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 Two essays on the 
 
 taxation uT mi- 
 
 earned incomes. 
 
 Southern Branch 
 of the 
 
 University of California 
 
 Los Angeles 
 
 Form L 1
 
 This book is DUE on the last date stamped below 
 
 OCT - - i^.^» 
 
 - '.^Ji: 
 
 ^ 9 l92r' 
 
 NOV -To 19M 
 
 ilov i< i;6^ 
 
 JAN ?^ 1927 
 JAN 6 192^ 
 
 '^ 14 192£' 
 ^ju'i X^ ia2c 
 
 FEB 19 mi. 
 
 JAN 7 1^38 
 JAN 2 8 1936 
 
 Form L-9-15m-10.25 
 
 MAY 15 1938
 
 THE TAXATION 
 
 OF 
 
 UNEARNED INCOMES
 
 TWO ESSAYS ON 
 
 THE TAXATION OF UNEARNED 
 INCOMES 
 
 HARRY GUNNISON BROWN 
 
 PROFESSOR OF ECONOMICS IN THE UNIVERSITY OE MISSOURI 
 
 Authoi of 
 ''Principles of Commerce' 
 
 "Transportation Rates and Their Regulation" ■ 
 "The Theory of Earned a}id Unearned Incomes" 
 
 (£.a{ixvah\a, Atasouri 
 
 MISSOURI BOOK COMPANY 
 1921 
 
 70"^ t
 
 Copyright, 1921 
 
 By Missouri Book Company 
 
 Published January, 1921.
 
 ■ 1.5 '-'<^ 
 
 CONTENTS BY SECTIONS 
 I. 
 
 EARNED AND UNEARNED INCOMES, INEQUALITY AND 
 TAXATION. 
 
 § 1 The Gonflict of Class Interests 3 
 
 § 2 The Price System and the Specialization of Pro- 
 ducers 8 
 
 § 3 Earned and Unearned Incomes — Wages and Profits 15 
 
 § 4 Earned and Unearned Incomes — Interest 19 
 
 nD § 5 Earned aand Unearned Incomes — Land Rent 24 
 
 ^ § 6 Inequality of Earned Incomes 41 
 
 ^ § 7 Recapitulation 46 
 
 II. 
 THE RENT OF LAND AND ITS TAXATION. 
 
 § 1 Land Rent as a Marginal Product of Land 51 
 
 ^ § 2 Land Rent versus Capital Interest 54 
 
 ' ^ § 3 Land Rent as an Unearned Income 56 
 
 ^^ § 4 Improvements by Special Assessments and the Right 
 
 of Landowners to a Rental Return 60 
 
 § 5 Other Services of City Landowners 63 
 
 § 6 The Increment of Land Values in Relation to the 
 
 Settlement of the American West 67 
 
 § 7 The Bearing of the Contention that there may be 
 
 Other L^nearned Incomes Not Especially Associated 
 
 with Land 76 
 
 § 8 The Taxation of Future Increments of Value 81 
 
 § 9 Land-Value Taxation in Relation to the Theory of 
 
 Vested Rights 84 
 
 § 10 The Ability Theory of Taxation 93 
 
 § 11 The Taxation of "Excess Profits" versus the Taxa- , 
 
 tion of Land Rent |06 
 
 § 12 The Taxation of Inheritances 98 
 
 § 13 Some Probable Effects of Making Land Rent the 
 
 Chief Source of Public Revenues 100 
 
 § 14 Summary and Conclusion 110 
 
 (v) 
 
 V 
 
 ■•^
 
 vi Contents by Sections 
 
 APPENDIX. 
 
 § 1 Suggestions for Legal Enactment or Constitutional 
 Amendment, Especially in States Having the Initia- 
 tive and Referendum 117 
 
 § 2 Reasons for Proposed Program 119
 
 THE TAXATION 
 
 OF 
 
 UNEARNED INCOMES
 
 Whence shall come the new barbarians? Go through the squalid 
 quarters of great cities and you may see, even now, their gathering 
 hordes. . . . 
 
 It is the delusion that precedes destruction which sees in the 
 popular unrest with which the civilized world is now feverishly 
 pulsing, only the passing effect of ephemeral causes. Between dem- 
 ocratic institutions and the aristocratic adjustments of society there 
 is an irreconcilable conflict. Here in America, as there in Europe, 
 it can be seen arising. 
 
 Henry George 
 In Progress and Poverty (1879). 
 
 It is, then, for some one to construct an economic science adapted 
 not only to the requirements of the facts but to the need of their 
 amelioration. To this end Economics must cease to be a system 
 of apologetics, the creed of the reactionary, a defense of privilege, 
 a social soothing sirup, a smug pronouncement of the righteousness 
 of whatever is — with the still more disastrous corollary of the un- 
 righteousness of whatever is not. . . . 
 
 When, in short, we have changed our calling from the painting 
 of Utopias and the capitalizing of dreams, and have, as scientists, 
 brought ourselves somehow into touch with fact, the prosperous 
 may no longer deride us or the disinherited curse. There will 
 need be no laughing then anywhere, and if there be cursing, it will 
 have changed its source. 
 
 H. J. Davenport of Cornell University 
 In The Economics of Enterprise. 
 
 (2)
 
 THE TAXATIO?^ OF UNEARNED 
 INCOMES 
 
 I 
 
 EARNED AND UNEARNED INCOMES, IN- 
 EQUALITY AND TAXATION 
 
 § 1 
 The Conflict of Class Interests 
 
 The task confronting us through these essays is to 
 discover whether taxation can advantageously be used as 
 a chief tool in the attainment and perpetuation of eco- 
 nomic democracy, and, if so, what system of taxation is 
 best for the end in view. Such an inquiry as is here 
 proposed, may well involve, as a first step, a consideration 
 of the nature of the economic system in and through 
 which the people of the modern world carry on their 
 struggle for the means of existence. For unless we sup- 
 pose this system to be the best possible, it ought clearly 
 to be either modified in greater or less degree or super- 
 seded. And whether the former or the latter change can 
 be most effectively brought about or can be brought about 
 at all, by taxation, as well as whether either sort of 
 change ought to be brought about by any method, can 
 hardly be intelligently decided without an understanding 
 of the fundamental nature of the system of which the 
 modification or supersession is contemplated. 
 
 It is the failure clearly to comprehend the nature of 
 the faults of the existing economic system which has, in 
 large part, made protest and even revolt ordinarily so fu- 
 tile in really improving the conditions of life for the com- 
 mon man to the extent that might else be possible. Pro- 
 
 (3)
 
 4 Thk Taxation oif Unearned Incomes 
 
 testant or revolutionary groups have to meet, always, the 
 more or less solid opposition of the groups v^hose inter- 
 ests are threatened by change and who know well how 
 to protect these interests. Individual members of the 
 conservative groups may be liberal-minded enough to 
 favor reforms of a palliative sort, especially as many 
 of these reforms seem likely to cost them nothing. But 
 few members of the conservative, property-owning class 
 seem able to contemplate without a sense of shock or a 
 feeling of indignation any proposal seriously to disturb 
 in its fundamentals that order or system of things (the 
 existing system of private property) in the meshes of 
 which they have been bred and to which they seem 
 mainly to owe their material well-being. To the support 
 of that system in general, they will usually rally. We 
 need not suppose that they understand it in the sense of 
 being able to contemplate philosophically its faults and its 
 virtues. But they are not devoid of an understanding of 
 how it works to maintain them and of how to make the 
 most, in argument, of certain of its apparent advantages. 
 Reputable economists in plenty are at hand to support 
 them and to make plausible by manifold arguments of 
 ingenious intricacy the claim that the present scheme 
 of things is good for the masses and that, anyway, the 
 views of those who attack it are associated with this or 
 that "now generally discredited" doctrine and so "fall to 
 the ground" and "need not be further considered." Young 
 economists not infrequently get the impression from their 
 teachers that certain views are commonly rejected by 
 reputable members of the craft, and deem it not worth 
 while to investigate them. Subconsciously they come to 
 feel that these views would be likely to put them "out- 
 side the pale." For it is not alone through inducing the
 
 Tilt Conflict of Class Interests 5 
 
 fear of loss of teaching positions (although this is a suffi- 
 ciently common means) that the defenders of the exist- 
 ing regime control the teaching of economic principles 
 and problems. 
 
 A task more difficult than that of the defenders of the 
 present system confronts those iconoclastic dissentients 
 who must, to be successful, get another system put in its 
 place. These dissentients have to rally the elements of 
 discontent, of which, presumably, they are a part, to the 
 support of a more or less definite program. But these 
 elements of discontent are in large part composed of 
 the relatively untrained masses ; hence they are even less 
 likely than the sufficiently ignorant propertied classes to 
 understand the innner nature of those arrangements 
 which most of the propertied classes defend and which 
 it appears to be the interest of the masses to attack ; and 
 they can not be expected to have a very intelligent com- 
 prehension of the kinds of change needed or of the type 
 of system which may best be substituted for the one we 
 have. The protesting masses are likely to be attracted 
 by something which sounds radical, which appears to up- 
 root the whole present scheme of things but which, in 
 fact, can not be made to work successfully in the existing 
 state of human nature. They are too likely to be the prey 
 of the demagogue or the fanatic. With a sense of having 
 been unjustly ground down by an economic system which 
 has made others prosperous, they are likely to favor abso- 
 lute equality of incomes, regardless of differences in ef- 
 ficiency, or to follow a Marxian philosophy and wish to 
 terminate all incomes from property just because these are 
 not labor incomes. If the propertyless masses succeed 
 in acquiring temporary control through revolution, they 
 are likely to blunder from one radical step to another
 
 6 Thk Taxation of Unearned Incomes 
 
 without adequate regard to those elements of human na- 
 ture which make some things workable and others not, 
 until the general turmoil and poverty and disorganization 
 discredit them far enough to put their deposed masters 
 back into the economic saddle. 
 
 Again, oftentimes a group of the propertied classes is 
 enabled to use the ignorance and discontent of the prop- 
 ertyless as a means of further lining their own pockets 
 even at the expense, partially, of the rest of the proper- 
 tied classes, as well as at the expense of the masses. 
 Thus, the tariff protected interests of a country, through 
 their organizations and organs, make it appear to mil- 
 lions of workingmen that free traders are aristocratic en- 
 emies who would take the bread from their mouths to 
 benefit foreigners and that a high tariff system is a neces- 
 sary means of providing workingmen with jobs. Or 
 those property owners who are in debt and who can gain 
 at the expense of other property owners (their creditors) 
 by a depreciation of the monetary standard, may some- 
 times succeed in rallying to their support millions of wage 
 earners to whom such depreciation may mean, chiefly, 
 increased cost of living with no immediate corresponding 
 rise of wages. 
 
 It is not only the propertyless masses who can be thus 
 put into a false position. Class prejudice sometimes 
 makes groups of the propertied classes, whose interests, 
 in a specific reform, are the same as the interests of the 
 masses, nevertheless oppose such a reform. And so, in 
 the case of a protest against various abuses in the sys- 
 tem of property, which, if effective, would limit mainly 
 the incomes of the wealthy few, these few are able to lure 
 to their support thousands of small property owners who 
 might even stand to gain by the proposed change, but
 
 The Conflict of Class Interests 7 
 
 whose prejudices are those of the larger owners of prop- 
 erty and who are easily roused to a belligerent spirit by 
 anything which can be made to appear to them as a threat 
 against a system of things which they have learned to 
 regard as sacred. 
 
 Hence, many of the great mass movements which 
 seem to be democratic movements, lose themselves in fal- 
 lacies and confusions and never even temporarily gain 
 their objectives or, if their objectives are gained, tempo- 
 rarily, become soon discredited and fall back out of 
 the rays of power and into obscurity. Real democracy is, 
 therefore, to the aspiring masses, as is the mirage to the 
 worn traveller in the desert — a hope, whose realization 
 appears perpetually to recede. Real democracy, in the 
 circumstances of class interest and class prejudice, must 
 wait upon some development of intelligent understanding 
 of the economic system we now have and of the economic 
 forces at work in that system, on the part of those who 
 are its victims. For, so long as the victims of the existing 
 economic system do not understand the faults of the 
 system against which they protest, well enough, spe- 
 cifically enough, and discriminatingly enough to make 
 workable reforms, so long as they are intellectually incap- 
 able of doing aught but lumping together for. elimination 
 unlike types of incomes, and so long as their revolts are 
 likely to be guided by a short-sighted selfishness, to be 
 directed by demagogues, fanatics and fools, and to result 
 in a turbulence and economic breakdown which brings 
 poverty even to themselves and discredit to their move- 
 ment, worth-while reform is hardly to be expected or 
 hoped for. Aristocratic economic relations must prob- 
 ably continue, even if they coexist incongruously with 
 democratic political institutions. Indeed, the exploited
 
 8 The Taxation of' Unearned Incomes 
 
 masses are ordinarily in large part the dupes of the privi- 
 leged interests as well as of their own ignorance, and 
 support, through their own prejudices and their own 
 votes, those very economic policies by which they are laid 
 under tribute. 
 
 §2 
 
 The Price System and the Specialisation of Producers ^ 
 
 We have now to analyze the existing economic system 
 so as to see by what processes it works and to what effect. 
 This system is sometimes called the price system (a term 
 which would doubtless continue to fit even if considera- 
 ble changes were made in economic arrangements) pre- 
 sumably because within its sway almost everything is the 
 subject of purchase and sale at a price. Not only food, 
 clothing, furniture, etc., and buildings and lands, but labor 
 services, the use of land, the use for fixed or indetermin- 
 ate periods of sums of capital, are commonly bought 
 and sold. Prices are the inducements by which men are 
 persuaded to dispose of goods, to lend, and to produce 
 goods for disposal. Money is an intermediary in the ex- 
 change of any kind of goods for any other kind. We 
 produce and sell one or some things in order that we 
 may buy other things. 
 
 The price system, whether as we know it or as some 
 variant of its present form, is a system which leaves 
 those within it largely free to engage in such occupations 
 and produce such goods as they choose. They may, in- 
 
 1 Cf. the Author's book on The Theory of Earned and Unearned 
 Incomes, Columbia, Mo. (The Missouri Book Co.). 1918, Chs. 
 I and II.
 
 The Price System 9 
 
 deed, be often subject to the compulsion of circumstances 
 but they are not subject to any other compulsion. Coer- 
 cive systems of industry are not unknown to historians 
 and to dreamers of Utopias. Slavery was, and is, coer- 
 cive. Feudalism, with its accompanying serfdom, was 
 coercive to the serf. The caste system of India is coer- 
 cive. And any variety of socialism which, in the desire of 
 its apostles to avoid the alleged evils of competition, 
 should place men in their jobs, would be coercive. So- 
 cial reformers must, in fact, make their choice between 
 some form of voluntary selection of occupations, which 
 inevitably means competition for the apparently prefer- 
 able places, or coercion. There is no other possibility. 
 
 It is not difficult to see that a voluntary system must 
 be in some degree a competitive system. If, in a system 
 which allows choice of occupations, one line of industry 
 pays better, all things considered, than another line, those 
 persons engaged in the second line are at liberty to enter 
 the first. But to enter it and sell their product they have 
 to bid down its price, i. e., compete. They then become 
 buyers of what they previously produced and to get this 
 they may have to bid up its price. Even a socialistic 
 government which should direct all industry must either 
 coerce its subjects into their respective lines of work or 
 must so apportion the rewards in different lines of pro- 
 duction as to make voluntary choice yield the desired 
 proportions of various kinds of goods. In other words, 
 the relative amounts of potential competitive offering of 
 services in different lines of production, must be taken 
 account of. Otherwise the system would break down. 
 
 Whether such a scientific proportioning of rewards as 
 would be necessary for the successful working of the 
 scheme of individual choice of occupations, would in
 
 10 The Taxation oe Unearned Incomes 
 
 fact probably be adopted by a democratically governed 
 socialist state, or whether groups of the citizens of such 
 a state would inevitably drift into bargaining and log- 
 rolling, directly or through their representatives, for un- 
 fairly large returns at each others' expense, or whether 
 socialists could avoid a compulsory centralized direc- 
 tion of industry, we need not inquire. Our present in- 
 terest lies primarily in understanding the nature of the 
 existing system. In this system men engage in pro- 
 ducing those goods which they severally think it pays 
 them best to produce, in order to exchange them, through 
 the intermediation of money or bank checks, for goods 
 which others produce; and if what men get for their 
 production seems too little and what they pay for the 
 goods of their desire seems too much, they have the op- 
 tion of becoming producers of the latter goods of which 
 they have been purchasers, thus tending, by their com- 
 petition, to rearrange the relative prices of these various 
 goods. 
 
 The fact that voluntary choice of industry tends thus 
 towards rearrangement of relative prices has led to the 
 statement that competition so afifects prices of goods as 
 to make the returns to the persons in any one industry 
 substantially equal to the returns to the persons in any 
 other industry. Such an assertion is true only in an 
 extremely general and indefinite sense. To illustrate the 
 necessary qualifications, let us suppose that A is pro- 
 ducing wheat as the best way of getting a living. He 
 might instead produce beets and would do so if that 
 would pay him better. But in view of his individual 
 likes and abilities and the qualities and situation of his 
 land, he can make, perhaps, very much more at the busi- 
 ness of wheat raising than he could at raising beets. He
 
 The Price System 11 
 
 may even, if efficient enough, be able to make more money 
 raising wheat than anybody else can make producing 
 beets. Nevertheless there are probably some persons 
 whose abilities or the characteristics of whose land, or 
 both, are such as, at the existing ratio of the price of 
 wheat to the price of beets, would make it more profit- 
 able for them to produce beets, and still others who 
 would find it about equally profitable to produce either. 
 These last would shift easily from wheat production to 
 the production of beets or vice versa, according as the 
 first or the second kind of produce rose in price in rela- 
 tion to the other. Those engaged in wheat production 
 will not necessarily receive returns exactly equal to those 
 received in beet production. They may receive either 
 more or less according to the circumstances. Thus, if 
 wheat is much more desired than beets by the commun- 
 ity in general, the price of wheat will be high enough 
 to bring into wheat production thousands of persons (and 
 their land or the land they hire) who at a lower price 
 of wheat would have chosen to produce beets. Yet there 
 will still be some who, because of their special aptitudes 
 and their preferences as to kinds of labor or because of 
 the qualities of their land, will continue to produce beets. 
 Their returns will be less than before. The returns of 
 wheat raisers will be greater. But the new condition, 
 like the old, will be one of equilibrium. 
 
