) the selling price. Roughly speaking, the unearned increment is the difference between the selling price and the other two items.

One of the hardest fights made in the Reichstag over the bill turned upon the point as to whether in calculating unearned increment the cost of permanent improvements should be subtracted from the selling price or added to the purchase price. In other words, using the notation indicated above, should increment be figured as c - (a + b), or as (c - b) - a ? Of course the gross amount of the result would be the same by either method. But, as will be shown later, the rate of tax is determined by the percentage of the unearned increment to the cost price plus such additions to it as the law allows. If, now, the value of permanent improvements made since the last purchase be added to the cost, the percentage of increment will be materially reduced, and consequently the tax rate.

Omitting everything except the three elements immediately concerned, the following illustration may serve to bring out the point clearly. A real-estate operator buys a piece of unimproved property for (a) 5000 marks, erects upon it a building worth (b) 80,000 marks, and sells the property for (c) 110,000 marks. Deducting the cost of permanent improvements from the selling price (110,000 marks minus 80,000 marks), the result is 30,000 marks, and further subtracting from this the original cost of the land (30,000 marks minus 5000 marks), the gross amount of the unearned increment is 25,000 marks. If, on the other hand, the cost of permanent improvements be added to the original cost of the land (80,000 marks plus 5000 marks), and the sum, or 85,000 marks, be subtracted from the selling price of 110,000 marks, we obtain the same result, or 25,000 marks, as the gross amount of the unearned increment. In the former case, however, the percentage of unearned increment is determined by the ratio of increment to cost price of the land alone, i.e., of 25,000 marks to 5000 marks, or 500 per cent. In the latter case the percentage is determined by the ratio of increment to the cost price of the land plus permanent improvements, i.e., of 25,000 marks to 85,000 marks, and the result is a percentage of increment of only 29.4 per cent. Now a 500 per cent of increment would be taxed at the maximum rate, 30 per cent, (see table, below) - yielding under the illustration 7500 marks to the public treasury. An increment of 29.4 per cent, on the other hand, would be taxed at a rate of only 11 per cent, yielding in the present instance only 2750 marks.

Naturally the land-owning interest favored the latter method of computation. As originally drafted, however, the bill provided that the value of permanent improvements should be subtracted from the selling price instead of being added to the purchase price. A very large number of the more recent municipal ordinances had already introduced this method of computation. Tax reformers supported it on the ground that increments of value shown by real-estate transactions are due in the great majority of cases to the increase of pure land value, not to improvements. They pointed out, further, that the bill provided for the full, even generous, reckoning of the value of all permanent improvements at their first cost. It is one of the peculiar omissions of German unearned-increment-tax legislation that depreciation in the value of buildings and other improvements is not taken into account. As a consequence, improvements made early in a long period of ownership may be allowed to go to rack and ruin, and thus greatly depreciate its selling price. This, of course, might greatly reduce or even wipe out a considerable increment in the value of the naked land, with the consequence that the seller would escape the tax in part or altogether. To allow the land-owner thus to profit by depreciation while at the same time he added the full original value of improvements to the purchase price of his property was energetically protested against by the friends of the new tax. After a bitter fight, however, the land-owning interests succeeded in having the bill amended exactly as they wished, the most important by far of a long series of concessions which they obtained from the Reichstag. Under the imperial law, therefore, cost of permanent improvements is added to, or rather merged with, the purchase price in calculating the percentage of unearned increment. As a consequence such percentages will be greatly reduced, and with them the tax rates. By this one change the annual revenue from the new tax will be reduced by many millions of marks.

To return to the three fundamental elements of unearned increment taxation, namely, (a) the price paid for the property at the last purchase, (b) the cost of permanent improvements since made, and (c) the selling price. Additions allowed to the first two of these items, and deductions made from the third, will, of course, reduce the amount of unearned increment. This much is obvious, but unless it is constantly kept in mind the bearing of the numerous and intricate qualifications which must now be dealt with will be utterly lost.

