Contributed by Edward J. Dodson, Cherry Hill, NJ
(Ed Dodson emailed GroundSwell that in the
"research work he has accumulated is this story is of how
Pittsburgh raised its revenue in the period before the
two-rate tax was adopted. The author of this paper is Paul
Underwood Kellogg (1879-1958), who began a long career of
civic reform after graduating from Columbia University.
Kellogg was one of the founders of the American Civil
Liberties Union. He began work in 1907 on which became a
six volume report called "The Pittsburgh Survey", funded by
the Russell Sage Foundation.)
The following excerpt comes from Kellogg's book, "Modern
View of Taxation".
"The local tax system which in our day resulted in
inequalities dates 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 exists
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. 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." 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."
"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.' 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 in 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.
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Ed Dodson is the Director of the School of Cooperative
Individualism, http://www.cooperativeindividualism.org. He
may be emailed at ejdodson@comcast.net.