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Real estate record and builders' guide: [v. 91, no. 2342]: February 1, 1913

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REAL ESTATE AND BUILDERS NEW YORK, FEBRUARY 1, 1913 ■lllilliMIIIIIIIH^^^^ ■lESIi'Eii': ;i!::;i!iiiiiiiiiiiiiii!H^^ PROPOSED SURTAX ERRONEOUS IN PRINCIPLE It Will Not Be Taken When the Land is Sold and the Value of the In¬ vestment Realized, But Must Be Paid Yearly From Extraneous Income. By PROF. JOHN BATES CLARK, of Columbia University. Bi*'i'i!:i'' ::i!:HI«iilllMlllilllilBliillMlli^^...... THE general tax now resting on land covers all its existing value at the time of assessment. It is proposed to retain this tax and to impose an ad¬ ditional one on the difference between the value of the land in any particular year and the value which it had in 1912. This second or increment tax will not be taken merely when the land is sold and the owner has thus received the wherewithal to pay it, but must be paid every year from other sources. On land which now yields no income whatever the owner must pay the tax from the income which he may get by labor, or by capital otherwise invested, and any increase in this tax will 'orce some of this land upon the market. That will happen for two reasons, namely, that the tax will be harder to meet and that the inducement to meet it and re¬ tain tlie land will be lessened. Of course, the value of land will fall from its pres¬ ent level. Would Be Forced on the Market. Of land which contains either very old buildings or new ones of the taxpaying variety, some portion would be forced upon the market; and this would happen although no increase of the tax on the increment of value were expected or feared. But such an increase certainlj- would be feared. .\ movement strong enough to carry through this enactment might be strong enough to carry through another which would double the sur-tax and the dread of such an increase would give the meas¬ ure an effect in destroying land value out of all proportion to the effect that it would have if it were known that the policy would stop with this single meas¬ ure. What Henry George Said. Mr. Henry George was once asked by a member of an audience which he had addressed whether he thought it just to confiscate, in effect, the land belonging to men who had recently paid for it in honest n.oney. His reply was: "If any¬ one is a great enough fool to buy land when this measure is impending, he does not deserve sympathy." Shrewd persons would never buy land if the single tax, in its full vigor, were impending as a certainty; but no one can tell precisely what is the degree of prob¬ ability that the measure will be adopted. The milder measure now proposed may fail of enactment, or it may be enacted and be followed up by a series of others of a kindred sort. The whole future val¬ ue of land then will become far more speculative than it now is, since it will be based, first, on a guess as to the in¬ crease in population and in the demand for buildings and, secondly, on a fur¬ ther guess as to the progress of the pol- Th e editorial purpose of the discussions oothe proposed "unearned Increment ta.\*' that have been appearing in the Record and Guide Is il) to ascertain whether the weight of competent opinion is for or against it and (2) how the measure. If enacted, would work out In practice. It Is evident that capital, representing frequently the savings of people of small means or the In¬ heritance of dependents, Is not safe if It Is In¬ vested In real estate unless ihe laws pertaining to real estate are in harmony with public senti¬ ment. A change in public sentiment with re¬ spect to fire prevention, fore.xample. may cause new legislation that will destroy an owner's entire equity In a building which conforms to every provision of law In existence when It Is erected. Social Justice is the only guarantee of stability In public sentiment and In legislation, which presumably, atleast. Is merely a re flection of the community's conscience; and those who are Interested in assuring permanence to invest¬ ments in real property must therefore be In¬ terested also lo obtaining equitable solutions of community problems. Is the proposed surtax on the unearned Increment of land values equi¬ table? The discussions that have appeared in these pages represent the opinions of academic authorities as well as of experienced real estate men. They show that there Is no unanimity ot belief even among leading economists and students of taxation and city government. Certainly real estate men are iustifled in oppos¬ ing a measure the equity or expediency of which ts doubted or denied by such unbiased students as Prof. John Bates Clark, Mr. Henry Bruere, Dr. Frederic C. Howe and Boiough President Cyrus C. Miller. icy of confiscation. It will depend, in great part, on the fraction of the future income from land which owners will be allowed to keep. The one certain thing about it is that the income which the owner can realize will be less than it would otherwise be. Would Discourage Construction. In this view, building upon land held in fee simple will be discouraged, and it will take a considerable reduction of the tax on buildings themselves to offset that discouragement. The probability is that such buildings as would be erected would be of a cheaper and less durable character than those which would be erected under the present system of tax¬ ation. It is the land which is the per¬ manently valuable part of real estate, and it is the improvements that are per¬ ishable. They lose value rapidly, not merely because they fall into decay, but because they become antiquated and therefore undesirable. .\ vast area in New York city is covered by buildings, once thoroughly good, which at pres¬ ent add nothing to the value of the land that they occupy; and if the owners had had no good value in the land itself, their entire investment would by this time have vanished. Of course, these facts react unfavor¬ ably on the borrowing of money for building purposes. The improvements in themselves are poor security, since they represent a vanishing value. The land is a good security, provided it rep¬ resents increasing value; but if that in¬ crease becomes problematical, money will not be willingly loaned on the two together unless the safety margin is a very large one. The Beginning of a More Drastic Policy. In so far as this influence goes, it may be expected to act as a check on the supply of buildings. If the influence is offset by a reduction in the tax on build¬ ings, the number and size of new struc¬ tures may be as great as before, but the quality is likely to be reduced. More¬ over, since new income is needed, throw¬ ing off the tax on the buildings will lend two-fold weight to the pressure for an increased tax on the land, and will cause tlie present measure, which to many per¬ sons seems mild, to reveal itself more clearly as the beginning of a more dras¬ tic policy of land confiscation. Will this check building operations and induce the city itself to furnish the capital that is needed? Will it borrow money and lend it to builders in vast amounts on undesirable security? Would the city be able to do this without ren¬ dering its own securities so undesirable as to force it to pay an unendurable rate of interest? Personally, I do not anticipate such an action on the part of the city; but I should expect, if the pol¬ icy foreshadowed by this bill were once entered upon, that grave evils would re¬ sult, which would lead to a very strong appeal to the city to offer relief. Land Confiscation. For one, I object radically to discuss¬ ing plans of land confiscation on the basis of its practical effects alone. There is involved in it an amount of despoiling of honest men for which it would be dif¬ ficult to find a parallel; and the fact that it is seriously advocated and calmly discussed on the ground of its effect in yielding more revenue or less revenue, causing more building or less building, is a strange phenomenon of practical morals. It becomes the stranger in view of the fact that, taking the country over, land owners are mostly middle- class persons, and, indeed, mostly labor¬ ers, if we use that term to cover those whose income is chiefly a payment for labor. If adopted in its rigor, the single ta.x would enormously accelerate the crushing out of the middle class, includ¬ ing the more industrious and frugal of the laborers.