 Similarly, an increased use of shoes and a diminished 
 desire for hats would, at least for a time, increase the 
 remuneration of shoemakers and decrease that of hat 
 makers. If the only barrier to change of occupation is 
 the difficulty of learning a new trade, wages in the trade 
 for which there is now a greater demand need not in- 
 definitely remain much higher than in the other trade in
 
 12 The; Taxation of Unearned Incomes 
 
 order to keep more workers in the former. But if the 
 new work is permanently distasteful to many of those 
 drawn into it in order to satisfy the demand, then the 
 wages paid in it may have to be permanently higher, even 
 if the work involved is to a large number of those en- 
 gaged in it, the most agreeable work they can find. The 
 persons who would have been in this work, even at the 
 old relation of prices, are therefore fortunate. They en- 
 joy surplus wages or profits above what would have been 
 necessary to induce them to go into the work. They 
 may, and probably will, enjoy larger average incomes 
 than the persons who remain in the other line. And yet 
 there is a sense in which it can be said that incomes in 
 their line are not higher than in the other, viz., that 
 there are still, in the other line, persons who find it, all 
 things considered, preferable. 
 
 Such inequality — if inequality it should be called — as 
 results from the conditions above discussed, is an inevit- 
 able concomitant of voluntary choice of industries. To 
 make incomes equal, under such circumstances, or to re- 
 duce the incomes of those in the favored line to what 
 we might consider the average level in the other line, 
 it would be necessary to make occupations coercive. 
 Whether or not we can put greater burdens on those 
 who get the larger incomes than on those who, in either 
 line, receive smaller incomes, is a different matter, which 
 we need not now discuss. It suffices, for the present, to 
 point out that public policy can not advantageously be 
 discriminatory as between industries, unless the indus- 
 try discriminated against is an undesirable one, e.g., the 
 manufacture and sale of harmful drugs, or unless it is, 
 or partakes somewhat of the nature of, monopoly.
 
 The Prici: System 13 
 
 There are, however, cases of difference between oc- 
 cupational incomes which ought, in the opinion of many, 
 to be in some way corrected. These are cases from 
 which the element of monopoly seems not to be wholly 
 absent. Thus, there may be many persons in a given 
 line of production, not because the pay is good and not 
 because the work is pleasant but solely because those 
 who are in this line are disqualified by lack of ability or 
 lack of training for engaging in other lines where com- 
 petition is less intense. The prices of the material goods 
 or the services they turn out will be relatively low be- 
 cause these goods or services are relatively plentiful, yet 
 the labor involved may be difficult and unpleasant. So 
 far as the explanation for the small per capita remunera- 
 tion received, is to be found in the lack, by many or most 
 of the people concerned, of the innate abiHty necessary 
 for the performance of other, better rewarded tasks, the 
 difficulty lies in there being a relative surplus of people 
 who lack relatively desirable (in view of contemporary 
 human needs and tastes) physical or mental character- 
 istics. The biologist interested in eugenics would be 
 likely to fear that partly to support such a class from 
 the surplus earnings of citizens whose characteristics 
 were better adapted to the satisfaction of the more im- 
 portant or of relatively inadequately satisfied human 
 wants, might involve counter selection, an undue multi- 
 plication of the unfit. There may be, indeed, too much 
 counter selection as it is. If so, that is an added reason 
 for not adopting a social policy calculated to increase it. 
 
 But human beings are probably not, innately, so differ- 
 ent in ability that most of the present inequality can be 
 thus accounted for. There are doubtless very many per- 
 sons whose natural aptitudes would enable them to un-
 
 14 The; Taxation oi^ Une;arne;d Incomes 
 
 dertake better paying work than they are at present en- 
 gaged in, if only they had the requisite training. Some- 
 times early disinclination to study and sometimes the 
 cost of education have been the obstacles that have kept 
 them from rising out of the ranks of common labor. If, 
 indeed, learning can be secured only by the children 
 whose parents have large incomes and if large labor 
 incomes can only be secured by those who are able to 
 get considerable training, we have a vicious circle of 
 cause and effect. Perhaps this is one of the reasons — 
 though the need for intelligent citizenship and leader- 
 ship in a democracy is surely another — why it is gen- 
 erally assumed in progressive democratic countries that 
 a system of public education should keep educational op- 
 portunity at least within the possible reach of nearly all. 
 Nevertheless, there are probably limits to the burden 
 which the public ought to be required to assume, even 
 for the spread of education. For one, and a most im- 
 portant, explanation of unequal wages is unequal birth 
 rates. If wage receivers who are unable to earn much 
 because those in their lines are too many, and because 
 the goods or services produced in these lines are 
 therefore too plentiful, were to limit their families, each, 
 to the number they could comfortably support, their ex- 
 cess of numbers, even if few among them worked up 
 into a "higher" economic class, would, in a few genera- 
 tions, cease to be a cause of low remuneration. Higher 
 wages in such a group would result from smaller num- 
 bers in it. And higher wages, together with smaller fam- 
 ilies, would enable the members of the group individually 
 and even without public assistance, to give their children 
 better training. But if the masses of people will not 
 practice birth limitation, while certain groups do prac-
 
 Earned and Unearned Incomes — Wages 15 
 
 tice it in order that their fewer children may be better 
 reared and trained, then there is grave doubt whether the 
 latter class ought to be heavily taxed in order that the 
 children of the former may have equal opportunities. 
 Continuous increase of population, since natural re- 
 sources are limited, tends towards diminished per capita 
 production. Hence a policy of providing for the train- 
 ing of the children of those who multiply rapidly, by 
 drafting the surplus incomes of those who do not, though 
 it may indeed equalize incomes, is almost certain to equal- 
 ize them downward ; while the spread of birth limitation 
 among the classes which suffer — while others gain — from 
 their surplus of numbers, tends to equalize upward. 
 
 Earned and Unearned Incomes — Wages and Profits 
 
 In the previous section the endeavor was made to ex- 
 plain only the inequality which may result between dif- 
 ferent occupations or lines of production, in the price 
 system. So far as we discussed wages, our interest lay 
 in the relation of the wages of unskilled to the wages of 
 skilled labor. We did not attempt to show how the 
 interests of different economic classes, e. g., laborers and 
 capitalists, in any one line of production are related to 
 each other. The persons connected with the production 
 of each kind of wealth or service are divided into classes 
 or sub-groups having interests more or less diverse. We 
 shall consider these sub-groups as three. There are those 
 who perform the labor, those who provide the capital 
 and those who own the land, used in carrying on the 
 production. The corresponding incomes are wages, in- 
 terest, and land rent.
 
 16 The Taxation of Unearned Incomes 
 
 The wages of labor are received for labor services. 
 They depend on demand for and supply of labor and, 
 ultimately, on the (marginal) productivity of the labor. 
 If the services of a workman add more to the produc- 
 tivity of an industry than he receives in wages, it be- 
 comes profitable to employ him, and demand for his serv- 
 ices is likely to result in increasing these wages. (Though 
 custom, prejudice, immobility of labor, and lack of means 
 for exact measurement of the amount and value of work 
 done, may make the readjustment slow and rough.) If, 
 on the other hand, a man's services appear to be of less 
 value than his wages, then these services are not likely 
 to be in demand unless and until the wages fall. Taking 
 the case of a group of wage earners of equal ability, we 
 may reasonably suppose that any establishment which 
 could use their services would tend to employ more of 
 them at a lower wage than at a higher wage, for it would 
 tend to employ them up to such a point that the gain 
 from hiring more was zero. And wages must be low 
 enough so that substantially all the labor force of a com- 
 munity (emigration aside) could get employment among 
 all the manufacturing, mining, farming and other estab- 
 lishments. Without our insisting, however, on all the 
 technical points of economic theory, it should be clear 
 that wages are paid for services rendered, that their 
 amount is fixed by demand and supply, and that demand 
 and supply so operate as to make wages higher when 
 labor productivity is large than when it is small. We 
 have already seen why wages may be higher in one line 
 than in another in connection with our study of the rela- 
 tion of the prices of some goods to prices of other goods. 
 It should be clear, also, that the more efficient workers
 
 Earned and Unearned Incomes — ^Wages 17 
 
 in any given line will be able, on the average, to command 
 higher wages than those who are less efficient. 
 
 Among incomes from labor ought to be included those 
 returns to the owners and managers of industry, above 
 interest on their capital and rent on their land, which 
 economists sometimes call profits. These are the rewards 
 of self -directed labor, as contrasted with wages the 
 amount of which is more or less contracted for in ad- 
 vance. Hence they are even more sensitive to the effi- 
 ciency of the worker at his job than are ordinary wages. 
 But they are certainly none the less the rewards of ef- 
 fort and are not to be confused with the income which the 
 employer gets by virtue of his ownership of property. 
 
 Incomes from labor are often assumed to have some 
 special justification as distinguished from incomes from 
 property. Socialists, for example, assert that labor alone 
 produces value and argue for the termination of all in- 
 comes from property. And while it may be doubted 
 whether this sect, if in control of our economic life, 
 would be very tender with those incomes from labor 
 which we call profits, they would, if consistent, neces- 
 sarily be more tender with those incomes than with in- 
 terest or rent. 
 
 Whatever may be true of most labor incomes, it is cer- 
 tain that some incomes from labor are unearned, if the 
 test be the giving of a quid pro quo to those from whom, 
 in the last analysis, the incomes in question are drawn. 
 When, for example, a group of men successfully form a 
 monopoly in order to raise the price of their goods or 
 services, to the public, above a normal competitive re- 
 turn, the reasonable presumption is that this excess above 
 a competitive return is unearned. So, also, when, though 
 monopoly is not formally or completely established,
 
 18 The Taxation of Unearned Incomes 
 
 methods of business are adopted which are calculated to 
 eliminate even an exceptionally efficient producer, the 
 additional incomes received by those adopting these 
 methods are to be regarded as unearned. So-called un- 
 fair competition is in this category. Thus, a business 
 concern may, as the National Cash Register Company 
 was proved in court to have done, misrepresent a com- 
 petitor's goods; ^ it may, if it controls the major part of 
 the business in its line, so that most dealers will feel 
 obliged to handle its goods, eliminate smaller even though 
 more efficient producers by ordering dealers not to sell 
 the latters' goods on penalty of not being allowed to han- 
 dle its goods ; or such a concern may make arrange- 
 ments with transportation companies to discriminate in 
 its favor and against its rivals, in the matter of freight 
 rates, thus again, despite the possible superior merit or 
 greater cheapness of the latters' goods, eliminating them 
 from the market. Income secured as a result of such 
 (now, in the United States, outlawed) methods of com- 
 petition, clearly is not to be regarded as earned. 
 
 But the case is different with the owners and man- 
 agers of a concern which increases its business and dis- 
 places many of its rivals by virtue of the superior quality 
 or cheapness of its goods, a superiority resulting from 
 more intelligent selection or use of machinery, better 
 adaptation of tasks to men, better organization of work, 
 or other waste-saving proficiency. Business and income 
 so secured are an index of superior service to the public 
 and are not, as in the cases previously discussed, a badge 
 of dishonor. 
 
 2 The various methods of unfair competition practiced by this 
 company are described in Seager, T/ie Principles of Economics, New 
 York (Holt), 1913, pp. 493-499.
 
 Earni;d and Unearned Incomes — Interest 19 
 
 The incomes of employees, like the labor incomes of 
 managing employers, may also be either earned or un- 
 earned, according as those from whom they are ulti- 
 mately derived — usually the consuming public — do or do 
 not receive an equivalent in goods or services. 
 
 §4 
 Earned and Unearned Incomes — Interest ^ 
 
 Incomes from property may be either from capital or 
 from land. We shall consider, first, those from capital. 
 As with incomes from labor, they may be either earned 
 or unearned. This assertion, of course, runs counter to 
 the socialistic view that interest as such is always exploi- 
 tation. According to the doctrine of orthodox socialism, 
 labor produces all value. From this premise it is argued 
 that those who perform the labor should get the entire 
 product. Since they do not get the entire product of 
 industry, the present economic system is asserted to be 
 one of robbery. Of course, as a matter of sound logic, 
 it is impossible thus to distinguish between labor and cap- 
 ital. While it may be true that nothing or next to noth- 
 ing can be produced by capital without labor, it is likewise 
 true that next to nothing can be produced by labor with- 
 out capital. Labor without buildings, roads, machinery 
 and tools would, indeed, be helpless and might easily 
 perish. 
 
 So much the socialist would perforce admit, but he 
 would perhaps reply that, although labor must use capi- 
 
 ^ In The Theory of Earned and Unearned Incomes, Chs. Ill and 
 IV, the author has attempted a more exhaustive study of interest on 
 capital than is here presented.
 
 20 The Taxation of Unearned Incomes 
 
 tal, capital is but the child of labor, that capital is only 
 an intermediate step between the putting forth of labor 
 and the securing of the full product of labor. This reply, 
 however, hardly gives a full account of the matter. Capi- 
 tal is always a surplus above the needs of present con- 
 sumption. Hence its creation involves not only labor 
 but also a refraining from the present consumption of the 
 products of labor. In short, the creation of capital in- 
 volves abstinence, or waiting, or saving. The person 
 who, though he labors never so efficiently, consumes in 
 current gratification all that his labor produces (or an 
 equivalent in other goods for which the goods he has 
 produced are exchanged), adds nothing to the capital 
 equipment of society. The only persons to whom society 
 owes anything for the benefits yielded by capital are those 
 persons through whose saving, as well as their labor, the 
 capital comes into existence. And if an increment of capi- 
 tal adds anything to the annual output of the community's 
 labor force, beyond what this labor force would pro- 
 duce with that much less capital equipment, such an 
 added annual output of industry is certainly made pos- 
 sible by that person or those persons whose saving, whose 
 excess of production over consumption, brought the cap- 
 ital into existence. And, further, provided the person 
 whose production and saving makes possible the exist- 
 ence of the capital, gets, as interest on this capital, no 
 more than the use of the capital adds to the production 
 of goods and services which would have been possible 
 without it, he cannot be said to rob anyone, since no one 
 is any worse off than if the accumulator of the capital 
 had never brought it into existence. If the socialist 
 would say, frankly, that, though the accumulator of cap- 
 ital makes possible an addition to the annual product of
 
 Earned and Unearned Incomes — Interest 21 
 
 industry above what all the labor available and all pre- 
 viously existing capital would otherwise produce, and 
 is in that sense the real producer of this additional annual 
 product, nevertheless not he but the other members of 
 society ought to get this additional product, ought to 
 exploit the actual producer of it, we might disagree 
 with the socialist but we could at least understand him. 
 But to say that labor alone produces all wealth is eco- 
 nomic nonsense. And in saying this, in the sense in 
 which he does say it, and basing upon it serious conclu- 
 sions regarding public policy, the self-styled scientific so- 
 cialist reveals his system as a pseudo-science. In this 
 regard, nearly all types of socialism seem to be on com- 
 mon ground. Interest appears to be anathema to socialists 
 of all or nearly all schools, not merely to those of pro- 
 fessed Marxian leanings. And guild socialism, the latest 
 fad of many socialist theorizers, is no exception. 
 
 Nor can the socialist easily distinguish between wages 
 and interest on other grounds, so as to justify one and 
 condemn the other. He cannot, for instance, make an 
 ethical distinction by asserting that wages are a reward 
 for sacrifice and interest a payment not earned by sacri- 
 fice. To be sure, saving may be, for many, a pleasure 
 which they would indulge were no interest paid. Partic- 
 ularly may persons whose incomes are large, save con- 
 siderable amounts for the benefit of their children with- 
 out being conscious of appreciable present deprivation. 
 But the labor for which wages are paid may also be, in 
 some cases, not only not a sacrifice, but a continuous 
 source of pleasure. There seems to be a notion, among 
 socialists and some others, that the reason why wages 
 are paid and, also, the reason why wages should be paid, 
 is because labor is unpleasant. It is true that the greater
 
 22 The Taxation of Unearned Incomes 
 
 unpleasantness of one kind of work than of another, 
 when the latter does not require a more rare type of 
 ability than the former, gives rise to higher pay for the 
 former. But if all work were a delight — as some work 
 is to some workers — those who did the work would not 
 on that account consent to forego their pay. Nor would 
 any employing property owner be able to avoid paying 
 wages for work done, so long as labor was productive, 
 since he would have to reckon with the competition of 
 other employers to whom productive labor would seem 
 worth hiring. It is because labor produces something 
 that wages are paid and not because labor is unpleas- 
 ant. Similarly, it is because capital and, therefore, in 
 effect, saving, produces with labor more than labor alone 
 could produce, that interest is paid for the use of capital 
 in industry. The time has gone by when sacrifice as 
 such can be regarded as a virtue apart from any bene- 
 ficial consequences it may produce, or can be regarded as 
 entitled, in itself, to any reward. 
 