(a) The Last Price paid for the Property. In determining this item the price at which the property was purchased at its last transfer serves as a basis. Four per cent of this amount is added to cover the original costs of acquisition, including fees connected therewith. If it can be shown that the costs of acquiring the property were really higher, the larger amount will be added to the purchase price instead of the regular allowance of 4 per cent.

The new imperial is frankly retroactive - indeed it is retroactive in three distinct ways. First, it reaches back to December 31, 1910,[5] three months prior to the date the law went into effect, to cover sales of real estate during this period. This was done of course, to get hold of fictitious real-estate transactions undertaken with the purpose of evasion. As it had been certain for a long time previous that the Empire intended to impose a tax of this character, and as many cities were considering similar action, it is believed that sales of this sort running into millions of marks have occurred throughout the country.

A second retroactive provision in the law is designed to get hold of other methods of evasion practised in the recent past and to prevent their employment in the future. All over Germany, whenever it has seemed likely that a city was about to enact an unearned-increment tax, large owners of real estate have hastened to create corporations and have then transferred their property to these corporations at prices sufficiently high to anticipate any increase in its value for years to come. By this ingenious device they hoped not only to avoid any immediate imposition of the tax, but also to escape it permanently, since they could thereafter virtually transfer ownership by selling corporate stock instead of selling the property outright. During the first five months of 1907, when Berlin was considering an unearned increment-tax ordinance, one hundred and seventy-four limited liability companies of this character were organized in that city. Rings were also formed in old-established real-estate corporations to buy up and then sell to the corporation desirable tracts which, it was thought, were thus brought under legal shelter from the impending tax. The imperial law reaches back six years, that is, to March 31, 1905, to cover such transactions. Instead of accepting the price at which the land was turned into the corporation it provides for an independent appraisal of its real value. The unearned increment is to be calculated from the value so determined, provided this value is 25 per cent less than the price paid by the corporation and the circumstances show that an evasion of part of the tax was intended. Another section of the law places stock transactions of real-estate corporations on the same basis with reference to the tax as direct transactions in real estate. By these provisions of the new law millions of marks of real estate values which owners had thought safely concealed will be brought under contribution.

Thirdly, and most important of its retroactive features, the new law reaches back for its basis in computing unearned increment to the last sale of the property (with exceptions to be stated later) even if that sale occurred before the enactment of the present law. Moreover, it reaches much further back than most of the municipal ordinances already in existence. Cologne, for example, leaves all unearned increment which accrued prior to the passage of its ordinance entirely free; Magdeburg taxes increment accruing since April 1, 1904; Duisburg, since January 1, 1900; Berlin and Breslau, since January 1, 1895; and Hannover, since April 1, 1885. Dortmund goes back to the last exchange, but if this occurred prior to January 1, 1860, a fixed tariff of land values is assumed instead. Hamburg goes back to the last sale without limit of time.

The corresponding retroactive feature of the imperial law is not so severe as in some of the municipal ordinances, but still it is fairly stringent. In computing unearned increment the price paid at the last sale shall be taken as the cost basis or purchase price, if this sale occurred since January 1, 1885. If it occurred prior to this date, an appraised valuation of the property as it stood on January 1, 1885, is assumed in calculating unearned increment, unless the present seller can show that he or his predecessors actually paid more for property, in which case the latter sum is taken as cost basis instead of the appraised valuation. The first of January, 1885, will remain basic in this way until 1925, when the tax gatherer will be reaching back a full forty years in computing increment on properties which are changing hands for the first time since 1885. After 1925, when properties are sold that have not changed hands for more than forty years, an appraised valuation of the property as it stood forty years before the date of sale will be taken as the cost basis in computing unearned increment, unless the seller can show that he or his predecessors actually paid more than the appraised valuation, in which case the higher actual purchase price will be used as a basis.

Various criticisms have been made against this complicated arrangement. Even for the present it will not be easy to fix a factory estimate of the values of many pieces of property as they stood in 1885. Between taxpayers and tax officials frequent differences of opinion are sure to occur and be taken to the courts. To reach back a full forty years in making such estimates will be an even more ticklish and contentious matter. After 1925, moreover, the tax officials will no longer be looking back to a single fixed date but to a series of dates forty years earlier than each transaction involving this application of the rule and advancing constantly as time goes on. From the point of view of tax technique, therefore, this provision of the law is likely to prove troublesome.

