The Modern View of Taxation
Paul Underwood Kellogg
[Excerpted from the six-volume work, The Pittsburgh
Survey, funded by the Russell Sage Foundation and published in 1914]
As already stated, the local tax system which in our day resulted in
these inequalities, dated back to a time when facilities for
distributing municipal services were meager, and also to a time when a
theory that taxes are payments for definite services rendered to
individuals as such, was much more widely accepted than now. This was
the principle at the bottom of the ward system through which, as the
modern city grew out of what had been a small compact community, the
childless downtown business districts came to pay but a trifle toward
popular education, while neighborhoods meager in wealth but prolific
in children staggered under the school load.
This was the principle at the bottom of the land classification
system through which, as suburban homes were brought within the sphere
of municipal housekeeping, working people came to pay a half more for
fire and police protection, sewerage, lighting, paving, and street
cleaning, than their prosperous neighbors. Now, even if it had been
possible to make adjustments that would have overcome these abuses,
the taxing principle involved would still have been open to question.
Since the [18]50's the trend among taxation experts has been away from
the payment-for-benefit theory. Its fallacy is apparent in the light
of the more recent definition of taxes. To attempt to define taxes for
the tax payer, to be sure, is almost like giving a man with a jumping
molar a theoretical description of toothache. Everybody knows taxes by
practical experience. Despite experience, however, hazy ideas abound,
and scarcely anything is as helpful in clearing them up as clean-cut
definitions.
In the older conception, as we have said, taxes were payments for
definite services such as protection, security, justice, education;
and there was a measurable connection between the charge and the
benefit conferred. Taxes were a form of insurance, according to
Montesquieu, who, a century and more ago, defined the revenues of the
state as "part of the property of each citizen which he
surrenders in order to insure the remainder." The more accepted
current view, however, does not acknowledge a tax to be a payment for
protection or other service. No contract for protection exits between
the state and the individual. The state can not be called upon to pay
damages for failure to protect property. Besides, protection, justice,
or education can not be measured or paid for like sugar or coffee. If
there were a direct and ascertainable connection between the tax and
the benefit conferred, then childless parents would not be taxed for
school purposes; then the halt, the lame, and the blind who need
protection most, would be taxed heaviest; and then the man whose life
is saved by the fireman or policeman, would be taxed an infinite sum
for the infinite service rendered.
The view of taxes more in tune with modern community life is well
stated in a recent United States government publication, thus: "Taxes
are compulsory contributions of wealth, levied and collected in the
general interest of the community from individuals and corporations
without reference to special benefits which the individual
contributors may derive from the public purposes for which the revenue
is required or to which it is applied.[1] Professor Bastable puts the
same definition more briefly thus: "A tax is a compulsory
contribution of the wealth of a person or body of persons for the
service of the public powers."[2] The idea of an exchange of
services, a barter of benefits, between the state and the individual
is absent. The government is expected, however, to use the
contributions made by the individual for the benefit of all; that is,
so as to advance the interests of all, regardless of who pays heaviest
or who benefits most. This idea was undoubtedly in Adam Smith's mind
when he laid down his first canon of taxation, which holds good today:
"the subjects of every State ought to contribute toward the
support of the government as nearly as possible in proportion to their
respective abilities."[3]
Taxation according to ability to pay, proportional taxation, has long
appealed to the spirit of fairness in this country. "It is not
the truth that the rich men should be penalized because they are rich,
or the poor escape because they are poor. The economic conception is
that the rich should pay much because it means little to them, and the
poor should pay little because a little means a great deal to them. In
short, the canon of general taxation is equality of sacrifices."[4]
But the ability, or equality of sacrifice, accepted as a
basis, what is the test of tax-bearing ability? One and another form
of taxes have been tried until almost every evidence of ability, from
the number of windows in peasant cottages or the amount of salt
therein consumed, to the princely incomes of modern times, have been
catalogued for government revenues.
In the early colonies, determining tax-bearing ability was relatively
simple. Land being plenty and to be had for the taking, and the wealth
of all colonists thus being practically equal, their tax-bearing
abilities were equal. A poll tax taking from each a uniform amount was
just. Later, as population increased and commerce grew, some land was
preferred over others; and the owners of the more favored sites had an
advantage. Wealth distinction arose and the flat poll tax was
supplemented by a land tax which took account of the greater ability
of the owners of the more valuable land. With differences in land
wealth came differences in tangible personal property, such as horses,
cattle, and household goods. A personal property tax, therefore,
proportional to the amount of such property, came into use. Later,
intangible personal property in the form of stocks, bonds, notes, and
mortgages, assumed appreciable size, and ownership in these became an
important evidence of ability to shoulder government expenses, and
this class of personal property was taxed.
