In view of the social benefits of the increment tax, especially the removal of many of the inequities of the present taxing system, the State might sometimes be justified in making good only a part of the losses that we have been discussing. But this could probably occur only for administrative reasons, such as the difficulty of determining the persons entitled to and the amounts of compensation. It would not be justified merely to enable the State to profit at the expense of individuals. And, in any case, there seems to be no good reason why the unpaid losses should amount to more than a small fraction of the whole.
In the foregoing pages we have been considering a law which would from the beginning of its operation take all the future increments of land value. There is, however, no likelihood that any such measure will soon be enacted in any country, least of all, in the United States. What we shall probably see is the spread of legislation designed to take a part, and a gradual growing part, of value increases, after the example of Germany and Great Britain. Let us glance at the laws in force in these two countries.
The German and British Increment Taxes
The first increment tax (Werthzuwachssteuer) was established in the year 1898 in the German colony of Kiautschou, China. In 1904 the principle of the tax was adopted by Frankfort-am-Main, and in 1905 by Cologne. By April, 1910, it had already been enacted in 457 cities and towns of Germany, some twenty of which had a population of more than 100,000 each, in 652 communes, several districts, one principality, and one grand duchy. In 1911 it was inserted in the imperial fiscal system, and thus extended over the whole German Empire. While these laws are all alike in certain essentials, they vary greatly in details. They agree in taking only a per cent. of the value increases, and in imposing a higher rate on the more rapid increases. The rates of the imperial law vary from ten per cent. on increases of ten per cent. or less to thirty per cent. on increases of 290 per cent. or over. In Dortmund the scale progresses from one to 12½ per cent. Inasmuch as the highest rate in the imperial law is 30 per cent., and in any municipal law (Cologne and Frankfort) 25 per cent.; inasmuch as all the laws allow deductions from the tax to cover the interest that was not obtained while the land was unproductive; and inasmuch as only those increases are taxed which are measured from the value that the land had when it came into the possession of the present owner,—it is clear that landowners are not obliged to undergo any positive loss, and that they are permitted to retain the lion's share of the "unearned increment."[96]
It is to be noted that most of the German laws are retroactive, since they apply not merely to future value increases, but to some of those that occurred before the law was enacted. Thus, the Hamburg ordinance measures the increases from the last sale, no matter how long ago that transaction took place. The imperial law uses the same starting point, except in cases where the last sale occurred before 1885. Accordingly, a man who had in 1880 paid 2500 marks for a piece of land which in 1885 was worth only 2000 marks, and who sold it for 3000 marks after the law went into effect, would pay the increment tax on 1000 marks,—unless he could prove that his purchase price was 2500 marks. In all such cases the burden of proof is on the owner to show that the value of the land in 1885 was lower than when he had bought it at the earlier date. Obviously this retroactive feature of the German legislation inflicts no wrong on the owner, since it does not touch value increases that he has paid for. Indeed, the value of the land when it came into the present owner's possession seems to be a fairer and more easily ascertained basis from which to reckon increases than any date subsequent to the enactment of the law. On the one hand, persons whose lands had fallen in value during their ownership would be automatically excluded from the operation of the law until such time as the acquisition value was again reached; on the other hand, those owners whose lands had increased in value before the law went into effect would be taxed as well as those whose gains began after that event; thus the law would reach a greater proportion of the existing beneficiaries of "unearned increment." Moreover, it would bring in a larger amount of revenue.
The British law formed a part of the famous Lloyd-George budget of 1909. It taxes only those increments that occur after its enactment. These are subject to a tax of twenty per cent. on the occasion of the next transfer of the land, by sale, bequest, or otherwise.[97] In some cases this arrangement will undoubtedly cause hardship. For example: if land which was bought for 1,000 pounds in 1900 had fallen to 800 pounds in 1909, and were sold for 1,000 pounds in 1915, the owner would have to pay a tax of twenty per cent. on 200 pounds. This would mean a net loss of forty pounds, to say nothing of the loss of interest in case the land was unproductive. It would seem that some compensation ought to be given here; yet the rarity of such instances, the administrative difficulties, and the general advantages of this sort of legislation quite conceivably might forbid the conclusion that the owner was made to suffer certain injustice. The compensating social advantages of the increment tax as well as of other special taxes on land, will receive adequate discussion presently.
Transferring Other Taxes to Land
Another taxation plan for reducing the evils of our land system consists in the imposition of special taxes on the present value of land. As a rule, these imply, not an addition to the total tax levy, but a transfer of taxes from other forms of property. The usual practice is to begin by exempting either partly or wholly buildings and other kinds of improvements from taxation, and then to apply the same measure to certain kinds of personal property. In most cases the transfer of such taxes to land is gradual, extending over a period of five, ten, or fifteen years. The plan is in operation in Canada and Australasia, and to a slight extent in the United States.
It has received its greatest development in the western provinces of Canada; namely, British Columbia, Alberta, Saskatchewan, and Manitoba. The cities of Edmonton, Medicine Hat, and Red Deer; Vancouver, Victoria, and thirteen others of the thirty-three cities of British Columbia; all the towns of Alberta except two; all but one of the villages of Alberta, and one-fourth of those in Saskatchewan; all the rural municipalities and local improvements districts in Alberta, Manitoba, and Saskatchewan, and 24 of the 28 in British Columbia,—exempt improvements entirely from taxation. The three cities in Alberta which retain some taxes on improvements; all the cities and towns and three-fourths of the villages in Saskatchewan; the four largest cities in Manitoba; and a considerable number of the municipalities in Ontario (by the device of illegal under-assessment in this instance),—tax improvements at less than full value, in some cases as low as fifteen per cent. Land is invariably assessed at its full value. It is to be observed that these special land taxes provide only local revenues; they do not contribute anything to the maintenance of either the provincial or the dominion governments. The reason why the local jurisdictions have adopted these taxes so much more extensively in Alberta than in the other provinces is to be found in a provincial law enacted in 1912, which requires all towns, villages, and rural areas to establish within seven years the practice of exempting from taxation personal property and buildings. Saskatchewan permits cities and towns to tax improvements up to sixty per cent. of their value, while British Columbia and Manitoba leave the matter entirely in the hands of the local authorities. The provincial revenues are derived from many sources, chiefly real estate, personal property, and incomes; but British Columbia, Saskatchewan, and Alberta levy a special tax on unimproved and only slightly improved rural land. The rate of this "wild lands tax" is in British Columbia four per cent., and in the other two provinces one per cent. Some of the municipalities of British Columbia and Saskatchewan also impose a "wild lands tax." By a law passed in 1913 Alberta levies a provincial tax of five per cent. on the value increases of non-agricultural lands. A movement for the reduction of the tax on buildings has developed considerable strength in the eastern provinces of Ontario, Nova Scotia, and New Brunswick.[98]
New Zealand and most of the states of Australia have for several years levied special taxes on land, consisting mainly of general rates on estates of moderate size, and a progressive super tax on large estates. The Commonwealth of Australia also imposes a tax of one penny in the pound on the value of land. A considerable proportion of the cities and towns in both New Zealand and Australia derive practically all their revenues from land, exempting improvements entirely. In both countries, however, the bulk of the total revenue is obtained from other sources than land taxes. In New Zealand they yield less than thirteen per cent. of the national receipts.[99]