 It does not follow that all interest is earned any more 
 than that all wages are earned. Capital, as well as labor, 
 may be so used as to produce a disservice rather than a 
 service to the general public. Capital may be invested 
 in the means of corruption, in building up political influ- 
 ence through which the public is exploited, in the tools 
 and machinery of noxious drug making, in the plant of 
 a periodical devoted to misrepresentation. If so, the in- 
 terest received cannot be said to be earned in the sense 
 in which we are using the term. So far as interest on 
 capital and remuneration of labor are received by per- 
 sons who do not give for them equivalent service to 
 those from whom such interest or wages are in the last 
 analysis drawn, it would seem that the receipt of such
 
 Earned and Unearned Incomes — Interest 23 
 
 interest and wages by them should be prevented, if pre- 
 vention is in any way possible. A democracy can hardly 
 afford to have a privileged class deriving large incomes 
 for disservices or even for negative services. 
 
 Under the plan of things laid down by orthodox so- 
 cialists no individual, as such, would be allowed to own 
 capital to any appreciable extent. Certainly no one 
 would be allowed to own any of the machinery of pro- 
 duction. Hence, no individual could have any motive in 
 accumulating capital unless that motive were the common 
 good and he would not actually accumulate it unless the 
 influence of such a motive overweighed the personal and 
 family sacrifice involved. Capital would, therefore, un- 
 der such a regime, presumably have to be accumulated 
 and maintained by the state. This would mean, in a dem- 
 ocratic community, that saving would have to be sup- 
 ported, or at least tacitly agreed to, by a majority of cit- 
 izens, in order that any saving should be done, while 
 under the present system capital is accumulated even if 
 only one person out of ten or one out of a thousand is 
 willing to make the incident present sacrifice. 
 
 Again, such state saving as the socialist would resort 
 to is, for the individual who is not in the majority, 
 compulsory saving. He must accept, in present con- 
 sumable goods, only that part of the wages he would 
 otherwise get, which the majority permits, in order that 
 the remainder should be used for the maintenance or the 
 increase of capital. Or, on the other hand, in case the 
 majority decides against adequate saving, then the indi- 
 vidual who would have saved must see the community's 
 productive equipment depreciate and the prospect of a 
 good living for his children progressively decline, without 
 being able to apply any remedy.
 
 24 The: Taxation of Unearned Incomes 
 
 It is not the intention to argue that no form of socialism 
 or near-sociaHsm could possibly be adopted which would 
 work differently. Thus, the state might operate all in- 
 dustry, but secure its capital from the voluntary saving 
 of its employees, and pay these employees interest based 
 on the per cent, advantage * of having their capital. In- 
 deed, voluntary choice whether to save or not, coupled 
 with payment of interest in accordance with the utility 
 to the community of the saving, would seem to be con- 
 sistent with voluntary choice whether to work or not 
 and in what occupation to work, coupled with payment 
 of wages in accordance with the utility to the community 
 of the work done. Compulsion as to saving would appear 
 to comport better with compulsory labor and compulsory 
 assignment to occupations. 
 
 Should any sort of quasi-socialized state be at all feas- 
 ible on the voluntary principle, the main question of ex- 
 pediency would perhaps be as to the efficiency of such a 
 state in serving its citizens economically, in comparison 
 with the efficiency of independent and more or less com- 
 peting business units. But objection to the private re- 
 ceipt of interest on capital is so fundamental in the doc- 
 trine of socialism — including guild socialism — that few 
 socialists are likely to urge any system which permits it. 
 
 § 5 
 Earned and Unearned Incomes — Land Rent 
 
 In beginning a consideration of land rent we may ad- 
 vantageously call attention to a fundamental distinction, 
 
 * Marginal advantage, the economist would say.
 
 Earned and Unearned Incomes — Land Rent 25 
 
 too often overlooked, between rent and interest. It is 
 sometimes said that the rent of land is no less interest 
 than the return on other capital, since the return on land 
 can be viewed as a given percentage on a given valuation, 
 while, on the other hand, the interest on other capital 
 can be viewed as an absolute amount in dollars per ma- 
 chine or factory, just as land rent is viewed as so many 
 dollars per building lot or per acre a year. But more 
 fundamentally there is a difference, despite the superficial 
 resemblance, between situation rent and capital interest. 
 The return on land should be looked at as an absolute 
 amount measured and determined by the surplus above 
 interest and wages (the surplus over production on the 
 extensive or intensive margin), which can be produced 
 by industry on the land in question. It is not determined 
 by the value of the land. Neither has the value of land 
 as such, i. e., its situation value apart from improve- 
 ments, any relation to any cost of production, since the 
 land was not humanly produced. On the contrary, the 
 value of the land can be arrived at only by discounting 
 its expected future rents or returns at some previously 
 found rate of interest. Thus, a piece of land which 
 would yield $5,000 per year net rent (above taxes, wages 
 of labor employed, interest on the capital invested in 
 buildings and other improvements, and insurance) would 
 be worth, if interest were 5 per cent., $100,000. Were 
 the current rate 10 per cent., such a piece of land would 
 be worth but $50,000. 
 
 With equipment of the producible and reproducible 
 kind, however, the relation between capital and income 
 value is not the simple one above outlined. The value 
 of such capital, though not unaffected by the value of its 
 expected services, is very directly related to the cost of
 
 26 The Taxation op Unearned Incomes 
 
 its production. Buildings of a type costing $5,000 each 
 will hardly be put up to sell for much less, as a rule, by 
 the builders. Nor, so long as the alternative is open to 
 him of supervising the construction of a similar building, 
 will a possible buyer care to pay a great deal more. The 
 value of a building is determined then, in large part, by 
 the expenses, such as wages, of producing the materials 
 and of puting it up ; and these wages are determined, in 
 the last analysis, by the existence of alternative lines of 
 activity open to the wage-earners, while the other costs 
 are determined by the alternative uses to which the land 
 or capital which must be used in producing the mate- 
 rials might be put. 
 
 Since the value of produced and reproducible capital 
 is thus in large part fixed directly by its cost of pro- 
 duction, the assertion that interest is in large part deter- 
 mined by the rate of productivity of capital does not in- 
 volve reasoning in a circle. Interest is 5 per cent, be- 
 cause, for one and perhaps the most important reason, 
 capital worth $10,000 will produce an annual net income 
 of $500. It therefore appears, to sum up our conclu- 
 sions thus far, that the value of produced capital depends 
 in a considerable degree on cost of production, that the 
 ratio between the value of capital and its income is an 
 important factor in determining the general long-run rate 
 of interest, and that this rate of interest is an essential 
 element in the valuation of land. 
 
 It is but a short step to the conclusion that the ac- 
 «_umulators of produced capital may — and in many cases 
 doubtless do — add to the value of the annual aggre- 
 gate income of society as much as they take out of this 
 income in interest ; while the owners of land, as such, 
 contribute no service in return for their income. Where-
 
 Earned and Unearned Incomes — Land Rent 27 
 
 as, in the case of produced capital, the pubhc (except in 
 certain cases, numerous enough no doubt, where the 
 capital is wastefully or injuriously used) pays the owner 
 for a service which, without his saving (or the saving 
 of someone whose right tg payment has been transferred 
 to him) would not have been enjoyed; in the case of 
 land the payment is made for a benefit which is depend- 
 ent on no individual's saving or effort and a benefit for 
 which, therefore, no individual is responsible. In the one 
 case the community pays for a service which is actually 
 rendered to it. In the other case it pays people who have, 
 in the capacity in which they are paid, rendered no 
 service.^ 
 
 To avoid any possible misunderstanding, let it be em- 
 phasized that land rent as here defined does not mean 
 merely the sum paid by a tenant to an owner, for the use 
 of the land, but equally the amount received by the per- 
 son who himself uses his own land, in excess of wages 
 for his labor and interest on his capital. This rent 
 comes to him in money when he sells the goods or serv- 
 ices which the land produces. He is paid, thus, by oth- 
 ers, for benefits which not he but the land renders. The 
 community, in buying from him, pays him for more than 
 the service he and his capital render them. 
 
 The nature of land rent and of the influences that 
 
 5 Professor Edwin R. A. Seligman, whose views regarding the 
 ideal sort of taxation appear to be fundamentally antagonistic to 
 those presented in this book, has, in the opinion of the present writer, 
 signally failed to grasp the distinction set forth above. See his 
 Principles of Economics, sixth edition, New York (Longmans), 
 1914, paragraph beginning at bottom of page 391. For a further 
 elaboration of this and related distinctions, see the succeeding essay on 
 The Rent of Land and Its Taxation, S 7.
 
 28 The Taxation of Unearned Incomes 
 
 bring it into existence can not, perhaps, be better set 
 forth than in the following passage from Henry George's 
 Progress and Poverty : ^ 
 
 "Here, let us imagine, is an unbounded savannah 
 stretching off in unbroken sameness of grass and flower, 
 tree and rill, till the traveler tires of the monotony. 
 Along comes the wagon of the first immigrant. Where to 
 settle he cannot tell — every acre seems as good as every 
 other acre. As to wood, as to water, as to fertility, as to 
 situation, there is absolutely no choice, and he is per- 
 plexed by the embarrassment of richness. Tired out 
 with the search for one place that is better than another, 
 he stops — somewhere, anywhere — and starts to make 
 himself a home. The soil is virgin and rich, game is 
 abundant, the streams flash with the finest trout. Na- 
 ture is at her very best. He has what, were he in a pop- 
 ulous district, would make him rich; but he is very 
 poor. To say nothing of the mental craving, which would 
 lead him to welcome the sorriest stranger, he labors un- 
 der all the material disadvantages of solitude. He can 
 get no temporary assistance for any work that requires 
 a greater union of strength than that afforded by his own 
 family, or by such help as he can permanently keep. 
 Though he has cattle, he cannot often have fresh meat, 
 for to get a beefsteak he must kill a bullock. He must 
 be his own blacksmith, wagonmaker, carpenter, and cob- 
 bler — in short, a 'jack of all trades and master of none.' 
 He cannot have his children schooled, for, to do so, he 
 must himself pay and maintain a teacher. Such things 
 as he cannot produce himself, he must buy in quantities 
 and keep on hand, or else go without, for he cannot be 
 
 OBook IV, Chapter II.
 
 Earned and Unearned Incomes — Land Rent 29 
 
 constantly leaving his work and making a long journey- 
 to the verge of civilization; and when forced to do so, 
 the getting of a vial of medicine or the replacement of a 
 broken auger may cost him the labor of himself and 
 horses for days. Under such circumstances, though na- 
 ture is prolific, the man is poor. It is an easy matter for 
 him to get enough to eat ; but beyond this, his labor will 
 suffice to satisfy only the simplest wants in the rudest 
 way. 
 
 "Soon there comes another immigrant. Although 
 every quarter section of the boundless plain is as good 
 as every other quarter section, he is not beset by any em- 
 barrassment as to where to settle. Though the land is the 
 same, there is one place that is clearly better for him than 
 any other place and that is where there is already a settler 
 and he may have a neighbor. He settles by the side of 
 the first comer, whose condition is at once greatly im- 
 proved, and to whom many things are now possible that 
 were before impossible, for two men may help each other 
 to do things that one man could never do. 
 
 "Another immigrant comes, and, guided by the same 
 attraction, settles where there are already two. An- 
 other, and another, until around our first comer there 
 are a score of neighbors. Labor has now an effective- 
 ness which, in the solitary state, it could not approach. 
 If heavy work is to be done, the settlers have a log- 
 rolling, and together accomplish in a day what singly 
 would require years. When one kills a bullock, the 
 others take part of it, returning when they kill, and thus 
 they have fresh meat all the time. Together they hire 
 a schoolmaster and the children of each are taught for 
 a fractional part of what similar teaching would have 
 cost the first settler. It becomes a comparatively easy
 
 30 Thej Taxation of' Unearned Incomes 
 
 matter to send to the nearest town, for someone is always 
 going. But there is less need for such journeys. A 
 blacksmith and a wheelwright soon set up shops and our 
 settler can have his tools repaired for a small part of the 
 labor it formerly cost him. A store is opened and he 
 can get what he wants as he wants it ; a postoffice, soon 
 added, gives him regular communication wij;h the rest 
 of the world. Then come a cobbler, a carpenter, a har- 
 ness-maker, a doctor; and a little church soon arises. 
 Satisfactions become possible that in the solitary state 
 were impossible. There are gratifications for the social 
 and the intellectual nature — for that part of the man that 
 rises above the animal. The power of sympathy, the 
 sense of companionship, the emulation of comparison and 
 contrast, open a wider, and fuller, and more varied life. 
 In rejoicing, there are others to rejoice; in sorrow, the 
 mourners do not mourn alone. There are husking bees, 
 and apple parings and quilting parties. Though the ball- 
 room be unplastered and the orchestra but a fiddle, the 
 notes of the magician are yet in the strain, and Cupid 
 dances with the dancers. At the wedding, there are oth- 
 ers to admire and enjoy; in the house of death, there are 
 watchers ; by the open grave, stands human sympathy to 
 sustain the mourners. Occasionally, comes a straggling 
 lecturer to open up glimpses of the world of science, of 
 literature, or of art ; in election times come stump speak- 
 ers, and the citizen rises to a sense of dignity and power, 
 as the cause of empires is tried before him in the struggle 
 of John Doe and Richard Roe for his support and vote. 
 And, by and by, comes the circus, talked of months be- 
 fore, and opening to children whose horizon has been the 
 prairie, all the realms of the imagination — princes and 
 princesses of fairy tale, mail-clad crusaders and turbaned
 
 Earned and Unearned Incomes — Land Rent 31 
 
 Moors, Cinderella's fairy coach, and the giants of nur- 
 sery lore; lions such as crouched before Daniel, or in 
 circling Roman amphitheater tore the saints of God ; os- 
 triches who recall the sandy deserts; camels such as 
 stood around when the wicked brethren raised Joseph 
 from the well and sold him into bondage ; elephants such 
 as crossed the Alps with Hannibal, or felt the sword of 
 the Maccabees ; and glorious music that thrills and builds 
 in the chambers of the mind as rose the sunny dome of 
 Kubla Khan. 
 
 "Go to our settler now, and say to him: 'You have 
 so many fruit trees, which you planted; so much fenc- 
 ing, such a well, a barn, a house — in short, you have by 
 your labor added so much value to this farm. Your 
 land itself is not quite so good. You have been cropping 
 it, and by and by it will need manure. I will give you 
 the full value of all your improvements if you will give 
 it to me and go again with your family beyond the verge 
 of settlement.' He would laugh at you. His land yields 
 no more wheat or potatoes than before, but it does yield 
 far more of all the necessaries and comforts of life. His 
 labor upon it will bring no heavier crops, and, we will 
 suppose, no more valuable crops, but it will bring far 
 more of all the other things for which men work. The 
 presence of other settlers — the increase of population — 
 has added to the productiveness, in these things, of labor 
 bestowed upon it, and this added productiveness gives 
 it a superiority over land of equal natural quality where 
 there are as yet no settlers. If no land remains to be 
 taken up, except such as is as far removed from popula- 
 tion as was our settler's land when he first went upon 
 it, the value or rent of this land will be measured by the 
 whole of this added capability. If, however, as we have
 
 32 The Taxation of Unearned Incomes 
 
 supposed, there is a continuous stretch of equal land, 
 over which population is now spreading, it will not be 
 necessary for the new settler to go into the wilderness, as 
 did the first. He will settle just beyond the other settlers, 
 and will get the advantage of proximity to them. The 
 value or rent of our settler's land will thus depend on 
 the advantage which it has, from being at the center of 
 population, over that on the verge. . . . 
 
 "Population still keeps on increasing, giving greater 
 and greater utility to the land, and more and more 
 wealth to its owner. The town has grown into a city — 
 a St. Louis, a Chicago, or a San Francisco — and still it 
 grows. Production is here carried on upon a great scale, 
 with the best machinery and the most favorable facili- 
 ties; the division of labor becomes extremely minute, 
 wonderfully multiplying efficiency; exchanges are of 
 such volume and rapidity that they are made with the 
 minimum of friction and loss. Here is the heart, the 
 brain, of the vast social organism that has grown up 
 from the germ of the first settlement ; here has developed 
 one of the great ganglions of the human world. Hither 
 run all roads, hither set all currents, through all the vast 
 regions round about. Here, if you have anything to sell, 
 is the market; here, if you have anything to buy, is the 
 largest and the choicest stock. Here intellectual activity 
 is gathered into a focus and here springs that stimulus 
 which is born of the collision of mind with mind. Here 
 are the great libraries, the storehouses and granaries of 
 knowledge, the learned professors, the famous special- 
 ists. Here are museums and art galleries, collections of 
 philosophical apparatus, and all things rare, and valuable, 
 and best of their kind. Here come great actors, and 
 orators, and singers, from all over the world. Here, in
 
 Earned and Unearned Incomes — Land Rent 33 
 
 short, is a center of human hfe, in all its varied manifes- 
 tations. 
 
 "So enormous are the advantages which this land now 
 offers for the application of labor that instead of one 
 man with a span of horses scratching over acres, you 
 may count in places thousands of workers to the acre, 
 working tier on tier, on floors raised one above the other, 
 five, six, seven and eight stories from the ground, while 
 underneath the surface of the earth engines are throbbing 
 with pulsations that exert the force of thousands of 
 horses. 
 
 "All these advantages attach to the land; it is on this 
 land and no other that they can be utilized, for here is 
 the center of population— the focus of exchanges, the 
 market place and workshop of the highest forms of in- 
 dustry. The productive powers which density of pop- 
 ulation has attached to this land are equivalent to the 
 multiplication of its original fertility by the hundred fold 
 and the thousand fold. And rent, which measures the 
 difference between this added productiveness and that 
 of the least productive land in use, has increased accord- 
 ingly. Our settler, or whoever has succeeded to his right 
 to the land, is now a millionaire. Like another Rip Van 
 Winkle, he may have lain down and slept ; still he is 
 rich — not from anything he has done, but from the in- 
 crease of population. There are lots from which for 
 every foot of frontage the owner may draw more than 
 an average mechanic can earn ; there are lots that will 
 sell for more than would suffice to pave them with gold 
 coin. In the principal streets are towering buildings, of 
 granite, marble, iron and plate glass, finished in the most 
 expensive style, replete with every convenience. Yet they 
 are not worth as much as the land upon which they rest
 
 34 The Taxation of Unearned Incomes 
 
 — the same land, in nothing changed, which when our 
 first settler came upon it had no value at all." 
 