Gratified as they were at the determination of the imperial authorities to make the law strongly retroactive, many tax reformers nevertheless objected to the cumbrous form given this part of the measure. Some of them boldly proposed to fix the basic date permanently at January 1, 1871. The Empire was founded about that time and special records of land values which could be referred to were made then. Moreover, even in the cities real-estate values had not then begun to make the mighty strides which have so increased rents, and in the end called forth the whole movement for the taxation of unearned increment. Between 1871 and 1885, on the other hand, Germany's economic development was very rapid, there was much wild speculation, and in the larger cities, at least, real-estate values advanced considerably. By limiting the retroactive effect of the law to the year 1885 much of this increment will escape taxation. On the other hand, the real-estate interests in the Reichstag of course bitterly fought both the temporary limit to 1885 and the later permanent limit of forty years. While the dates were finally fixed as stated, important concessions, to be noted later, were secured by the land-owning interests in other parts of the law.

(b) Cost of Permanent Improvements. It will be recalled that under the imperial law the cost of permanent improvements is to be added to, or rather merged in, the purchase price in computing unearned increment. What, then, are to be included under permanent improvements?

Theoretically expenditures for repairs and generally for the purpose of maintaining a property in its original condition are not so included. Depreciation, as we have seen, is not considered in any way. But sums spent since the last purchase of the property, or since the date at which its value was fixed under the terms of the law, for building, rebuilding, and for other special permanent improvements, form the basis of this item. Five per cent of the total amount so expended is added to cover the owner's trouble in directing the making of the improvements. If the owner is engaged in the building industry and has himself undertaken the making of the improvements, 15 instead of 5 per cent may be added to their actual cost on this score.

Next to be added to this general item are the costs of street improvements, sewerage, and other similar public improvements to which the property owner contributed, plus 4 per cent annually thereon from the time such contributions were made until the property is sold, not, however, to exceed a period of fifteen years.

Finally, an extremely complicated item is added, based both upon the original purchase price and the permanent improvements just considered. If taken together they show the property to have cost less than 100 marks an are ($964 per acre), or three times as much in the case of vineyard land, an amount equal to 2½ per cent per annum from the time of purchase in the case of purchase price, and from the time of making improvements in their case, shall be added. In the case of land which on the same basis represents a higher value per are, there shall be added on such excess, if unimproved, 2 per cent per annum; if improved, 1½ per cent. If the period of ownership has been less than five years and the land has remained unimproved, these additions are reduced one-half.

This extremely awkward double-barrelled provision of the law is designed to accomplish various ends. In the first place it favors agricultural land with a high percentage, because increase in the value of such land in Germany is frequently due largely to the unremitting labor of peasant owners. Particularly is this true of vineyard lands; hence the special clause bringing them under the 2½ per cent rate up to a value of 300 marks per are ($2892 per acre). The lower additional rates allowed on the value of land and improvements above 100 marks per are are designed to let the tax burden fall more heavily on real estate that has ceased to be used agriculturally and is either built upon or ripe for such uses. Last, this whole provision is designed to meet objections urged against the strong retroactive feature of the law. During a period ranging from twenty-six up to a maximum of forty years the monetary standard of value can decline very materially in purchasing power. Relative to a higher general range of prices a large apparent increase in land values may be real only in part or even totally deceptive. Without some safeguard, therefore, sellers of real property who for a long time owned and occupied it ran the risk of being heavily taxed on an alleged increment which, considering a higher general range of prices, really did not exist. Hence the allowance of a small, steady annual rate of interest upon purchase price and improvement costs.