Thus from early to late the principle that justice in taxation is
obtained through contribution to the support of government in
accordance with individual ability, has been generally recognized.
Much of Pittsburgh's system proved to be an exception, as we have
seen, to this general trend. Longer than any other great American city
it taxed on a plan which claimed a basis in the benefit theory, but
which violated the tenets of that theory; a plan which, when all was
said and done, cut the wealthy man's taxes down because of his
flowers, his shrubbery, the open spaces about his house, and the other
evidences of his greater tax-paying ability; and which called upon the
people of moderate means and less to make up what the wealthy escaped.
The scope of this study properly closed with its demonstration of how
a worn out taxation scheme was thus working social injustice in
Pittsburgh. The report as it was drafted for practical use concluded
with three major recommendations by which to remedy that injustice;
namely, to abolish the land classification, abolish the ward rates,
and abolish them both together. The tax law of 1911 eliminated the
land classification; a new state code created a united school budget
for the municipality, -- and both were passed by the same legislature.
Space should be given, however, to outlining a further reconstructive
program promoted by some of the tax reform forces whose initial
campaign proved thus successful. Their scrutiny of the distorted
equilibrium which had existed in Pittsburgh between land and building
taxes led them naturally enough to propose that the balance should be
struck the other way.
In a report made in December, 1911, the committee on housing of the
Pittsburgh Civic Commission recommended that the legislature enact a
law fixing the tax rate on buildings in Pittsburgh at 50 per cent of
that on land, the reduction in the building tax to be made up by
increases in the land tax. In order that the change might be made
gradually and not occasion hardship, the plan in its final form
provided that the 50 per cent reduction should be spread over thirteen
years, the rate on buildings being reduced to 90 percent of that on
land the first year, 80 percent the fourth year, and so on, making a
10 per cent reduction at the first of every cycle of three years. The
proposal was thus not to stop at eliminating the classification plan,
but to turn it inside out; from a policy discriminating in favor of
land to go to one of discriminating against land.
These civic bodies were successful in securing the passage of this
legislation in 1913 with the qualification, however, that it should
not apply to the school tax. With 1914, Pittsburgh becomes the first
large city in the United States to enter upon the experiment of
halving the tax rate on buildings - a point which by the gradual
stages set in the law will be reached in 1926.
As has already been seen, the higher tax which for forty years had
been levied on built up property in Pittsburgh tended to encourage the
speculative holding of land out of use; to augment the sales price of
available land, and thus discourage the location of industries in the
city; to discourage building enterprises and thus perpetuate the
ramshackle dwelling which hold their tenants when workmen's homes are
hard to buy or high to rent. High land cost and excess building tax
have been the lot of householder and factory builder in Pittsburgh.
The new plan does more than take the penalty off building houses and
factories; it rewards that kind of enterprise by a lower tax the same
way that Pennsylvania rewards industrial capital in exempting
machinery from taxation. It will cut the tax on improvements in half
and spread one part out as an additional penalty for holding land out
of the market.
In pointing out that the price of land in Pittsburgh is high in
comparison with prices in many other American cities of about the same
size, the Civic Commission cited two causes in addition to the
peculiar topography. One-third of the city's acreage is, to be sure,
made up of hillsides too steep to be built upon, but the two
aggravating causes have their roots in the tax classification systems
which has been described, one being the over-speculation in the years
when large fortunes were to be quickly made in Pittsburgh land, the
other, the ownership of great tracts by a few individuals.
One the latter point the report stated:
"In this city as a whole, five families possess
land assessed for 7.4 per cent of all the assessed land values in
the city, but their assessed building values are only 36 per cent of
their land values. These families own land assessed for 11 per cent
of the assessed land values in the first and second wards, or in the
retail, wholesale, and manufacturing district most in demand. Yet I
these two wards the five families own land assessed for 12.7 per
cent of the assessed valuation of the land. The sixth and
twenty-third wards are the two with most area for residences. In the
former, two families own 30 per cent and in the latter, one family
owns 31 per cent of the assessed valuation of land.