 But, it may be said, at least many of the present land- 
 owners are persons who have made their savings from 
 what they have earned and have chosen to invest their 
 savings in land rather than elsewhere. Have they not, 
 in their savings, given the community as much value as 
 they draw in rent? The answer may well be that they 
 have given, to that part of the community from whom 
 their rent income is derived, nothing whatever. If A, 
 who has saved $10,000, uses it to buy a piece of land from 
 B, he is merely paying B for the privilege, previously en- 
 joyed by B, of receiving rent from others for the use of 
 something which neither he nor any other individual pro- 
 duced and the use of which would be equally available 
 had no owner or purchaser of land ever been born. In 
 turn, B has now the $10,000 of accumulations and it is 
 quite possible that he may use it in some way that will 
 increase the annual product of industry. If so, the com- 
 munity, or some members of the community, will come 
 to be paying B, in interest on capital, for services which, 
 without A's saving, would not have been available, while 
 they will be paying A, in rent, for benefits from the use 
 of land, which are not due to any individual's work or 
 savings. If, before, the community was paying the land- 
 owner B a rent while getting no service that could fairly 
 be regarded as coming from him now it is making pay- 
 ments to both A and B, as rent and interest respectively, 
 and receiving services in return from only one. If, be- 
 fore, B the landowner was a pensioner to whom the 
 community gave something for nothing, now A has be- 
 come the pensioner, having bought out B, and is receiv- 
 ing, from the rest of the community, something for noth-
 
 Earned and Unearned Incomes — Land Rent 35 
 
 ing. For it should be clearly evident that the $10,000 
 paid to B for the land is not a service rendered to C, D, 
 or E, who are the persons that have to pay A for the 
 use of the land. Yet much of emphasis is commonly di- 
 rected to the assertion that the land-using part of the 
 community ought to pay rent to landowners because 
 these landowners have in many cases paid previous land- 
 owners for the land and despite the fact that none of the 
 landowners in the series can be said to have rendered any 
 service to those from whom they collect rent payment. 
 In other words, it is asserted that C, D and E ought to be 
 obliged to pay A for no service rendered by him or by 
 anyone, simply because A previously paid $10,000, not to 
 C or D or E, but to B. Is such a doctrine good utilita- 
 rianism? Is its application good social policy? 
 
 The same principles apply in the case of such natural 
 resources as coal and iron mines, oil and natural gas 
 wells and power sites. The incomes derived by the own- 
 ers of the steel trust and others from such resources 
 represent, not service, but the privilege of drawing trib- 
 ute from the masses as a condition to allowing these 
 masses to make use of the bounty of nature. And those 
 enthusiasts for government ownership of all natural re- 
 sources, who would have the public buy up these re- 
 sources from their present owners at current values are 
 simply proposing that the tribute now collected as rent 
 or royalties or dividends shall be given an added sanc- 
 tion and shall be collected in the future as interest on gov- 
 ernment bonds, to the payment of which the government 
 will be pledged. These natural resources had no cost of 
 construction. Their salable value is but the capitalization 
 of tribute. To issue government bonds for them is to
 
 36 The Taxation oi^ Unearne^d Incomes 
 
 make this tribute rendering more irrevocable, perhaps, 
 than before. 
 
 The suggestion has been made (most prominently and 
 effectively by Henry George) that the proper way for 
 the community to deal with all such unearned incomes 
 is to appropriate them to public use by the method of tax- 
 ation. Whether or not it is possible or desirable to take 
 such unearned incomes by taxation, it should be clear 
 that under the competitive individualistic system of busi- 
 ness, no other method of preventing the individual receipt 
 of such incomes is possible. If, for example, when the 
 owner and user of a piece of land were different per- 
 sons, the owner could be forbidden to charge as rent 
 the surplus, due to advantageous situation, yielded by 
 that specific piece of land above the ordinary returns 
 to labor and capital, the user would proceed to appro- 
 priate such surplus. For the fact that the titular owner 
 was not allowed to charge rent would not increase the 
 supply of the goods produced or marketed on the land, 
 and, since price is fixed by demand and supply, would 
 not lower the price of such goods. The producer or 
 dealer who was fortunate enough to have, for nothing, 
 the use of a piece of land so good or so advantageously 
 situated as to give him a larger return than would cover 
 his outlays for wages and interest (including interest on 
 his own capital) and pay for his own time, would not, 
 on that account, sell his output below the market price 
 charged by competitors. But even if he did, his compet- 
 itors need not lower their price, since there has been 
 no increase in supply or decrease in demand, and since, 
 therefore, the demand on other producers or dealers by 
 consumers remaining unsatisfied, will be as great as be- 
 fore. So, even if the favored producer does lower his
 
 Earned and Unearned Incomes — Land Rent 37 
 
 price (as it is safe to say he will not), that would merely 
 pass the favor to a privileged few of the consumers of the 
 article. The price could not be reduced to all consum- 
 ers unless reduced by all other producers. 
 
 Furthermore, some of these other producers are pro- 
 ducing under conditions such that their labor and capital 
 produce little or no surplus for rent ; they may be, for 
 instance, producing on land so poor for the purpose that 
 it yields substantially no surplus.'^ For them to reduce 
 their price would be to curtail their wages or interest or 
 both. In that case, the attempt to terminate rent would 
 result in lessening other kinds of incomes of the produc- 
 ers of the goods in question and giving these incomes to 
 the consumers of the goods. But these consumers can 
 be no other than the producers of other goods. The in- 
 jured producers would, therefore, under a regime of free 
 choice of industry, change their occupations and the line 
 of their investment. In short, rent can not be distributed 
 to all consumers of all goods, and to give it to some con- 
 sumers or to transfer it to tenants leaves as large an ele- 
 ment of special privilege in the situation as before. Un- 
 less, then, appropriation or taxation of rent, by and for 
 the whole community, is possible, the situation is irreme- 
 diable under the competitive system of business. 
 
 It is perhaps desirable to add an illustration from the 
 economics of railroad transportation. Suppose two cit- 
 ies to be connected by a railroad which runs through a 
 narrow river valley. The traffic is more than this line 
 can handle. Another line is essential but the second has 
 to follow a winding and hilly route. The cost of car- 
 
 7 Or they may be producing on what economists call the inten- 
 sive margin. 
 
 70774
 
 38 The Taxation of Unearned Incomes 
 
 riage of goods on the second road is necessarily higher. 
 The first road has an advantage of situation. It has an 
 exclusive use of the better route, from which it derives 
 a substantial revenue. For it can and will charge rates 
 as high as does the winding hilly road and will still get 
 plenty of traffic. To require rate reduction of the first 
 road will not transfer this excess income to the general 
 public. For, since this river-valley road cannot carry 
 all of the traffic, some shippers, at least, must pay rates 
 high enough to make worth while the operation of the 
 other railroad. Otherwise it will be abandoned — or 
 never built. And to reduce rates only on the river-valley 
 road is merely to transfer to a favored group of ship- 
 pers, and not to the whole public, this road's revenue 
 from a natural advantage of situation and from the 
 growth of the community served. The excess income 
 of the river-valley road is situation rent. Taxation of 
 rent by the public can be made to secure, for the general 
 benefit, as much of this income as it is desired to get. 
 Rate regulation can not. 
 
 One thing, at least, can be asserted with positiveness, 
 viz., that a tax on the rental value of all land, however 
 used, can neither be shifted from one landowner to 
 others nor from landowners as a class to any other class. 
 The reasons are that such a tax can in no wise limit the 
 supply of land or determine the direction of its use. It 
 cannot decrease the supply of land because land, as we 
 have defined it, is not humanly produced. If it were, a 
 lax on it might decrease the amount of it and so make 
 rent higher. If the landowners who lease their land 
 charge higher rents for its use, tenants will endeavor to 
 economize in the use of land and some of the owners 
 will find their land idle and yielding no revenue. These
 
 Earned and Unearned Incomes — Land Rent 39 
 
 will quickly reduce their rent charges, the more so if un- 
 used land is taxed at the same rate as used land, since 
 --nly so can they avoid loss. 
 
 We may state the matter convincingly in a somewhat 
 different way if we call attention to the fact that the 
 landowners were presumably, before the tax was laid, 
 charging all the rent they could get. There is nothing in 
 the tax to make tenants willing to pay more or land more 
 difficult to hire. Supposing the tax to apply also to un- 
 used land, even more land will probably be on the mar- 
 ket for hire than would otherwise be the case, because 
 of the loss to owners in leaving their land idle. Hence, 
 owners cannot raise their rents. 
 
 To put the matter in still another way, it may be said 
 that rent is the surplus which can be produced by labor 
 and capital on any piece of land above what that labor 
 and capital could produce on the poorest land in use,^ for 
 which no rent is paid and which has either no value or a 
 purely speculative value based on prospects. A tax on 
 the value of land would not increase this surplus yield on 
 the superior land, and could not, therefore, increase 
 rent. 
 
 Let us suppose that a tax is levied upon a piece of 
 land because of its value, because, that is, of its superi- 
 ority over the poorest land in use and in proportion to 
 that superiority, and that the owner of the land tries, be- 
 cause of the tax, to charge more rent to the tenant. In 
 that case the tenant may resort to poorer land on which 
 the rent and, therefore, the tax is insignificant or zero 
 
 8 Or, more fully stated in the terminology of economics, above the 
 amount which labor and capital could produce on either the exten- 
 sive or the intensive margin of production.
 
 40 The Taxation of Unearned Incomes 
 
 and leave without rent and with his tax nevertheless to 
 be paid, the too grasping landowner. Such a prospect 
 or its actual realization must cause the owners of land to 
 keep down their rent charges and to pay the tax them- 
 selves. 
 
 Since a tax on land values — or on land rent, for this 
 comes to the same thing ^ — cannot raise rents, it can in 
 no way raise the prices which tenants charge for the 
 goods they produce or sell on the land. But can it raise 
 the prices charged by the owners of the land for the 
 goods they produce or sell on it when they themselves use 
 their land? Clearly not. Such owners will not, because 
 of the tax, produce any less of the goods in the produc- 
 tion of which they are engaged. Refusing to produce 
 the goods would not relieve them of the tax. They will 
 produce as many goods as if there were no tax. And if 
 the tax does not make such goods any scarcer, their price 
 will not be made higher. In other words, if, before the 
 tax is laid, landowners are charging for their goods all 
 they can get, the tax will not cause them to charge any 
 more for they cannot get any more. 
 
 If, then, we look at the matter of general land-value 
 taxation from any point of view whatever, we arrive 
 at the same conclusion, viz., that a tax on land value or 
 land rent is paid by the owner of the land and by no one 
 else, that the owner cannot because of such a tax raise 
 either his rent or the prices of his goods, but that, in- 
 
 Although the capital value is itself affected by the tax and falls 
 as the tax rises, while the rental value is relatively independent of 
 the tax. It is therefore simpler to tax economic rent than to tax 
 capitalized value. Indeed, a tax on rent of lOO per cent, would 
 reduce capitalized value to zero.
 
 Inequality of Earned Incomes 41 
 
 deed, productive land held out of use by speculators is 
 forced onto the market so that, if land rent changes at 
 all, the direction of the change is likely to be downward. 
 Other taxes may discourage production. But land-value 
 taxation, so far as it has any effect at all on production, 
 operates to increase it and thus to reduce prices or to raise 
 wages or both. 
 
 § 6 
 Inequality of Earned Incomes 
 
 Suppose, however, that it eventually becomes possible 
 to do away with all unfair business practices, to stamp 
 out the industry of the business highwayman, to break 
 up, or regulate, or operate by the public, all monopolies 
 so that justice shall be done to the consumers of monopo- 
 lized goods, to make birth rates in different classes even 
 enough and educational opportunity general enough so as 
 to avoid the partial monopoly which the relatively few 
 now have of valuable training and skill, and to take by 
 taxation for public purposes the unearned income from 
 land or sites. Would we then have the ideal economic 
 society? There would still be inequality. The man of 
 exceptional genius might still find it possible to secure 
 very great income, and the man who had received large 
 inheritances from his ancestors (assuming the passing 
 of wealth to be substantially unchecked) would have a 
 large income earned, not by his own, but by his parents' 
 and grandparents' saving.^" It is conceivable that the 
 
 1° It must be admitted that inheritance of property accumulated 
 in a past when exploitation was still possible would not always be 
 inheritance of earned property. It might very plausibly be argued, 
 therefore, that a taxation system adapted to a period of transition
 
 42 The Taxation oif Unearned Incomes 
 
 amount of inequality even yet resulting would be dan- 
 gerous in a democracy. Large incomes, even if fairly 
 earned by the individuals or families enjoying them, 
 might possibly confer the power of corruption and lead 
 to the temptation to use such power for the gaining of 
 unearned income in the future. That the danger would 
 be as great as at present can hardly be credited, and we 
 certainly need not now be prepared definitely to advo-. 
 cate taxation of earned incomes on such grounds. But 
 the believers in democracy will insist that democracy 
 must at all events be protected, and if, by any chance, 
 it should develop that inequality, even of earned incomes, 
 were great enough to threaten democracy, sufficient lim- 
 itations, by taxation of incomes or inheritances or other- 
 wise, ought probably to be put upon such inequality. 
 
 Again, though all incomes be earned, it may be con- 
 tended that the utility of a unit of money (e. g., a dollar) 
 to the man who possesses many such units is so much 
 less than its utility to the man who earns few as to justify 
 taxing the former more heavily and spending some of 
 the money really earned by the former, for the benefit of 
 the latter. This is the theory on which charitable relief 
 is largely based and it is also the basis of the so-called 
 ability theory of taxation. 
 
 Clearly, however, there are dangers in carrying such a 
 policy too far. Those whose ability is high in one fine 
 may, to be sure, often be persons of only mediocre ability 
 in other lines of activity ; but if the line in which they 
 show ability is one in which ability is scarce relative to 
 the use society has for it, such persons need to be en- 
 
 away from unjust economic institutions should contain features 
 which might not be permanently desirable.
 
 Inequality of Earned Incomes 43 
 
 couraged to make full use of their ability and it is fur- 
 thermore desirable that they should have descendants 
 who inherit their capacity for such efficient service. A 
 system of taxing earned incomes which should come too 
 close to leaving individual incomes equal would almost 
 certainly discourage the revealing of ability above the 
 average by those who have it or are capable of devel- 
 oping it, unless invidious distinctions of honor and rank 
 in society were to take the place — if they could do so 
 effectually — of differences in creature comforts. 
 
 We need not say that the time can never come when 
 the abler members of a group will put forth their full 
 efforts for the welfare of their weaker social brothers 
 and sisters, who, in turn, will gratefully accept equality 
 of incomes bestowed upon them by those whose produc- 
 tive efficiency is greater than theirs. But it is not to be 
 assumed that this time has yet come, if it ever should or 
 can. Furthermore, it is greatly to be desired that society 
 should breed more largely from its abler than from its 
 inferior members, that those who have high special abili- 
 ties, provided these abilities are of a useful kind, should 
 be well represented in posterity. It may indeed be true 
 that there is now altogether too much of a tendency for 
 society to breed from inferior strata rather than from 
 the superior. But a change in moral standards and ideals, 
 a growing pride in the ability to pass on worth-while 
 characteristics, may some day change this. Absolute 
 equality of incomes among adults, on the other hand, 
 would negative it, unless those of higher ability were 
 willing to take for themselves and their children fewer 
 and poorer creature comforts than their efforts gave to 
 their inferior brothers and sisters. Again, incomes based 
 on size of families would enable those persons who irres-
 
 44 The; Taxation oi^ Unearned Incomes 
 
 ponsibly have large families, together with their numer- 
 ous children, to exploit almost without limit those who, 
 by themselves having small families, endeavored to pre- 
 vent population from outrunning the possibilities of com- 
 fortable subsistence. Whether or not, therefore, we 
 might expect the efficient eventually to be willing to put 
 forth their best efforts that the inefficient might fare 
 equally well, it is not even to be desired that the efficient 
 should be willing to put forth their best efforts that the 
 inefficient might have as many or more children and as 
 well cared for as those whose superior ability produced 
 a greater volume of goods. 
 
 A parallel argument can be made regarding interest 
 on the accumulation of capital. It is perhaps not even 
 desirable that those who save capital should have to see 
 the interest earned by it go to the support and increase 
 of the children of the incapable and unthrifty. And cer- 
 tainly one cannot but experience grave doubt whether 
 capital would be saved in anything like the present degree 
 if no income whatever were allowed from it either to the 
 accumulator or to his children. 
 
 It is to be hoped that no one will draw from the above 
 remarks relative to the competition of individuals within 
 any community and fitness to survive, the conclusion that 
 any selective purpose is secured by allowing the private 
 receipt of what we have called unearned incomes. Su- 
 perior efficiency in producing worth-while goods is a very 
 different thing, in its relation to societal interests, from 
 superior craftiness in getting something for nothing. A 
 society composed of persons of the former characteristic 
 would have at hand the means for pleasurable existence 
 on the part of all its members. A society composed of
 
 Inequality of Earned Incomes 45 
 
 persons of the latter characteristic would be one in which 
 each man's hand was "turned against his neighbor." 
 