While admitting the justice of this reasoning in general, tax reformers objected to the actual arrangement made in the law on the ground that it unduly favored the "millionaire peasant" type, familiar in the neighborhood of large German cities. It would be no less favorable, they complained, to that class of land speculators whose practice it is to acquire at little more than agricultural prices large tracts some distance out from the edge of cities and then to hold them for long periods until they are demanded at high prices for building purposes. So far as account is taken in this paragraph of changes in the purchasing power of money it would also appear that while the state has sought to protect the property owner against the consequences of a depreciating standard of value and higher general prices, it has not in any way safeguarded itself against the consequences of an appreciating standard of value and lower general prices. During periods of the latter character unearned-increment taxes are not likely to be very productive.

(c) The Selling Price. From the selling price the third element of importance in computing unearned increment are to be deducted the costs of the transaction incurred by the seller, including fees. Further, if the seller can show that he failed to realize an annual income of 3 per cent on the cost of the property plus improvements, the amount by which he fell short of this income for any period not exceeding fifteen consecutive years may be deducted from the selling price. The enormous advantage which this provision gives to the speculator who holds unimproved land for long periods is apparent. In connection with the additions allowed to the purchase price it enables him to escape taxation altogether for at least fifteen years unless his increment grows at a rate faster than 4 per cent or 5 per cent a year.

Having thus defined the elements upon which the determination of the unearned increment depends, the law next fixes the rates of taxation upon a progressive scale. The rates are based on the percentage of unearned increment to the purchase price of the property plus the cost of permanent improvements and the various additions allowed thereto. Beginning at an increase of value of 10 per cent or less, the tax rate is fixed at 10 per cent of the increment. The tax rate increases 1 per cent for each additional 20 per cent of increment until it reaches a rate of 19 per cent on increments of from 170 to 190 per cent. Beyond this point the tax rate increases 1 per cent for each 10 per cent additional of increase of value until it reaches a maximum rate of 30 per cent, which is imposed on all gains of 290 per cent and over. However, the taxes levied under these rates are subject to a deduction of 1 per cent of their amount for each completed year since the last sale of the property. If the last sale occurred prior to January 1, 1900, this reduction shall be computed at the rate of 1½ per cent annually for the period up to January 1, 1911. In order to present a clear picture of the tax-rate provisions of the law the table on the opposite page has been prepared. It shows the basic tax rate for the various percentages of unearned increment, and also the rates as they will be reduced, under the provision just mentioned, after ten, twenty, and thirty years of possession.

Comparing imperial rates with those fixed in municipal ordinances, it should first be stated that the new law does not exempt low percentages of unearned-increment taxation. In most of the local enactments increases of value of less than 10 per cent were left free. If full value is admitted on all permanent improvements, as is certainly the case in the imperial law, it is hard to see why such exemptions should be allowed. To this position the government adhered in spite of the opposition of the landed interests.


[Adapted from Justizrat Hermann Kausen's Die Reichswertzuwachssteuer, p.98, with changes made to conform to the final text of the act of February 14, 1911. Actually the deduction of 1 per cent per annum is to be made from the gross amount of tax due under the basic rate, but the results would be exactly the same under a table such as the above.]

As regards the scale of tax rates, ranging in the imperial law from 10 to 30 per cent, the following list of the extremes in number of the more important local ordinances may be of interest:

District TAX RATE
Lowest % Highest %
Hamburg 1 12.5
Dortmund 3 15
Essen 3 15
Frankfurt-am-Main 2 25
Berlin 5 20
Breslau 6 25
Cologne 10 25

Under municipal tax ordinances, however, the high rate of 25 per cent is, as a rule, imposed upon unearned increments of about 150 per cent, whereas under the imperial law a 25 per cent rate is not reached until the increment amounts to 240 per cent. Moreover, owing to the addition of the value of permanent improvements to the purchase price, the higher percentages of unearned increment will seldom be attained under the imperial law. Finally, experience in various cities has shown that the highest percentages of unearned increment emerge only on long-term property holdings. The reductions of the tax by 1 per cent per annum will save such large percentages of increment from the higher rates. Thus a case of unearned increment amounting to 290 per cent, accruing after thirty years' ownership, will pay at the rate of 21 per cent instead of at the maximum rate of 30 per cent first fixed in the law.