"Thus to natural tendency have been added unusual human forces
which have placed the price of Pittsburgh land at a figure which is
prohibitive to prospective industries and residents. A few
individuals have been enabled by circumstances to place and hold
land prices at a figure which prevents the profitable use of the
land by others."
Here, then, we have the extreme consequences of the old scheme of
discrimination, which let real estate off with a half or two-thirds
rate, and here also an argument which has large popular appeal in
favor of the new scheme of land discrimination, which would make the
land rate double. In so far as, in the case of rented houses, taxes on
buildings can be shifted to the tenants while taxes on the land stay
with the owner, the advocates of the measure claim for it that it will
lower rents and the cost of living, and is socially desirable. In so
far as city land values are the creation of the community about them,
they regard it as socially just. The reaction upon the city's
prosperity was prophesied by the Commission in these glowing terms:
"Manufacturers can be induced to come to Pittsburgh
by exemption from taxes. This has often been urged. The tax plan of
this report offers a practical method for offering low taxes as an
inducement. This plan would appeal only to those who will actually
build industrial plants. The low tax is given only when buildings
are put up; that is, only to actual benefactors of the city.
"The higher taxes on land would induce owners to place land on
the market by making it harder to hold land vacant. As owners become
more anxious to sell, the price of land would tend to decrease. Thus
prospective industries could secure sites at more attractive prices,
decreasing the interest item in fixed charges. All this would tend
to a great development of the city.
"Rents would be decreased by both the lower price of land and
the lower taxes on buildings. How would this happen? A premium would
be placed on putting capital in buildings and a penalty for putting
it in vacant land. Therefore capital as rapidly as possible would
shift from land to buildings and buildings would be erected to pay
the increased taxes on land and to secure for capital the advantage
of investment in buildings instead of land. Thus the law of supply
and demand would bring down the price of land. As rent consists of
interest on land value, plus interest and taxes in building value,
the cheaper land and the lower taxes on building would decrease
rents. All this would stimulate building, and building means labor
well employed.
"Here is the solution of the housing problem. New houses at
reasonable rents would be built on land vacant at present. The
present most undesirable houses would be vacated. Their sites are
those most convenient for industries. These sites would have to be
improved to pay taxes or be sold at low enough figures to enable
industries to use them profitably. So the two obstacles to
Pittsburgh's program would be largely overcome, bad housing would be
almost abolished, and factories no longer kept away by high price of
land.
"Precedents for such taxation are many. Great Britain has
recently levied new land taxes to force vacant land into use. The
German cities of Hamburg, Frankfurt, and Cologne, followed by most
large cities, have adopted this method of securing better housing;
in some cities workingmen's homes are entirely exempt. The cities of
Australia and New Zealand generally tax buildings at less than full
rate. In America, the cities of western Canada have this plan of
taxation. In no case has a city adopting this system gone back to
the old one."
As a proposal, showing the swing of the pendulum away from the
entrenched evils disclosed by this investigation, the tax prospectus
of the Civic Commission finds place in these pages. In the estimation
of the writer the adoption of this second change in the tax system
will work for the good of the whole community.
To Hamburg, Frankfurt, and Cologne, and, in America, to Vancouver and
other of the cities of the British Northwest which have adopted this
plan of taxation, one would have to go for an inductive study of its
results. Neither those results, nor a discussion of the taxation
theories they involved, but the objective conditions to be found in
taxes laid and collected in the city of Pittsburgh, were the subject
matter of this inquiry, and the resulting findings have been set forth
deliberately, opportunely, and to constructive purpose.
There remain to be noted certain changes in public administration,
which apart from whatever general tax policy is followed, are equally
demanded by the conditions disclosed.
Paul Underwood Kellogg was born in 1879. He
graduated from Columbia University and in 1907 began his study
of Pittsburgh. In 1912 he became editor of the periodical Survey
and later helped to found the American Civil Liberties Union. He
died in 1958.
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NOTES:
- United States Census, Bulletin
105, Abstract of Annual Report, 1907. Statistics of Cities, p.7.
- Bastable, Charles Francis:
Public Finance. Third edition, p.263. New York, Macmillan.
- Smith, Adam: Inquiry into
Nature and Causes of Wealth of Nations. London, Routledge, 1892.
- Smart, William: Taxation of
Land Values, p.20. New York, Macmillan, 1900.
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