 If all exploitive activities were terminated and if all un- 
 earned incomes derived from advantages of situation, 
 etc., as distinct from unethical business practices, were 
 appropriated by the public, the individual receipt of un- 
 earned incomes would be impossible. It would then be 
 necessary to decide whether and how far the taxing of 
 earned incomes for the sake of using the funds to bene- 
 fit those whose earning power was small, could be re- 
 garded as a proper public policy. It is entirely possible 
 that if the receipt of unearned incomes by individuals 
 were henceforth completely prevented, the inequality re- 
 maining would not be such as to justify further attempts 
 at leveling. For further attempts in this direction might 
 be thought of as involving the establishment of new 
 privileged interests, the privilege in question being to 
 those who produce least to enjoy equally or more nearly 
 equally than their productive efficiency would seem to 
 justify, with those who produce much. 
 
 However this and other problems ought to be settled, 
 it is clear that economic democracy is not to be attained 
 without thought and that it is unlikely to be attained in 
 full all at once. Mobs and reigns of terror will not in- 
 troduce it. If it be true that the exploited masses can- 
 not trust the teaching of those lawyers, statesmen and 
 others, who constitute the intellectual defenders of things 
 as they are, it is also true that without intelligent leader- 
 ship in statecraft and an understanding, by their leaders, 
 of economic principles, an understanding zvhich the so- 
 cialist leaders certainly have not, blunders, discredit and 
 eventual rejection will be the probable fate of those who 
 might become the effective forces of reform.
 
 46 The Taxation of* Unearned Incomes 
 
 §7 
 
 Recapitulation 
 
 At the beginning of this essay it was pointed out that 
 before economic reform can be profitably discussed, 
 there must be an intelHgent comprehension of the ex- 
 isting system of economic organization. For the bene- 
 ficiaries of the present system have their intellectuals who 
 can give it theoretical justification and they know how, 
 practically, to run it ; while its violent overthrow by ignor- 
 ant revolutionary groups would be almost certain to be at- 
 tended with mistakes calamitous enough to discredit 
 them and would quite possibly result in the restoration 
 of the temporarily outlawed system of privilege. 
 
 Addressing ourselves to the securing of a birds-eye 
 view of the existing economic system, we found it to be 
 one of division of labor with voluntary specialization 
 of individuals and their property in different lines of 
 production. Prices are the inducements by which men are 
 led to sell goods or to produce goods for sale. Compulsion 
 might be substituted but probably would not be popularly 
 approved. Competition tends towards partial equalization 
 of returns in different lines but does not necessarily re- 
 sult in complete equalization. Thus, in any given relation 
 of public demand for two different articles, there may be 
 some persons and some sites as to whom and whose 
 owners it is a matter of indiiference whether they should 
 be devoted to producing the one article or the other. But 
 there may also be persons whose efficiencies are such 
 that they secure much larger incomes where they are than 
 they could get in an alternative line or, perhaps, than 
 many persons in such an alternative line do get; and a
 
 Recapitulation 47 
 
 parallel statement can be made regarding the use of 
 specific pieces of land and the interests of their owners. 
 
 Inequality results, then, so far as returns to labor are 
 concerned, from differences of ability innate or acquired. 
 So far as it results from differences of ability which are 
 innate, it is undesirable that the multiplication of those 
 of less ability should be encouraged at the expense of 
 those of greater ability. So far as inequality of incomes 
 is due to differences of opportunity, these differences 
 are partly a matter of education and partly a matter of 
 comparative birth rates. Low wages in any group are 
 likely to be due to the numbers in that group, competing 
 for employment, and these numbers depend as much 
 on comparative birth rates as on the avenues of escape 
 from the group through education. 
 
 In present-day economic society incomes are divided 
 into wages for labor (including profits to self-employed 
 labor), interest on capital and rent on land. Wages of 
 labor are earned or unearned, as the terms are here used, 
 according as they are received for an equivalent serv- 
 ice rendered. If, for example, the owners and con- 
 trollers of an industry derive a monopoly profit because 
 their management has resulted in the building up of a 
 monopoly which exploits the public, much of the so- 
 called profit is unearned. So, also, both the controllers 
 of a business and their hirelings, if engaged in corrupting 
 legislators or in the practice of unfair competition can 
 not be said really to earn what they receive. The same 
 distinction may be made as regards income from capital. 
 Interest is unearned when the capital is used in anti- 
 social and exploitive ways. It is earned when the use 
 of the capital confers an equivalent benefit upon those 
 from whom, in the last analysis, the interest is drawn.
 
 48 The Taxation op Unearned Incomes 
 
 As to land, its rent, resulting from natural advantages 
 or from advantages of situation relative to population 
 centers (pure rent as distinguished from interest on im- 
 provements), is clearly unearned, and is no less unearned 
 because the owner may have paid some previous recipient 
 the so-called value of the land for the privilege of getting 
 a return from the rest of the community for no service 
 rendered. And the rent of land is unearned whether the 
 land is used in socially desirable ways or not, for, in 
 any case, the owner is in no sense responsible for the ex- 
 istence or the advantages for business, of his land. 
 
 Towards the end of the essay we raised the question 
 whether, supposing every kind of unearned income to be 
 terminated or publicly appropriated, it would be desirable 
 for the community to tax large earned incomes (or inher- 
 itances) at a high rate for the purpose of preventing, in 
 large part, what inequality might otherwise still remain. 
 For the view that this should be done could be cited a 
 conceivable danger to democracy from inequality even of 
 earned incomes, in case such earned incomes proved to 
 be very unequal, and the theory of charitable relief ac- 
 cording to which units of wealth give greatest utility to 
 those whose wealth is small. But, on the other hand, it 
 seemed that efficiency, survival of the best, and accumula- 
 tion of capital might all be militated against by too great 
 an approach to equality. Indeed, equality of incomes it- 
 self, if productive accomplishments are greatly uneven, 
 is a form of privilege in favor of persons who contribute 
 less than they receive. 
 
 In any event, we are brought back to the conclusion 
 that the establishment of economic democracy is not a 
 simple task. And it cannot be successfully accomplished 
 unless the great mass of the disinherited who would fain
 
 Recapitulation 49 
 
 establish a better system are led by men of greater under- 
 standing of economic principles than is possessed by pres- 
 ent-day Marxian theorists. Unfortunately, it seems to be 
 these theorists who have attained chief influence and 
 leadership among the supporters of radical economic re- 
 forms. 
 
 The path of democracy is in truth a way of peril, beset 
 with the pitfalls of a too common ignorance and flanked 
 by the ambushed forces of privilege. Yet only through 
 this pathway can there be any hope at all of the eventual 
 attainment of a better economic order. For although, in 
 a democracy, interested persons and classes are ever seek- 
 ing to confuse and mislead, in matters of economic policy, 
 a citizenry unduly prone to believe itself championing 
 worthwhile reform v^hen it is really but subjecting itself 
 to a more hopeless exploitation ; nevertheless government 
 by any limited class would be almost an absolute guaran- 
 tee of the self-aggrandizement of that class at the ex- 
 pense of all others. With democracy there is at least the 
 chance that education and the resulting growth of intelli- 
 gence may lead to better things. We need not — if we 
 are scientists we cannot — have the faith in democracy 
 sometimes professed by the practical politician anxious to 
 flatter the common man into giving him his support and 
 vote, that "the people" will always know and do what the 
 general well-being requires. But we may have a limited 
 faith in democracy as the only possible pathway — if any 
 such pathway there be — to an economic system funda- 
 mentally expedient and just.
 
 The savage beasts, in Italy, have their particular dens, they have 
 their places of repose and refuge; but the men who bear arms, and 
 expose their lives for the safety of their country, enjoy in the mean- 
 time nothing more in it but the air and light ; and, having no 
 houses or settlements of their own, are constrained to wander from 
 place to place with their wives and children. 
 
 Tiberius Gracchus 
 
 ( Plutarch's Lives. ) 
 
 We demand prompt action by Congress to open up for de- 
 mobilized soldiers, sailors and marines the opportunity to employ 
 their labor on the unused land and natural resources of our coun- 
 try. And we don't want to be confined to swamp lands, cut-over 
 stump lands and desert lands, either. We hold that the hundreds 
 of millions of idle acres of good agricultural, mineral and timber 
 lands and vacant city lots are none too good for the use of the 
 soldiers who are conceded to have saved civilization at $30 per 
 month, minus large reductions for fines, insurance, etc. . . . Na- 
 ture's bounty has provided Uncle Sam and all his nephews with ample 
 opportunity for all to work if the government will only let down 
 the bars of monopoly and privilege. 
 
 (From a circular issued by The Private Soldiers and Sailors 
 Legion of the United States of Ajierica — quoted in the Ne^v: 
 York World, April 9, 1919.) 
 
 (50)
 
 II 
 
 THE RENT OF LAND AND ITS TAXATION i 
 
 § 1 
 Land Rent as a Marginal Product of Land 
 
 In The Theory of Earned and Unearned Incomes, the 
 writer had occasion to suppose the existence of a piece 
 of land on which the labor of five men working with the 
 aid of improvements and equipment worth $5,000, pro- 
 duced a yearly product above repair and depreciation 
 costs, of $2,200. Of this $2,200, wages constituted 
 $1,500, interest (at 8 per cent.) $400, and $300 a year 
 remained as rent. This $300 measures, roughly, the 
 amount of rent the owner could secure from a tenant. 
 It is the surplus produced on the land, above the remun- 
 eration of the labor and waiting (i. e., saving, or the post- 
 ponement of consumption) used. But the remuneration 
 of waiting or saving, the interest on capital, is fixed by de- 
 mand and supply at a point where it equals the marginal 
 productivity of waiting.^ Likewise, the remuneration of 
 labor is fixed by demand and supply at a point 
 where it equals the marginal product of labor.^ 
 Hence, to say that a piece of land yields per 
 year a surplus of $300 over interest to waiting and 
 wages of labor is to say that it yields a surplus of $300 
 
 1 This essay is reprinted with considerable changes and additions, 
 from Chapter VI of T/ie Theory of Earned and Unearned Incomes. 
 
 2 The Theory of Earned and Unearned Incomes, Chapter IV. 
 
 2 The Theory of Earned and Unearned Incomes, Chapter V, S i. 
 
 (51)
 
 52 The Taxation oi^ Unearned Incomes 
 
 above the marginal product of such waiting and labor. 
 Let us suppose this particular piece of land to be non- 
 existent. Then the labor and capital applied upon it 
 must needs be applied on poorer or less well situated land 
 not previously used, or this labor and capital must be 
 applied to using more intensively land already in use. 
 Applied in either of these ways, such labor and capital 
 would produce $300 less than could be produced if the 
 labor and capital were applied to the $2,200 yielding land. 
 In other words, the $300 is the product of this particular 
 piece of unimproved land in the sense that the existence 
 and use of this piece of land makes it possible for a prod- 
 uct $300 larger * to be secured with no more labor and 
 waiting, simply because the land resources to which the 
 labor and waiting are applied are that much better than 
 the margin at which the labor and waiting in question 
 must otherwise be applied. But although $300 may thus 
 be regarded as a contribution of the land to production, 
 it is not on that account to be regarded as a contribution 
 of the landowner to production. 
 
 It is to be emphasized that the rent of city land is de- 
 termined in just the same way as the rent of land in the 
 country. The well-located merchant derives a larger re- 
 turn from his business as a retailer or a jobber by virtue 
 of his superior situation. So, also, the manufacturer 
 
 4 By way of qualification it may be said that this differential is 
 not fixed but is greater for some potential users of the land than 
 for others. Some users may be able to gain from the use of a piece 
 of superior land much more than they have to pay. To others, the 
 differential is less than the rent and they will presumably use in- 
 ferior land. The marginal product of the land is its productivity 
 to the user who is just induced to hire it and who, if rent were 
 greater, would have to resort to poorer land.
 
 Land Rent as a Marginal Product 53 
 
 whose business is wisely located in relation to sources of 
 power and to shipping facilities derives from such a loca- 
 tion advantages for which he may be willing, if necessary, 
 to pay a high rent and for which, if the desired location is 
 equally advantageous to others, he will have to pay such 
 a rent. In the case of either country or city land it is 
 here intended to regard as land rent only the amount 
 which is the marginal product of the land as such. In- 
 terest on the cost of improvements, whether swamp 
 draining and fertilizing in the case of farm land or filling 
 and levelling in the case of city land, is not properly a 
 part of the rent of land but is a return on capital in- 
 vestment. 
 
 The amount of rent which landowners can get for the 
 use of their land appears to be pretty definitely fixed by 
 the conditions of demand and supply. Attention is com- 
 monly called, by economists, to the fact thai a tax on 
 land rent can not be shifted. The owner of the land can- 
 not, when a tax is levied, get any more rent. The tax 
 does not increase the marginal product of the land. It 
 does not decrease the marginal product of waiting or the 
 marginal product of labor. It cannot make interest 
 lower or wages lower. It cannot, therefore, increase the 
 difference between the total product of the land and the 
 amount going to capitalists and wage earners. It does not 
 make land any scarcer. The tax-paying landowner can 
 even less afiford to keep his land idle than the landowner 
 who is untaxed. It does not decrease the quantity of 
 goods produ':ed on the land and does not increase prices. 
 It simply leaves the landowner with a smaller income by 
 the amoii*:t of the tax subtraction. A tax on interest 
 might diminish saving and make interest, eventually, 
 higher. A tax on wages, especially if heavy, might di-
 
 54 The; Taxation o? Unearne;d Incomes 
 
 minish population and so make wages, in a later gen- 
 eration, larger.^ But a tax on rent can have no effect 
 other than to diminish the amount of revenue received 
 by landowners and give this revenue to the general public. 
 It should be said, however, by way of qualification, that 
 when the rent results not chiefly from a favorable situa- 
 tion or other conditions independent of the owner's labor 
 but in part from a fertility which has to be maintained 
 by the owner's efforts, some shifting may take place. 
 (Return on improvements due to labor is properly inter- 
 est on capital.) But a tax upon the situation rent or 
 value of land falls upon the owner and upon no one else. 
 
 §2 
 
 Land Rent versus Capital Interest 
 
 An examination of the justice of special land-value 
 taxation may advantageously begin with a brief consid- 
 eration of the difference between rent and interest.^ 
 It is sometimes said that the rent of land is no less 
 interest than the return on other capital, since the re- 
 turn on land can be viewed as a given percentage on 
 
 5 This suggests the Physiocratic doctrine that all taxes musi inev- 
 itably be borne by the landed proprietors of a country, through di- 
 minished population and lower rents. The conclusion may be (and 
 may not be) largely true, if we include owners of urban, etc., as 
 well as agricultural land, as the Physiocrats did not. But a tax 
 on wages thus shifted to landowners will fall upon them in very 
 different proportions than a direct tax levied as a percentage of rental 
 value. The former will fall much more heavily in proportion 
 on the owners of near-marginal land and the latter will fall with 
 equal proportionate weight on the owners of superior land. 
 
 ^ This and the following paragraphs of this section appear also 
 in I, § 5, but are repeated here because of their relation to what is 
 to follow.
 
 Land Rent versus Capital Interest 55 
 
 a given valuation, while on the other hand, the interest on 
 other capital can be viewed as an absolute amount in 
 dollars per machine or factory, just as land rent is 
 viewed as so many dollars per building lot or per acre 
 a year.'^ But more fundamentally there is a difference, 
 despite the superficial resemblance, between situation rent 
 and capital interest. The return on land should be looked 
 at as an absolute amount measured and determined by 
 the surplus over production on the extensive or inten- 
 sive margin. It is not determined by the value of the 
 land. Neither has the value of land as such, i. e., its 
 situation value apart from improzTinciits, any relation to 
 any cost of production, since the land was not humanly 
 produced. On the contrary, the value of the land can be 
 arrived at only by discounting its expected future rents 
 or returns at some previously found rate of interest. 
 Thus, a piece of land which would yield $5,000 per year 
 net rent (above taxes, wages of labor employed, interest 
 on the capital invested in buildings and other improve- 
 ments, and insurance) would be worth, if interest were 
 5 per cent., $100,000. Vv^ere the current rate 10 per cent., 
 such a piece of land would be worth but $50,000. 
 
 With equipment of the producible and reproducible 
 kind, however, the relation between capital and income 
 value is not the simple one above outlined. The value of 
 such capital, though not unaffected by the value of its ex- 
 pected services, is very directly related to the cost of 
 its production. Buildings of a type costing $5,000 each 
 will hardly be put up to sell for much less, as a rule, by 
 the builders. Nor, so long as the alternative is open to 
 
 ■^ This view seems to be presented in Fisher, T/ie Nature of Capital 
 and Income, New York (Macmillan), 1906, pp. 184-188.
 
 56 Thi; Taxation of Unearned Incomes 
 
 him of supervising the construction of a similar building, 
 will a possible buyer care to pay a great deal more.* The 
 value of a building is determined then, in large part, by 
 the expenses, such as wages, of producing the materials 
 and of putting it up ; and these wages are determined, in 
 the last analysis, by the existence of alternative lines of 
 activity open to the wage-earners, while the other costs 
 are determined by the alternative uses to which the 
 land or capital which must be used in producing the ma- 
 terials might be put. 
 
 Since the value of produced and reproducible capital 
 is thus in large part fixed directly by its cost of produc- 
 tion, the assertion that interest is in large part deter- 
 mined by the rate of productivity of capital does not in- 
 volve reasoning in a circle. Interest is 5 per cent, be- 
 cause, for one and perhaps the most important reason, 
 capital worth $10,000 will produce an annual net in- 
 come of $500. It therefore appears, to sum up our con- 
 clusions thus far, that the value of produced capital de- 
 pends in a considerable degree on cost of production, that 
 the ratio between the value of capital and its income is an 
 important factor in determining the general long-run rate 
 of interest, and that this rate of interest is an essential 
 element in the valuation of land. 
 