By way of summary of the various provisions of the new law regarding computation of unearned increment and tax rates, a typical example may be of service.[6] Let us assume that on April 3, 1905, a piece of unimproved property with an area of 1.63 acres was bought for 3939 marks. In 1906 a dwelling house was erected upon it, and the city made street improvements upon which the owner had to pay an assessment. The property was sold, February 5, 1911, for 35,000 marks. Omitting minor details, the computation of unearned increment would be as follows: Add to the purchase price of 3939 marks (1) 4 per cent to cover the costs of purchase including fees, or 158 marks; (2) the cost of the dwelling erected in 1906, which was, say, 20,000 marks; (3) 5 per cent of the cost of this building to repay the owner for his work in directing the making of this improvement, or 1000 marks; (4) the assessment of 1000 marks paid by the owner for street improvements made by the city in the same year; (5) 4 per cent thereon for the four full years elapsing between 1906 and the date of sale, or 160 marks; (6) the allowance of 2½. per cent on the value of the property up to 100 marks per are for five full years, amounting to 20 marks; (7) the allowance of 2 per cent on the value in excess of this amount per are as long as the property remained unimproved, or one year, which makes[7] 79 marks; (8) the allowance of 1½ per cent on this excess plus the expenditures for the dwelling (20,000 marks) and directing its erection (1000 marks) from the time this improvement was made until date of sale, or four years, making 1496 marks.[8] The sum of these various items, or 27.852 marks, is the total cost of the properly as determined under the imperial law. Next subtract from the selling-price of 35,000 marks the amount by which the owner fell short of a 3 per cent income on his investment during the year the property remained unimproved, or 123 marks,[9] and the result, 34,877 marks, is the selling price of the property as determined under the imperial law. Legal selling price (34,877 marks) minus legal cost (27,852 marks) gives a gross unearned increment of 7025 marks. The ratio of this amount to legal cost (7025 to 27,852 marks) shows the percentage of increment to be 25.2; and, accordingly, the tax rate is 11 per cent. Eleven per cent of the 7025 marks …

Next in interest to the provisions regarding the computation of unearned increment and tax rates was the question of the division of the income from the tax among the Empire, the states, and the cities or other local government bodies. It will be recalled that the municipalities of Germany began the development of this form of taxation several years before the Empire entered the field. Strong pressure put upon them from above forced them to this solution of their financial difficulties.[10] Naturally, therefore, they protested on every possible ground against any invasion of what they had come to look upon as their own bailiwick.[11] Legally and logically, however, the position of the cities was open to attack. Against the unquestioned constitutional right of the Empire to enter upon taxation of this character the cities could urge only their moral right based upon prescription. As a matter of logic it was impossible for the cities to deny the right of the Empire, and, for that matter, the right of the state and other local government bodies as well, to participate in the revenue derived from the taxation of unearned increment. The use of the term "unearned" in this connection is subject to qualification. Primarily, of course, it means unearned by the landlord. We have already seen what pains were taken in the law to assure owners the benefit of every possible contribution made by them in the form either of investments or of labor. If anything remained after these deductions were fully and fairly made it was clearly not due to the exertions of the landlord, and, hence, so far as he was concerned, deserved to be called unearned. Now the cities declared their intention of taking by taxation a portion of such residual amounts on the ground that they were due to a considerable extent to the beneficent operations of municipal government. In other words, part of the increment unearned by the landlord was clearly earned by the city. On exactly the same grounds, however, it cannot be denied that other parts of the increment unearned by the landlord were due to the beneficent operations of imperial, state, and local governments other than municipal. In the case of Berlin and the capital cities of the various states, of military and naval stations, of cities in which great public institutions with their administrative forces were located, the contributions of imperial and state governments to local land values were direct and undeniably very great. And even in other places the work of imperial and state governments in maintaining peace and order, furthering commerce abroad and at home, fostering manufacturing, agriculture, and other industries, and so on, must have contributed materially to the growth of land values.

Nearly all the representatives of city interests conceded the general validity of this argument. Unfortunately it furnishes no quantitative basis for a just and universally applicable division of the revenue arising from a general unearned-increment tax.

Indeed it is clear that the division of the increment unearned by the landlord into quotas assumed to be earned by imperial, state, and local governments respectively cannot justly be accomplished upon the same basis for all localities. If, nevertheless, some uniform rule had to be adopted, the advocates of city interests were quite certain that it should apportion by far the larger share of the revenue to the municipal governments. City governments, they held, were closer to the local property owner, and the services of such governments in providing or supervising public utilities, safeguarding public health, furnishing facilities for public amusements, and so on, contributed in the main much more directly and materially to the growth of land values than the services of state or imperial governments. A division of the revenue, giving two thirds to the cities and one third to the Empire, was accepted as fair by some of the advocates of city interests.[12]

Apart from the vital point as to their quota under the imperial law the interest of the cities was identical with that of the Empire, and opposed to that of the landowning class. In other words, as partners in a common tax undertaking, both city and Empire desired as strong and productive a measure as possible. One other point, however, made by the advocates of municipal interests against the proposal of an imperial tax is of sufficient importance to deserve notice, namely, that owing to the wide variations of conditions in different localities, and particularly as between city and country, no unearned-increment-tax legislation applicable uniformly over the Empire could be just. In proof of this assertion attention was called to the wide and numerous differences shown by a comparison between the various local ordinances enacted prior to 1911. It is impossible to deny a certain validity to this argument, and future amendments to the imperial law may have to take it into account. The differences discoverable in the earlier ordinances, however, are said to be due largely to the varying degrees of strength and tenacity with which the landlord interest fought them in municipal councils.

In favor of an imperial unearned-increment law various arguments besides the general points already noted were made. One was that local property owners were often strong enough to cause the rejection or emasculation of unearned-increment-tax ordinances in city councils. Imperial legislation and administration, it was hoped, would be more free from this influence. At one stroke unearned-increment taxation would be introduced by an act of the Reichstag over the whole of the German Empire. While the latter point was well taken and of unquestioned weight, we have already seen that the landlord interest proved itself far from lacking in influence in the Imperial Diet. Finally the advocates of legislation by the Empire urged that the tax rates could readily be made high enough to insure those cities which already had ordinances of their own, incomes as large as they were already enjoying from this source.

Let us turn from the arguments on this point to actual adjustment of imperial with local interests made by the law of February 14, 1911. The lion's share of the income from the new tax, 50 per cent altogether, goes to the Empire; 10 per cent of the amounts collected in their respective territories goes to the state governments as reimbursement for the costs of administering the law; and the remaining 40 per cent is left to the municipalities or other local government corporations. Further, the state governments are given power to deal on their own account with this last 40 per cent. The municipalities may, therefore, find themselves forced to stand for further reductions imposed upon them by the various state diets for the benefit of the counties (Kreise), provinces, or of the state itself. Some consolation may be derived by the cities from the fact that, with the consent of the supervisory authorities of the state, they may add local levies on their own account to the imperial tax rates, but these supplements (Zuschlage) will not be allowed to exceed in revenue-producing power the amount due the city under the imperial law, i.e., 40 per cent of the total amount collected. Further, the imperial and local rates taken together may in no case take more than 30 per cent of the unearned increment.

With these limitations additional local rates may be variously according to the different kinds of property involved and the length of the period during which it has been in the possession of the seller. Some room for local adjustment is thus allowed even under the terms of the imperial law. Indeed one of the arguments in defence of the low scale of tax rates provided by the imperial law was that the rates must be so fixed in order that cities desiring it would have room to add Zuschlage of considerable size on their own account. It is believed, however, that real-estate interests will make it extremely hard for city councils to proceed far in this direction.

One further concession is made to those communities which, prior to April 1, 1909, passed an unearned-increment-tax ordinance to take effect before January 1, 1911, or in which prior to the latter date an ordinance had gone into operation with retroactive effect back to April 1, 1909. In case such communities can show that their average yearly income under their ordinances in excess of the portion allotted to them under the imperial law, the difference is to be paid them out of the share of the Empire until April 1, 1915. Or instead of this a community, with the consent of the imperial chancellor, may retain its existing ordinance for the same period, paying over to the Empire, however, all income in excess of the average which it received from its own tax prior to April 1, 1911. It is left to the imperial federal council (Bundesrat), by the way, to determine what this average has been in given cases. So far no general method of computing such averages has been promulgated. Owing to the great diversity of municipal ordinances on the subject it will be a matter of great difficulty to do so, and any solution is certain to cause friction between city and imperial officials. For the time being, therefore, the Bundesrat has decided to avoid general rules and to deal only with individual cases as they come up.