 § 3 
 
 La)id Rent as an Unearned Income ^ 
 It is but a short step to the conclusion that the accumu- 
 lators of produced capital may — and in many cases doubt- 
 
 8 If he purchasers a building already constructed he pays, in its 
 cost, for the supervision of its construction. 
 
 ^ This section is in part repeated from I, § 5, because of the bear- 
 ing of the repeated paragraphs on the immediately succeeding discus- 
 sion.
 
 Land Rext as an Unearned Income 57 
 
 less do — add to the value of the annual aggregate in- 
 come of society as much as they take out of this income 
 in interest ; while the owners of land, as such, contribute 
 no service in return for their income. Whereas, in the 
 case of produced capital, the public (except in certain 
 cases, numerous enough, no doubt, where the capital is 
 wastefully or injuriously used) pays the owner for a 
 service which, without his saving (or the saving of some- 
 one whose right to payment has been transferred to him), 
 would not have been enjoyed, in the case of land the pay- 
 ment is made for a benefit which is dependent on no in- 
 dividual's saving or effort and a benefit for which, there- 
 fore, no individual is responsible. In the one case the 
 community pays for a service which is actually rendered 
 to it. In the other case it pays people who have, in the 
 capacity in which they are paid, rendered no service. 
 
 The view presented so consistently in this book 
 that incomes received not in payment for service ren- 
 dered lack social justification will not, of course, be ac- 
 cepted by the Junker type of mind. More or less plausi- 
 ble arguments may again be advanced as they have often 
 been before, in favor of incomes to privileged classes. 
 It will be alleged that members of these classes, not hav- 
 ing to worry about their livelihood, will become efficient 
 officers of state, scholars devoted to research, and, in 
 other ways, profitable social servants. To the argument 
 that if a class is to be supported without definite regard 
 to a special service for w^hich their income is received, in 
 order that such results may accrue, the public might se-
 
 58 Thk Taxation op Unearned Incomes 
 
 lect in a better way the individuals who should make up 
 this class, it will doubtless be replied that, in practice, the 
 public will not select in any such manner as to give 
 equally good results. Or the supporters of a privileged 
 aristocracy may go a step farther and defend its exist- 
 ence, not by virtue of any alleged superior social serv- 
 ice, but as being good in itself, as a class for the good 
 of which other classes exist, as constituting "the back- 
 bone of the state." To one who accepts either view above 
 outlined, no argument against exploitation will be con- 
 vincing, especially if the exploitation is of an ancient sort 
 and has the prescriptive sanction of long usage, as is the 
 case with land rent. 
 
 To avoid any possible misunderstanding, let it be em- 
 phasized that land rent as here defined does not mean 
 merely the sum paid by a tenant to an owner, for the 
 \ use of land, but equally the amount received by the per- 
 / son who himself uses his own land, in excess of wages for 
 ^ his labor and interest on his capital. This rent comes 
 j to him in money when he sells the goods or services which 
 ^ the land prodvices. He is paid, thus, by others, for bene- 
 fits which not he but the land renders. The community 
 in buying from him, pays him for more than the service 
 he and his saving render them. 
 \ But, it may be said, at least many of the present land- 
 owners are persons who have made their savings from 
 what they have earned and have chosen to invest their 
 savings in land rather than elsewhere. Have they not, 
 in their savings, given the community as much value as 
 they draw in rent? The answer may well be that they 
 have given, to that part of the community from whom 
 their rent income is derived, nothing whatever. If A, 
 who has saved $10,000, uses it to buy a piece of land
 
 Land Rent as an Unearned Income 59 
 
 from B, he is merely paying B for the privilege, pre- 
 viously enjoyed by B, of receiving rent from others for 
 the use of something that neither he nor any other in- 
 dividual produced and the use of which would be equally 
 available had no owner or purchaser of land ever been 
 born. In turn, B has now the $10,000 of accumulations 
 and it is quite possible that he may use it in some way 
 that will increase the annual product of industry. If so, 
 the community, or some members of the community, will 
 come to be paying B, in interest on capital, for services 
 which, without A's saving, would not have been available, 
 while they will be paying A, in rent, for benefits from 
 the use of land, which are not due to any individual's 
 work or savings. If, before, the community was paying 
 the landowner B a rent while getting no service that 
 could fairly be regarded as coming from him, now it is 
 making payments to both A and B, as rent and interest 
 respectively, and receiving services in return from only 
 one. If, before, B the landowner was a pensioner to 
 whom the community gave something for nothing, now 
 A has become the pensioner, having bought out B, and 
 is receiving, from the rest of the community, something 
 for nothing. For it should be clearly evident that the 
 $10,000 paid to B for the land is not a service rendered 
 to C, D, or E, who are the persons that have to pay A for 
 the use of the land. Yet much of emphasis is commonly 
 directed to the assertion that the land-using part of the 
 community ought to pay rent to landowners because 
 these landowners have in many cases paid previous land- 
 owners for the land and despite the fact that none of 
 the landowners in the series can be said to have ren- 
 dered any service to those from whom they collect rent 
 payment. In other words, it is asserted that C, D, and
 
 60 The Taxation of Unearned Incomes 
 
 E ought to be obliged to pay A for no service rendered by 
 him or by anyone, simply because A previously paid 
 $10,000, not to C or D or E, but to B. Is such a doc- 
 trine good utilitarianism? Is its application good social 
 policy ? 
 
 §4 
 
 Improvements by Special Assessments and the Right of 
 Landozvners to a Rental Return 
 
 Nevertheless, to assert that in practice the landowner, 
 as such, never performs any service for vv^hich he is en- 
 titled to a return in payment for the use of his land is 
 going too far. If he is entitled to nothing else, he is usu- 
 ally entitled to a return on the cost, to him, of improve- 
 ments (such as cutting through and paving streets) met 
 by special assessments. These assessments are custom- 
 arily made on all owners of land where a street is to be 
 put through or paved, on the theory that they derive a 
 special benefit from the improvement, a theory which is 
 generally in accord with the facts. It would seem that 
 there is much the same reason for the owners of land 
 which is, in effect, improved by such expenditures, to 
 meet them as there is for farmers to pay the cost of 
 fencing and manuring their own land. 
 
 That the benefit of this street building (as of social 
 growth) goes to the landowners as such, and not to the 
 owners of buildings on the land, should become apparent 
 when it is realized that a building, apart from its situa- 
 tion, can hardly go much above the cost of putting up an- 
 other like it. Suppose two building lots side by side, 
 each worth $2,000. On one, a $5,000 house is put. The 
 other stands vacant. If the building of a street or the
 
 Improvements by Special Assessments 61 
 
 growth of the community makes the combined house and 
 lot worth $9,000, is not the added $2,000 an increase in 
 the value of the land ? If there is no change in the cost 
 of putting up such a house, will not the adjoining land 
 (on which an exactly similar house can be built for 
 $5,000, to sell, with the lot, for $9,000) immediately come 
 to be worth $4,000? A house or other building unwisely 
 located where it cannot be used may come to have less 
 value than its cost, by the necessary expense of moving 
 it, or, if it is not movable to a desirable locality, by an 
 indefinite amount. But a house, as such, can hardly in- 
 crease in value much above its cost of duplication. 
 Analysis seems to show that the increase inheres in the 
 site. 
 
 If, then, on the basis of this fact, the owner of land is 
 compelled to bear the cost, or most of the cost, of the 
 improvements made, it seems but reasonable that he 
 should be allowed to enjoy some return on his investment 
 in the expense of paving or other improvement, if any 
 such return is forthcoming. This does not mean that he 
 is entitled to secure all the value that results from so- 
 cial growth, or, perhaps, any of the value so resulting, but 
 it may mean that he should be regarded as the owner 
 of, and is entitled to interest on, the difference between 
 what the value of the land in question would be to a 
 prospective purchaser by whom the costs of improvement 
 had still to be met, and the value to a purchaser after such 
 improvements have been made. In short, the investor is 
 entitled to a return — if the land can ever be made to 
 yield it — on the expense to him of the special assess- 
 ments. 
 
 It seems clear enough to the writer that a not very ex- 
 cessive rate on such expenditures for street-making, etc.,
 
 62 The Taxation of Unearned Incomes 
 
 will compensate owners on the average for any risks that 
 their land may, in certain contingencies of population- 
 shifting, yield less than an average return on such ex- 
 penses. If, however, a group of lot-owners take steps 
 to have a street cut through long before there is need of 
 it and therefore find that a return on this cost cannot 
 for some time be had, it does not follow that these own- 
 ers are entitled to get, out of the increased value which 
 later may result from social growth, all the interest lost 
 during the interval of waiting. 
 
 That the value of city land usually includes more than 
 can be accounted for by the expense of such improve- 
 ments is evident if we call to mind the value of well- 
 situated land where such local improvements have not yet 
 been made. A piece of land in a great city, situated 
 where the building of a street was contemplated but not 
 begun, might well be less valuable by only about the 
 cost of the necessary assessments than if the street were 
 there. Without doubt it is sometimes true that improve- 
 ments such as street construction start the fashion of liv- 
 ing in a given section of a city and so bring up the value 
 of sites there by far more than the cost of the improve- 
 ments. But it is also true that the outward pressure of 
 population or the building of a railroad or trolley line 
 gives value to the unimproved land in the absence of 
 streets, and makes the putting through of the streets 
 worth while. In this latter case the causal influence runs 
 the opposite way. It is the conditions leading to in- 
 creased value, and the contingent possibility of deriving 
 from the land an income previously not obtainable even 
 if improvements had been made, that give rise to the 
 street-cutting movement.
 
 Other Services of City Landowners 63 
 
 Our conclusion seems to be that owners of land are 
 entitled to a return on their investments in improve- 
 ments, such as special assessments for cutting streets, in 
 the same sense and to the same degree that they are en- 
 titled to a return on the cost of building houses or fac- 
 tories ; that, however, they are no more entitled to a so- 
 cially guaranteed return in the one case than in the 
 other ;" and that there is no reason why they should be 
 allowed more than enough, on the basis of such expendi- 
 tures, to make the expenditures worth while. It does not 
 follow that the sums required as special assessments or 
 purposely invested by land speculators in street building, 
 etc., are not fairly subject to tax in the same way as any 
 property is subject to tax, but only that whatever rea- 
 sons there may be for special taxation of land values in 
 general do not apply to the part of land values clearly due 
 to such investments any more than they apply to the 
 part of farm land values due to the owners' expendi- 
 tures in fertilization. 
 
 §5 
 
 Other Services of City Landowners 
 
 Are there any other expenses met or services per- 
 formed by the city landowner which are to be regarded 
 from the viewpoint of the land-value-taxation philosophy 
 as entitling him to some exemptions? Does the land- 
 lord, for instance, perform a service worthy of a share 
 of economic rent by "managing" the land? Is the joint 
 activity of landowners in a given section, in determining 
 
 1° Except as the community compels them to make improvements 
 at their expense in advance of their own desire to do so.
 
 64 The Taxation of Unearned Incomes 
 
 the class or race of tenants who may live in such a sec- 
 tion, or attending to other matters of common interest, 
 a service entitling them to the enjoyment of rent? Some 
 of this activity or attention is needed only when the land 
 is used for residential purposes, and perhaps might be 
 given, under some arrangement for a percentage consent 
 in favor of new residents, by tenants instead of by land- 
 owners as such, or, as is sometimes the case in a limited 
 degree, by municipal ordinance. The desired protection 
 of tenants in the matter of neighbors is but inadequately 
 given when even two or three landlords, by departing 
 from a general understanding, choose, for a profit, to ad- 
 mit undesirables as tenants or purchasers. Municipal pro- 
 tection might not, in a democratic community, be much 
 better, but it probably would not be much worse. At 
 any rate, any service of this sort yielded by landowners 
 does not entitle them to more than a very small fraction 
 of the annual rent of the land. To say that it is worth all 
 the rent in every case is to say that it is worth much more 
 in a metropolis than in a small town. And to say that 
 all the rent is earned by such service is to say that the 
 cost and trouble of rendering the service so offsets the 
 rent as to make the value of the land (the amount that 
 a purchaser would pay for the future enjoyment of the 
 rent) zero. 
 
 Another view is that the rent of land, instead of 
 being, aside from interest on special assessments, alto- 
 gether an unearned income, is partly a compensation 
 for risk and a stimulus to seek out and bring into use 
 desirable locations. In such a view, it might be argued 
 that the real estate dealers who develop a new section 
 of a city or a city suburb for residential purposes risk 
 getting but an inadequate return ; or the capital put into
 
 Other Services of City Landowners 65 
 
 improvements may be, if the new section proves to be 
 wholly unpopular, entirely lost. Must there be a chance 
 for a corresponding gain of the so-called unearned-incre- 
 ment variety in order that the improvements desired shall 
 be made?^^ And if the possibility of surplus gain needs 
 to be kept open to the land speculator, must this gain in- 
 clude all the rental value of the land for all future time ? 
 Is the fact that a given speculator foresaw, earlier than 
 others, the possibility of developing certain sites, and thus 
 hastened the flow of business or population to them, a 
 reason why later generations of business people or of 
 residents to whom the early bringing into use of the 
 land is no advantage, should have to pay him for the 
 privilege of working or living on it? Of what service is 
 such earlier development to these later generations, that 
 they should have to pay an extra rent for the space used, 
 in order to compensate for an early risk of loss, land- 
 owners or the descendants of landowners who took risk 
 by, possibly, premature building in a new section? So 
 long as this section is now built up and available for 
 business or residence, its having been built long before 
 their use of it is probably of no advantage to present 
 users. If these present users must pay more in conse- 
 quence of such early development, the landowner is pre- 
 sumably receiving payment from persons to whom nei- 
 ther he nor his predecessors have, as landowners, ren- 
 dered a corresponding service. 
 
 In the case of inventions and patents, we limit the time 
 during which the inventor is to enjoy a special profit on 
 his idea, our philosophy being — partly, at least — that 
 
 11 Cf. Hadley, Economics, New York (Putman), 1896, pp. 287- 
 291.
 
 66 The Taxation of Unearned Incomes 
 
 after a few years the general progress of knowledge 
 would be likely to bring the essential idea involved to 
 someone else or to several, and that the general public 
 or that part of the public using the invention cannot be 
 regarded as perpetually indebted to the patentee. May 
 not the discovering of, and the calling of the community's 
 attention to, the value of new sites (and likewise of new 
 mines, etc.) be a service of this limited kind? Can it 
 be supposed that the residents of a city would forever, 
 and despite increase of numbers, be indifferent to the ad- 
 vantages of living in "Hillcrest," "Riverview," "Country- 
 side," or "Eastville"? For how many generations must 
 the public pay the descendants of, or the purchasers of 
 land from, those who first emphasized or advertised the 
 advantages of these sections for the service of thus ad- 
 vertising them ? It is, indeed, quite possible that the land 
 speculators who first, by their advertising, induced pop- 
 ulation to move into a new section, have sometimes per- 
 formed a disservice rather than a service, by unduly has- 
 tening a movement which would have normally come 
 somewhat later. 
 
 Another point sometimes emphasized in the case of 
 patents is that a limited period of special profit is enough 
 to induce the invention and its exploitation. It is un- 
 necessary, therefore, to make the public pay this excess 
 profit forever. May not the same conclusion apply in the 
 case of the service of landowners in calling attention to 
 the advantages of special sites? 
 
 A parallel argument applies in the case of mines, oil 
 wells and power sites. It is unreasonable to suppose 
 either that resources of these sorts would never be dis- 
 covered except by the individuals who first happen upon 
 them, or that it is necessary, in order to get them discov-
 
 Settlivment of Western Land 67 
 
 ered and used, to grant the discoverers the entire rental 
 value of them so long as they are used. 
 
 Even if we should decide that this particular kind of 
 service was of no value and that we did not wish popu- 
 lation or business location to be affected by the activi- 
 ties of land speculators, and even if, therefore, we al- 
 lowed no part of the rental value of land to go into 
 private hands to pay for such services, there would need 
 to be no fear that houses and other structures would not 
 be built. Obviously, a certain intensity of demand and 
 willingness to pay rent for houses, etc., on the part of 
 tenants, would yield a sufficient average return on the 
 cost of building to make investors willing to take the risk 
 of building in places where there was reasonable proba- 
 bility of the use of the houses, and this without any 
 prospect of realization of situation rent as an offset to 
 possibilities of loss. 
 
 While we are on this general topic, one point should 
 be particularly emphasized, viz., that foresight, purely as 
 such, deserves nothing whatever. The man who, fore- 
 seeing a rise in certain land values from a probable in- 
 crease in, or shift of, population, puts himself in a 
 strategic position to profit by it, is not thereby rendering 
 any service to those from whom he derives return. Fore- 
 sight used to give a service may earn remuneration. Fore- 
 sight used to get something for nothing seems hardly de- 
 serving of any special protection. 
 
 The Increment of Land Values in Relation to the Settle- 
 ment of the American West 
 
 The expectation of an increase of land values, consid- 
 ered as an inducement to bringing new land into use, has
 
 68 The Taxation oi^ Unearned Incomes 
 
 sometimes been brought up in connection with the settle- 
 ment of the West. It has been asserted, for example, 
 that the lure of the "unearned increment" was instru- 
 mental in inducing the settlement of the West.^^ It has 
 also been argued, in the same connection, that the 
 stimulus to settlement of the West and its earlier settle- 
 ment because of this prospect of an increasing value of 
 the land, benefited not only the settlers, but also those who 
 remained East, and that, therefore, the unearned incre- 
 ment was "diffused" throughout the country.^^ Many 
 have doubtless drawn from this contention the conclu- 
 sion that the descendants of the early settlers in the 
 West are clearly entitled to any increase that may have 
 come to the value of their land, even when cities have 
 grown up on or near it and their descendants have been 
 able to retire and live as landed aristocrats, leaving to 
 others not so fortunate the occupation of agriculture in 
 which their fathers were wont to engage. The argu- 
 ment regarding the diffusion of the increment is based 
 upon the belief that the prospect of rising land values, by 
 inducing a movement of the labor supply westward and 
 its settlement upon the farms, prevented the labor con- 
 gestion in the East, in the cities, and even in the agri- 
 cultural West from being as great as it might otherwise 
 have become. Hence, it can be argued, the settlement of 
 the West prevented the (marginal) product of labor 
 from being so small and wages from being so low, in 
 the East and elsewhere, as might otherwise have been 
 the case. 
 