By these transition provisions of the new law those cities which anticipated the Empire in unearned-increment taxation are guaranteed against any diminution of their income from this source during a period of four years. After 1915, however, all local legislation will be permanently superseded by the imperial law administered uniformly throughout the whole country. So far as the continuation of local ordinances is concerned a recent announcement by the imperial chancellor is of great interest.[13] For the present he has determined to grant permission to retain existing ordinances for periods of one year only. This will enable municipalities having their own ordinances to study results obtained under the imperial law in other cities. If the latter prove satisfactory, the uniformity contemplated by the law may be attained, with the full consent of the interested cities, earlier than 1915.

From an American point of view those aspects of the new imperial law which we have just been considering are interesting. They show the federal government of Germany reaching down to abrogate or rearrange in thoroughgoing fashion a detailed part of the tax systems of many municipalities and local governments scattered through its separate states. Under our constitutional system such interference by Washington in affairs of local taxation is, of course, quite out of the question.

In accordance with the usual German practice the actual administration of the new unearned-increment tax is turned over to the various state governments, subject, however, to the supervision of the imperial plenipotentiaries for customs and taxes. Ample provision is made in the law for the hearing and decision of all complaints made by taxpayers. Fines are provided for various offences. In the opinion of the German Municipal Conference the administrative provisions of the law are so unduly complicated that they will greatly increase the amount of work and the costs necessary to collect the tax, and will lead to much litigation.[14]

Experience has shown that no prophecies are more apt to be misleading than those regarding the income to be yielded by an unearned-increment tax. All the factors affecting the real estate market, including the perturbations and evasions caused by the impending tax itself, and all the complicated legal paraphernalia for the computation of unearned increment, play a part in the final result. Over a very wide field, such as that covered by the new imperial law. however, fluctuations in the many local real-estate markets will perhaps tend to compensate each other. As to the probable income which the new tax may be expected to yield, all cautious prophets are silent. Only one line of speculation may be suggested regarding this matter. In 1909 a stamp tax was placed in the imperial budget with the understanding that the unearned-increment-tax law should be worked out later and substituted for it. Now to enable the government to dispense with this stamp tax an annual income of at least 20,000,000 marks from the unearned-increment tax would be necessary. And as the Empire was to receive only half of the income from such a tax, a total revenue of 40,000,000 marks ($9,528,400) was to this extent indicated. Whether or not the government's original bill would have produced so much is highly problematical. But it is absolutely certain that the amendments made in the Reichstag enormously reduced the revenue-producing power of the act. That the government shares this view is proved by the later action of the Reichstag, which, upon the urgent representations of the imperial secretary of the treasury, postponed the substitution of the unearned increment for the stamp tax from 1911 to 1914.

In its main outlines, therefore, the new imperial law may be described as fairly strong in its retroactive features and weak elsewhere. Financially its present importance is very slight. In its extreme complexity the law is a true product of the German intellect. As experience is obtained in its administration and as decisions are handed down by the courts regarding its interpretation, the difficulties arising from this course may be greatly reduced. Still it remains a very vital question, particularly from the point of view of more democratic countries which may wish to follow Germany's example, as to how far the complexity of unearned-increment taxation is inherent in the nature of the subject itself. As the law stands it is not satisfactory to the Empire from the point of view of productivity, nor to the cities as regards their share of the income, nor to the real-estate interests which, of course, are fundamentally opposed to all taxation of this sort. Between the three it is certain to be considerably amended soon after its effects become manifest. German land tax reformers are inclined to lament that the new law has "no teeth in it." A fairer statement would be that it has simply cut its milk teeth and may be expected to develop mature molars and incisors later. Taking all thing's into consideration, however, the new imperial law is one of the largest and most significant practical applications of the single-tax idea that has ever been attempted.