 12 See J. B. Clark, The Distribution of Wealth, New York (Mac- 
 millan), 1899, pp. 85-87. 
 
 13 Ibid.
 
 Settlement of Western Land 69 
 
 But may we not, in some degree, question the con- 
 clusion that an unearned increment, or any substantial 
 amount of it, was necessary to get the West settled? 
 After all, relatively few of the settlers were fortunate 
 enough to take up land which afterward became part of 
 the sites of cities and it is probable that most of them 
 did not seriously expect such fortune. May we not con- 
 clude that, for the most part, they might have been 
 willing, for the possibility of enjoying homes where the 
 (marginal) product of their labor gave promise of be- 
 ing high to go and take up new land even though the 
 value of the bare land, as such, could not be expected 
 greatly to increase ? It is those who, thus, did not great- 
 ly profit from rising land values, whose sons and grand- 
 sons are now, presumably, working farmers and not land- 
 ed gentry. 
 
 But if, as some economists assert, the prospect of an 
 increasing land value was an essential part of the invi- 
 tation of the West, then the question arises whether set- 
 tlement was hastened, to the temporary economic loss 
 of those who went first and to the later loss (through 
 rent payments) of those who followed, and whether a 
 more gradual spreading of population westward, when 
 a real need rather than an artificial inducement began 
 to operate, would not have been economically better.^* 
 
 As to the question whether the early comers or their 
 descendants are entitled to rent compensation for being 
 earliest because of any service that they thus rendered, 
 we must bear in mind that any such compensation, under 
 
 "Cf. Professor H. J. Davenport's article entitled "Theoretical 
 Issues in the Single Tax," in the American Economic Revieiv, March, 
 1917, especially pp. 22-26.
 
 70 The Taxation oe Unearned Incomes 
 
 our present land system, does not come from those east- 
 erners whose wages are conceivably higher because of 
 the drawing ofif of surplus population to the West. Nor 
 will it probably come, for the most part, from wage- 
 earners in the West whose wages have been made high- 
 er by the movement to the land so stimulated by the 
 prospect of securing a profit from its appreciation. Un- 
 der the present land system, the rental compensation to 
 wealthy western landowners comes from people living 
 in the West, and mostly from people who came a little 
 too late to get land for themselves, or, in some cases, 
 from people who had other ambitions. It is these people 
 whose coming and whose demand for the use of the land 
 bid up land rents. To them, as persons who have come 
 to be inhabitants of the West, any artificially induced 
 scarcity of labor in the East is no longer — if, perchance, 
 it once was — an advantage. Their wages are not higher, 
 but are perhaps lower, in the long run, than if the West 
 were less completely settled. For the (marginal) prod- 
 uct of western labor, if not less, is almost certainly not 
 greater. The old alternative of taking up new and 
 good land is gone. Of course, so long as there was 
 still other new and good land to be had, even western 
 wages must have been kept up by the rush of labor to 
 this land, but this would not continue to be the case as 
 the land filled up and as the available free land be- 
 came progressively poorer. ^^ 
 
 In what sense, then, and how far, were the benefits of 
 rising land values difi;used ? Was it in such a sense that 
 
 1^ Furthermore, the consequent inflow of new labor from the 
 East and of immigrant labor into both East and West tended, by 
 rapidly filling any vacuum, to prevent any considerable realization 
 of such a gain in wages.
 
 SettivEment oe Western Land 71 
 
 the descendants of those who did not take up land 
 must, in justice, pay the descendants of those who 
 did, for the privilege of living and working on 
 it? Are the descendants of those who did not 
 acquire the land to be regarded as having so gained 
 from the possibly slightly larger labor incomes of their 
 grandfathers, or to have so lent their moral sanction to 
 the system, as to be under obligation not to change it, 
 even where cities have grown up and have made land 
 which was worth its hundreds of dollars now worth 
 millions? Is it their social duty to go on paying in- 
 definitely for the use of land which would be equally 
 available and which would be about equally desirable if 
 any individual owner to whom or to whose descendants 
 the payments for its use are made had never lived? Or 
 can society in general be regarded as having ever even 
 impliedly pledged itself that the increase in land values 
 resulting from social growth should go entirely to in- 
 dividuals and should not be subject to any considerable 
 taxation by states or cities? 
 
 Is it not, indeed, clear that we are very definitely main- 
 taining a land system which makes part of the public 
 pay large sums annually to the rest of the public for 
 no service that the recipients of these sums, or their an- 
 cestors, or any other landowners as such have ever ren- 
 dered to the persons from whom their rental incomes 
 are derived? Why are those who thus pay without get- 
 ting, under an obligation to maintain the system and to 
 continue paying through all future time? Must count- 
 less generations of the disinherited be held under obliga- 
 tion to pay for a somewhat problematical "diffusion" ben- 
 efiting some of their ancestors, a diffusion from which
 
 72 The; Taxation of Unkarnrd Incomes 
 
 most of the descendants of those who may thus have 
 somewhat benefited have very hkely reaHzed nothing 
 whatever? We do not allow the creditors of a father to 
 require payment for the father's debts from the labor in- 
 come of a son, however much the father may have gained 
 — in his lifetime — by his borrowing, nor do we insist on 
 "compensation" to a creditor who is therefore unable to 
 recover. We adhere to this policy because we do not con- 
 sider it socially desirable to make one class partially the 
 slaves of another class, to compel them to spend part 
 of their time working for that other class without re- 
 turn from the latter, even though the latter class may 
 conceivably have rendered a real service to the ancestors 
 of the class that pays. May it not be as much contrary 
 to good public policy to recognize any implied contract 
 by which, as an offset to the possibly temporarily larger 
 incomes of one class, the descendants of that class have 
 to pay others for the use of the earth ? Is not the recog- 
 nition of any such implied contract equivalent to recog- 
 nizing the right of men to sell their children or their 
 grandchildren into slavery ? We would not recognize the 
 latter right, in our society, directly and avowedly, even 
 if the children were sold to get food to save their lives. 
 Must we recognize the former? It is true that, in the 
 case of land rent, we associate the payment made with 
 a material thing, the land, but are we not, nevertheless, in 
 essence, dealing with a payment for which no service is 
 rendered ? 
 
 If it is said that the western homesteaders sometimes 
 had to fight the Indians, it can also be said that they 
 frequently and largely received protection from the 
 United States army paid for out of the general tax fund; 
 and it may well be that men who served in the army and
 
 Settlement of Western Land IZ 
 
 gave such protection, or men who contributed in taxes to 
 maintain it, afterward came to have to pay, for the use 
 of land, persons so protected. It is to be questioned 
 .whether any service of the pioneers, still less of the 
 droves of later settlers, who followed them while the 
 land was still cheap, was so important and far-reaching 
 that the descendants of the more fortunate ones can be 
 held to have acquired a right to receive tribute for all 
 future time because of this service, and that the millions 
 of dollars of situation rent in the cities of Chicago, St. 
 Louis, Denver, Los Angeles, and San Francisco really 
 all represent legitimate payment from later comers and 
 their descendants for the equivalent services to these later 
 comers and their descendants, of those who chose to come 
 first. Surely, one who holds this needs take but a short 
 step farther to prove that the whole idea of the unearned 
 increment is a myth, or the product of diseased imagina- 
 tion, and that, really, anything that anyone gets is earned 
 by equivalent service to the one who pays it. 
 
 A qualification of society's right to land rent should be 
 made in the case of a country the population of which 
 has increased or is increasing beyond the point of maxi- 
 mum per capita production. In such a country there may 
 be many families who have each enough land for the 
 most efficient application of their own labor and for com- 
 fortable subsistence and who, by limitation of offspring, 
 are preventing the undue subdivision of such land into 
 small plots — who are doing their share in keeping up the 
 general level of comfort by trying to prevent too great an 
 increase of population in relation to available land. If 
 the rest of the nation multiplies quite without re- 
 gard to natural resources or land space and so forces 
 down the wages of labor production, society's right to
 
 74 The; Taxation of Unearned Incomes 
 
 land space will scarcely justify re-dividing the land equal- 
 ly, thus directly depriving the families which have kept 
 down their numbers of the standard of comfort which 
 would naturally result from their low birth-rate. Nor 
 will this right of society justify a system of taxation 
 of rental values which indirectly accomplishes the same 
 result. For it should be clear that if the land so held 
 by individual families comes to be more valuable, not by 
 virtue of its yielding more, but solely because pressure 
 of population increases the demand for it, then to take 
 all of the greater annual value in taxation may leave less 
 to the owners than they could previously fairly earn. 
 To express differently the same thought ; if the policy 
 of state appropriation of land rent is consistently applied, 
 so that individuals get only the earnings of their other 
 capital and the wages of their labor (employed or self- 
 directed), then an increase of population which lowers 
 the productiveness of labor will not only enable the state 
 to collect more than previously from individual landown- 
 ers, but will leave less to them as individuals and families 
 than before. Such an increase of population will then leave 
 less than before even to those families which are in no 
 way responsible for the population increase from which 
 flows their new family poverty. For this reason, — viz., 
 because it would remove a stimulus to desirable limita- 
 tion of offspring, because it would penalize the far-see- 
 ing, because it would give to families whose ideals tend 
 toward universal misery the inheritance of those fami- 
 lies whose self-imposed limitation of numbers certainly 
 does not decrease the amount of land available for the 
 rest of society and whose ideals, if generally adhered to, 
 would bring universal plenty — such an appropriation of 
 all rental values of land might not be a desirable social
 
 SeITTlement of Western Land 75 
 
 policy. Part of the rental value of land, even of agricul- 
 tural land.held by actual cultivators, may fairly be taken, 
 but not, in crowded countries, all. 
 
 However, in practice the increase of land values is us- 
 ually in large part an increase in the value of special 
 sections of land which growth of population causes to 
 become more advantageously situated in one or more 
 M^ays. As the country grows, certain places come to 
 have new and special advantages as market centers, as 
 ports, etc., and thus acquire an increased rental value not 
 dependent on a lowering of the margin of production. 
 Increase of population in a fertile, unsettled plain, con- 
 taining a great deal of land of approximately the same 
 fertility, might not for many years lower the marginal 
 product of labor. To be sure the later settlers 
 might have to go farther, but the more distant points 
 would be no more isolated than the first-taken land was 
 at an earlier date, and the extension of roads and rail- 
 roads might make them less so. Rent would rise, not be- 
 cause the margin has become lower, but because the 
 situation of a part of the land relatively to markets, pop- 
 ulation centers, etc., has become better. Still more clearly 
 does this fact stand out when at some point on the plain 
 a city develops, called into existence by the increasing 
 number of those whom its merchants, artisans, et al., can 
 effectively serve. Its growth is, possibly, an advantage 
 even to the owners of marginal land, but confers a spe- 
 cial advantage on those whose near-by location enables 
 them to reap exceptional profit from supplying the city 
 needs as to produce. The growth of the city confers a 
 still greater advantage on those whose land comes to 
 have value for distinctly urban uses. The occasional set- 
 tler who or whose descendant finds that his land is in
 
 7^ The Taxation of Unearned Incomes 
 
 the center of a thriving city may become a milhonaire as 
 a consequence of conditions to which his own contribution 
 was neghgible if anything at all. In this case and, in 
 general, in a country like the United States, land rent has 
 probably grown much more largely by the increase of the 
 possibilities of special, often supra-marginal, land, thus 
 creating a differential between it and marginal land, than 
 by forcing cultivation to a lower margin. Hence, any 
 desire that we may feel to protect small landholders who 
 limit their families from being made to suffer through 
 the general increase of population, need not prevent 
 us from taking, in taxation, most of the rental value of 
 land, including that of mines and power sites, and nearly 
 all of the rental value flowing from its situation of city 
 land. 
 
 § 7 
 
 The Bearing of the Contention that there may he Other 
 
 Unearned Incomes Not Especially Associated 
 
 with Land 
 
 It has sometimes been pointed out, by way of objection 
 to the single-tax proposal, that land rent is not the only 
 income which is of the nature of an unearned differen- 
 tial. Sometimes the incomes of genius in excess of what 
 persons of ordinary ability can secure are presented as an 
 analogous case. Whatever may be, in some respects, the 
 degree of likeness, the two cases certainly are not alike in 
 all respects. Thus, it may not be equally possible to tax 
 largely and successfully the incomes resulting from the 
 exercise of genius, as to tax land rent, for, in the case 
 of the large incomes of the exceptionally gifted, the at- 
 tempt to tax them heavily might conceivably discourage
 
 Other Alleged Unearned Incomes 17 
 
 effort and cause the former recipients of these incomes to 
 be satisfied with smaller — and, therefore, untaxed — re- 
 turns. Taxation of the rental value of land, however, if 
 based upon such general considerations as the evident 
 yield of neighboring sites and the apparent market value 
 of the land to be taxed, i. e., if the tax is not made larger 
 because an efficient producer or business man gets more 
 from his land than others could get, would probably in 
 no wise affect the owner's choice of uses for the land or 
 his intensity of use of it or the efficiency of his use of 
 it. Having a tax to pay which was independent of his 
 efficiency, he would be just as eager to earn the maxi- 
 mum income out of which to pay the tax as he would be 
 to earn the maximum income if he were not taxed. 
 
 Indeed, the levying of a tax upon the potential situation 
 rent of land, whether actually received or not, would 
 discourage the speculative holding of land out of use 
 and so would operate to prevent the forcing up of rent 
 by any scarcity of available land induced by such specu- 
 lative holding. 
 
 Economists whose class sympathy (of the influence of 
 which they are not always conscious) or whose training 
 by their former teachers, incapacitates them for seeing 
 any distinction between land and capital and predisposes 
 them to accept superficial resemblances as a conclusive 
 defense, are fond of saying that other values than land 
 values are enhanced by social forces. It is true enough 
 that dress suits are likely to have less salable value in the 
 Ozark Mountains than in the centers of wealth and fash- 
 ion and that a twenty-story office building is worth more 
 in New York City than in a country village. Neverthe- 
 less, cases of monopoly excepted, it can hardly be denied 
 that, year in and year out, produced goods cannot be
 
 78 The; Taxation of* Unearned Incomes 
 
 sold anywhere for much more or much less than the 
 cost of producing them in the places where they are to 
 be sold. An occasional dress suit may have to be sold at 
 a sacrifice in the Ozarks, and a building too large for the 
 needs to be met may prove to have been a mistaken in- 
 vestment in the country village. But as a general rule 
 dress suits will not be produced in or transported to the 
 Ozarks except as the anticipated price covers costs, nor 
 will skyscrapers be regularly built to sell for less than a 
 return which seems reasonable in relation to building ex- 
 penses. And, on the other hand, where competition 
 is active and is carried on fairly, the prices of goods 
 which have to be humanly produced cannot go much 
 above costs. Even making all possible qualifications for 
 cases of obsolescence and for changing conditions of pro- 
 duction, can anyone say that cost is really an element of 
 corresponding significance in the case of land rent? 
 
 Again, it may be said that there is possible no large 
 remuneration, in a sparsely settled primitive community, 
 for the person gifted with an exceptional voice or other 
 highly specialized talent. But neither is so large a serv- 
 ice possible in return for the remuneration. When 
 such remuneration is received it is in return for an equiv- 
 alent service rendered by the person who receives it, and 
 this is not the case with the situation rent of land. May 
 not considerations of eugenics as well as of efficiency 
 in service, apply differently to the proposition to tax such 
 incomes than to the proposition to tax land rent? 
 