  1. R. Brunhuber on "Taxation of the Unearned Increment in Germany." in this Quarterly, Vol. XX, pp.83-106 (November. 1907); also article by the present writer on "The New Unearned Increment Taxes in Germany," Yale Review, Vol.XVI. pp.236-261 (November, 1907).
  2. The text of the law with a brief introduction is published in convenient form under the title Zuwachssteuergesetz v.14. Februar, 1911, by Heymann, Berlin, 36 pp. A very useful commentary with the complete text of the law has been issued by Dr. Walter Boldt, Stadtrat in Dortmund, under the title: Das Reichszuwachssteuergesetz v.14. Februar, 1911, mit Anmerkungen, Erlauterungen und Beispielen fur Steuerberechnungen, also published by Heymann, 171 pp. Finally the administrative orders and forms (Ausfuhrungsbestimmungen) for the execution of the law, officially issued March 27, 1911, have been reprinted by the same publisher in a pamphlet of 80 pages. Among other texts of earlier date which have been found useful are Justizrat Herman Kausen's Die Reichswertzuwachssteuer, Koln, Neubner, 1910, 155 pp.; Georg Haberland's Die Wertzuwachssteuer, Berlin, Unger, 1910, 60 pp. ; and the Protokoll d. Hannoverschen Stadtetags, Hannover, Janecke, 1910, 69 pp., which contains the government's bill in its original form together with the changes made at its first and second readings.
  3. Of these 457 cities and towns, 301 were in Prussia, 77 in Saxony, 22 in Hesse, and the rest scattered throughout the other states of the German Empire. Cf. Boldt, p.8.
  4. On final passage the bill was carried by a vote of 199 to 93, 20 members not voting. For the bill the Conservative, National-Liberal, Economic-Unionist, and Free Conservative parties voted almost solidly. A majority of the Centrum and a part of the Independent party also voted for it. The Social-Democrats and a part of the Independent party voted against it, while the Poles abstained from voting.
  5. In the first form of the bill this date was fixed at April 1, 1910, several days preceding the introduction of the bill into the Reichstag by the chancellor. Though the date was subsequently changed, there never was a time during the consideration of the bill in the Reichstag when evasion by this method appeared possible.
  6. Adapted from Boldt, p.156.
  7. From the purchase price, 3939 marks, increased by costs of acquisition figured at 4 per cent, or 158 marks, is subtracted 163 marks, the value of 1.63 acres at 100 marks per are, leaving 3934 marks on which this allowance of 2 per cent for one year is made.
  8. To the 3934 marks figured in the preceding note is added the cost of building the dwelling plus the 5 per cent allowed the landlord for directing the making of this improvement, and the sum, or 24,934 marks, is the basis for this allowance at the rate of 1½ per cent for four years.
  9. In this case, also, to the actual purchase price of 3939 marks is added 4 per cent, or 158 marks, to cover the costs of acquisition including fees.
  10. See article by the present writer on "Berlin's Tax Problem" in the Political Science Quarterly, Vol.XX. p.666 (Dec., 1905); also Yale Review, Vol. XVI, p.242 (Nov., 1907).
  11. In addition to the general references cited in the note, p.734, and especially the minutes of the Hannoverian Stadtetag, consult the Mitteilungen d. Zentralstelle d. deutschen Stadtetags, Band ii, Nos.19-20, p.489.
  12. See p.150 of Stadtrat Boldt's earlier work on Die Wertzuwachsstruer, Dortmund, 1909. This suggestion assumed that the cities were to do the work of assessing and collecting the tax, and thus left the states out of account.
  13. Mitteilungen d. Zentralstelle d. deutschen Stadtetags, 10. Juni, 1911, p.137.
  14. Antrag d. Vorstandes d. deutschen Stadtetags betr. Reichszuwachssteuer v.1. Nov., 1910. Mitteilungen d. Zentralstelle d. deutschen Stadtetags v.12. Dez., 1910, p.489.