 Furthermore, some of the incomes which are often 
 thought of as unearned are chance gains so offset by cor- 
 responding deficiencies of incomes at other times, as to 
 mean no average loss to the public. If the failure of the 
 Argentine wheat crop may unexpectedly give to Ameri-
 
 Other Alleged Unearned Incomes 79 
 
 can farmers, grain dealers and millers a higher return 
 than was contemplated when they made their expendi- 
 tures for seed, labor or grain; so, also, an unexpectedly 
 large crop of wheat in Argentina, Canada, or elsewhere, 
 may compel the same persons to accept prices which 
 fall far short of compensating them for the expenditures 
 and effort undergone. The general public is likely to 
 gain in the latter case as much as it loses in the former. 
 But the general public never gains from an unexpected 
 fall in the rental value of land except in the sense that 
 the public is then less exploited than before. It continues 
 to be exploited, though in a smaller degree. There is lit- 
 tle point to an attempt at equating continuous exploita- 
 tion varying in degree, with occasional excess pay for 
 service which is likely at other times to be underpaid. 
 It will be worth while, here, to emphasize the fact 
 that land rent involves exploitation when the land is 
 used in socially desirable ways as well as when it is used 
 anti-socially. In the latter case, payment is made for a 
 disservice. But even in the former case payment is made 
 for a zero service or for a service less than equivalent 
 to the rent. Where wages of labor, interest on capital 
 or rent on land are secured by activities or by uses of 
 property which definitely injure the general well-being, 
 which are anti-social, these activities or uses should be 
 prohibited rather than that men should be allowed thus 
 to secure wealth which society afterwards taxes. When 
 a business concern by means of unfair competition, e. g., 
 by misrepresentation of competitors' goods or by securing 
 discriminating rates on the railroads,^" succeeds in get- 
 
 ^^ See, for a fuller discussion along this line, the author's Principles 
 of Commerce, New York (Macmillan), 1916, Part III, Chapter 
 VII, § 4-
 
 80 The; Taxation oif Unearned Incomes 
 
 ting extra profits which its rivals do not get, or, being 
 able to undersell the rivals discriminated against, gets 
 business which would otherwise go to them, we have a 
 clear case of unearned income resulting from anti-social 
 activity. Success is made to depend, not on superior 
 service, not on superior efficiency in economizing labor, 
 but on the ability to exclude rivals from the market even 
 if, as may well happen, these rivals are much more effi- 
 cient in the proper business of both or all. The public 
 cannot afford to let the principle become established 
 that success and wealth may be gained by such methods. 
 In the long run, consumers must expect to suffer unless 
 competition of this sort is effectively forbidden. So, too, 
 in the case of monopoly, which gives more than an ordi- 
 nary return to effort or to the users of capital or land, 
 it is the consumers of the monopolized article or articles 
 who are entitled to relief since it is they alone who 
 are exploited.^'' In general, industrial free-booting should 
 
 1^ No opinion is here expressed regarding the relative desira- 
 bility, from the viewpoint of preventing high monopoly prices 
 to consumers, of public regulation and of public operation of in- 
 dustries which have to be or ought to be of monopoly size. But if 
 public operation is chosen, it would seem, on the principles set forth 
 in this book, undesirable that the public should pay for the capi- 
 talized value of the land rent included in the prospective returns of 
 such monopolies. If not to pay for such capitalized exploitation in 
 cases where the public chooses to take over the ownership of any in- 
 dustries is objectionable as discriminating against some landowners 
 while allowing others to continue to enjoy site rent, then the taking 
 over of these industries by purchase should be deferred until a gen- 
 eral policy is adopted towards all site rent. Nor should govern- 
 ment for any long period guarantee interest or net dividends on the 
 bonds or stocks of companies whose property it undertakes to oper- 
 ate. For suppose that during the period of such a guarantee, one
 
 Taxation of Future Increments 81 
 
 be stamped out, so far as this is possible. But for un- 
 earned income in the form of land rent, purely as such, 
 the tax method is adequate and is the logical method of 
 correction. 
 
 Again, even if there are — as there may be — other in- 
 crements than situation rent which are equally unearned, 
 it does not follow that the heavier taxation of land 
 values should be deferred until such time as a general 
 agreement is reached regarding such other increments. 
 It may suit the views of reactionaries to have us use the 
 claim that many and complicated reforms are needed, 
 as a reason for delaying one the justice and desirability 
 of which are reasonably evident, but that kind of atti- 
 tude should scarcely suit anybody else. 
 
 §8 
 
 The Taxation of Future Increments of Value 
 
 Hesitating to accept the more radical proposal of 
 Henry George in favor of sweeping into the public treas- 
 uries situation rent both new and old, some writers have 
 
 or several of the States, or the Federal government itself, should 
 choose to adopt a new tax systenn, e. g-, to increase very greatly the 
 tax on site values. This would for all other industries than the 
 ones in question diminish the land rent part of their incomes, though 
 to be sure, removal of other taxes might increase other elements in 
 their incomes. But, whatever the net result on these other indus- 
 tries, the holders of the securities of the government-operated indus- 
 tries would experience no effect as regards their annual returns. The 
 better way would be to guarantee (if there is to be a guarantee of 
 past earnings), net earnings from business but not net earnings after 
 the subtraction of taxes.
 
 82 The; Taxation of Unearned Incomes 
 
 contented themselves with advocating the public taxa- 
 tion and use of future increases in the rental value of 
 land.^® This advocacy, they seem to have felt, frees them 
 from the necessity of urging anything that looks like 
 confiscation. But there are reasons for thinking that if 
 the more radical proposal involves confiscation, the other 
 does also, though it may be less in degree ; and it is doubt- 
 ful if the more moderate plan can be successfully de- 
 fended without raising a presumption that the more far- 
 reaching scheme has also something in its favor. 
 
 To the proposal that only future increases in rental 
 value be taken by the state, it has been answered that to 
 take future increases without compensating landowners 
 in the case of future decreases in the value of their land 
 unfairly deprives them of the chance of gain while still 
 leaving them the risk of loss. In the words of F. A. 
 Walker, "the game of 'heads I win, tails you lose' is not 
 one in which the state can, in fairness and decency, play 
 a part."^^ If one believes that the present rental yield 
 of land, as well as future increases of this yield, should 
 not go to the private owner, this contention will not dis- 
 turb him. Otherwise it may seem to be convincing. 
 
 There still remains the argument, however, that, in a 
 growing country, increases are frequent and decreases 
 rare and that, therefore, no large injustice would be done 
 by the scheme. But what if the opposition contends, as 
 it plausibly may, that the present owners of land have, in 
 
 '^ See, for example, Taussig, Principles of Economics, New York 
 (Macmillan), 1912, Vol. II, p. 102. This scheme was suggested 
 by John Stuart Mill in the middle of the last century. 
 
 ^^ Political Economy, Advanced Course, New York (Holt) 1887, 
 pp. 416-17.
 
 Taxation of Future Increments 83 
 
 many cases, bought it at prices which they were willing 
 to pay only because of the prospect of future increases? 
 The opposition may contend, in other words, that ex- 
 pected future yields have been discounted into the pres- 
 ent price of the land, and that, therefore, to tax heav- 
 ily these future yields will deprive such purchasers of an 
 income they paid to receive, and will depreciate the value 
 of their land below the price at which they bought it. 
 Some increases, to be sure, may come as unforeseen luck, 
 but many must be, at least in part, anticipated. Is a 
 tax on such increases any less "confiscation," so far as 
 the capitalized value of land is concerned, than would 
 be a moderate increase in tax which would take away a 
 part of the constant annual rent of a piece of land bought 
 with no expectation of a rise, but bought in the belief 
 that its owner would be left undisturbed in the enjoy- 
 ment of the entire rent? 
 
 Without now pursuing this comparison further, we 
 may note that a doctrine according to which the public 
 has no right to take by taxation future increases in land 
 values, increases not earned by any service rendered by 
 the landowners, must, logically, be opposed to other gov- 
 ernmental policies of which most of us are in favor. 
 Such a doctrine would mean, for instance, that the pur- 
 chaser of stock in a company which contemplated — or 
 the purchaser of whose stock foresaw the likelihood of 
 its undertaking — selling out to, or becoming part of, a 
 monopoly and so securing monopoly profits, since such 
 purchaser paid more for his stock because of this expec- 
 tation, must be allowed to enjoy these monopoly profits, 
 or, if they are taken away from him, must be compen- 
 sated. Has the purchaser of stock under circumstances 
 of this kind any such claim even if the policy of limiting
 
 84 The Taxation of Unearned Incomes 
 
 monopoly profits is one which was not previously in 
 force but was adopted after he purchased the stock? 
 
 § 9 
 
 Land-Value Taxation in Relation to the Theory of 
 Vested Rights 
 
 The principal objection actually felt, if not the one 
 chiefly emphasized by opponents of land-value taxation, 
 is an objection based upon respect for v2sted rights, viz., 
 that such a scheme of taxation would take away from the 
 owners of land a large part of the capitalized value of 
 their property by making it impossible for them to enjoy 
 from it the expected future income. If a piece of land 
 yielding $1,000 per year is valued on a 5 per cent, basis, 
 its selling price would be $20,000. To take $200 a year 
 would mean, since a tax on land rent cannot be shifted, 
 that the selling price of the land must fall to $16,000. 
 Hence, it is said, since such taxation takes from the 
 owner a fifth of the value of his property, it is confiscation 
 and a denial of vested rights. Of course what we defi- 
 nitely take is a fifth of the yearly income, but since the 
 value is dependent upon the income the establishment 
 of such a tax as a permanent part of the tax system 
 in effect takes one-fifth of the capital. But how is it if 
 through indirect taxation we take $100 a year from the 
 family of a workingman whose annual income is $500 
 If the man's expectation of life is thirty years, would not 
 the capitalized value of his income be well in the thou- 
 sands of dollars, supposing it to be salable? And would 
 not this capitalized value be reduced one-fifth by a tax 
 of $100 per year if such a tax were adopted as a perma- 
 nent part of the tax system? To be sure, workmen are
 
 The Theory op Vested Rights 85 
 
 not in the habit of thus capitalizing and selHng the right 
 to their future incomes, but is the injury to them from 
 a tax any the less for that, or the fundamental nature of 
 the problem essentially different? If a need of increased 
 revenues were thus met, there might be sympathy ex- 
 pressed for the working classes and objection to the tax 
 as an undue hardship upon them, but the word "con- 
 fiscation" or the expression "vested rights" probably 
 would not be used. No complaint would be made that 
 the fundamental rights of property were being invaded 
 or that society had violated any implied pledge. 
 
 It seems to be this last notion, that of an implied 
 pledge or sanction given by society, which makes many 
 thinkers regard so askance any proposal for radical 
 changes. We must not take rent in taxation because 
 the enjoyment of it is a vested right. "Society" has 
 allowed individuals to appropriate nearly all of rent in 
 the past and various persons have bought land, relying 
 upon the continuance of the system. Hence the private 
 enjoyment of land rent must always be allowed unless 
 compensation is paid by the dispossessed to the posses- 
 sors. 
 
 If we are perfectly frank in our adoption of this 
 vested-rights argument as a reason for refusing to take 
 from those enjoying them incomes not earned by service 
 given to those who pay them, we shall have to admit very 
 frankly that several types of incomes ordinarily objected 
 to by economists must be continued indefinitely. Thus, 
 in consistency, we must protest against any regulation of 
 monopoly which will do away with the monopoly prices 
 on which any monopolists had counted, and particularly 
 so if the monopolists have bought stock at a higher price 
 because of the expectation of monopoly profit. "So-
 
 86 The: Taxation of Unearned Incomes 
 
 ciety" has permitted this profit in the past, has lent its 
 "sanction" to it, has allowed people to buy stock in the 
 expectation of realizing an exceptional profit. May 
 society, therefore, by its regulations cut down this profit? 
 Must it not pay the monopoly prices indefinitely or else 
 compensate the monopolists by paying them in advance 
 the capitalized value of their expected future monopoly 
 profits ? 
 
 So, again, if we would be perfectly consistent, we must 
 not remove the protective tariff on goods when those who 
 have invested in the companies producing such goods 
 have paid more for their stock than they would otherwise, 
 in the expectation of deriving protected profits. In other 
 words, since, largely through the influence of those en- 
 gaged in protected industries, the policy of protection has 
 been maintained for a limited number of years, society at 
 large owes such industries a continuance of favor. In 
 still other words — for this is the inescapable implica- 
 tion — those who wish to consume the protected goods 
 may properly be required to pay for these goods an ex- 
 cess price, a price above the real value of the service 
 given. In this view of the case, the taxed class, being 
 part of society, has some sort of responsibility for what 
 society has done, even for what the class that profits by 
 protection has influenced society to do, and has no right 
 suddenly to refuse longer to pay tribute to the protected 
 class. 
 
 The foregoing is a view which the writer cannot bring 
 himself to accept. Society is under no obligation nor is 
 any class in society under an obligation to pay tribute 
 to any person or group of persons for all future time. 
 Still less is a class which, while another class has con- 
 trolled government, has been exploited, under obligation
 
 The; Theory of Vested Rights 87 
 
 to continue to let itself be exploited if and when it is able 
 to get into the saddle. Society as such has given no 
 pledge, and is not in a position to give a pledge, that 
 its policy will not change. Those who buy stock in a 
 monopoly or invest their money in a protected industry 
 must be held to have done so, not under any guaranty of 
 permanence, but at their own risk, knowing it to be the 
 right of the rest of society to cease paying the excess 
 prices and adopt a new policy at any time. 
 
 How does the matter stand in the case of land values? 
 Must not purchasers of land be presumed to have pur- 
 chased in the knowledge that rates of taxation might be 
 changed and that government might discriminate, for 
 purposes of taxation, among different kinds of property 
 as it often has done among different commodities? Is 
 it correct to think of land-value taxation primarily as a 
 system of taxation that infringes on vested rights by 
 taking something away from landowners? Is it not 
 more enlightening to call to mind that, indeed, the rest 
 of society is continually (weekly, monthly, or annually)-' 
 paying tribute to the owners of land, tribute for which 
 neither these owners nor any previous owners as such 
 have ever rendered a return to those who thus pay them ? 
 When we say that for the public to take in taxation most 
 of the rental value of land would be to confiscate the 
 "property" of those who had previously enjoyed this 
 rent, do we not express the fact the wrong way about? 
 Would it not be nearer the truth to say that the rest of 
 society simply refuses longer to have its earnings con- 
 
 20 Cf. Henry George, Progress and Poverty, Book VII, Chapter 
 III, particularly pp. 362 and 363. (Page reference is to edition of 
 1905, Doubleday, Page & Co.)
 
 88 The Taxation of Unearned Incomes 
 
 fiscated by the landowning class? Does the situation 
 value of land, the value apart from improvements, repre- 
 sent anything else but the estimate, in a present valuation, 
 of the future tribute, the future payments without cor- 
 responding services, which the owners are in a position 
 to get from others? Are not the masses paying a per- 
 petual tax to the owners of land for the privilege of living 
 upon, and making use of, sites which were neither pro- 
 duced nor rendered valuable by the owners ? Suppose the 
 masses who are thus paying tribute without receiving 
 either labor services or more capital equipment for pro- 
 duction than would otherwise be available, or indeed 
 anything else worth the price, simply decide to stop 
 paying this tribute ! Would their doing this be confis- 
 catory? And must they, if they are to cease paying, com- 
 pensate the landow^ners by giving to the latter interest- 
 bearing bonds worth as much as the land, and payable 
 finally, as to interest and principal, by the same persons 
 who now pay rent? Is this not equivalent to saying, 
 not only that those who are slaves in the sense that they 
 devote much of their labor to the support of a parasitic 
 class cannot be freed without provision for compensating 
 the parasitic class, but also that the compensation must 
 be provided by the slaves? Could we reasonably expect 
 the slaves, once they were in the saddle politically and 
 thoroughly understood the matter, to take this view of 
 it? 
 
 As an analogy to the payment of tribute for the use 
 of land to persons who are in no way responsible for its 
 existence, let us suppose that an ancient king or a small 
 ruling caste has somewhere given to a favorite or to 
 someone of political influence the negotiable privilege 
 of collecting each year a certain amount of the taxes
 
 The Theory of Vested Rights 89 
 
 and turning them to his own use. The favorite later 
 sells his "right" to another for a large sum of money 
 which that other had honestly earned by hard and faith- 
 ful work at a useful task. Some time after this second 
 arrangement is made, the taxed class overthrows the 
 power of the king or aristocracy and establishes itself in 
 power. Must this class go on contributing the tax be- 
 cause the would-be recipient paid to get it, notwithstand- 
 ing he paid nothing to those whom he now expects to 
 pay him? And if they refuse, using the money in ques- 
 tion instead as part of their general tax fund for common 
 purposes, are they guilty of an immoral act ? Must not the 
 would-be collector of tax money be assumed to have made 
 his purchase subject to the condition that society could in 
 its own good time make such changes as its members 
 might see fit? And if the remainder of society came 
 to believe that, in the long run, the greatest good to the 
 greatest number would be attained by establishing a sys- 
 tem in which, in general, each should profit according 
 as he served, and in which, except as some special social 
 reason justified the apparent exception, no one might re- 
 ceive tribute from those he did not serve, would not 
 society have a moral right to establish such a system? 
 
 The truth is that few of those who advocate large 
 taxation of land values, even of the single-taxers, urge 
 any but a gradual change in the rate of taxation of land. 
 A sudden break with the past is not sought for. Nor, if 
 it were, would there be any serious likelihood of its 
 coming. Though we may work for the change with 
 ardor, it will probably come through compromises and 
 little by little. But even if the tax change, as such, were 
 suddenly made, its being preceded by a long period of 
 agitation and of growth of the land rent taxation senti-
 
 90 The Taxation of Unearned Incomes 
 
 ment would forewarn landowners and operate to ease 
 the transition for those who were likely to lose by it. 
 Indeed, it is not unlikely that by the time such a change 
 goes into effect — if it finally does go into effect — many 
 landowners will have come into possession of their land 
 more or less expecting the change and will have allowed 
 for it in the price offered for the land they have pur- 
 chased. 
 
 Again, even if, here and there, a town or city in- 
 creases rapidly the amount of tax it puts upon land, 
 this may not, while the new system is not general, cause 
 very considerable loss to landlords. For it will be likely 
 to mean that in those cities business and individuals 
 are relieved of other taxation which elsewhere they have 
 to meet, and the policy will, therefore, probably cause 
 those towns to be more rapidly settled (by the drawing 
 of population away from other towns) and land rents 
 in them to go up.^^ This is a result which would not be 
 brought about if the equally rapid increase of land- 
 value taxation in other places kept the balance. ^^ 
 
 Furthermore, even if the tax were generally applied, no 
 great loss would fall on small landowners who have im- 
 proved their land and who themselves live on it, persons 
 
 21 Suggested by Professor H. J. Davenport's Exercises, printed 
 to be used with his Economics of Enterprise. Cf. pp. 28 and 29 
 of Professor Davenport's article in the American Economic Revieiv, 
 March, 1917- 
 
 22 Some may regard it as an objection to a purely local applica- 
 tion of anything approaching the single tax and the local use of the 
 funds derived from it, that such a policy gives to labor in the town 
 adopting it a benefit more than it receives elsewhere and therefore 
 induces labor to come to such a city when otherwise it would stay 
 away, and, by inducing surplus labor to come, brings diminution of 
 the product of this particular labor.
 
 The Theory oe Vested Rights 91 
 
 who own their own homes and Httle else,-^ and many such 
 would clearly gain. But to persons owning land and 
 buildings which are used by others or for the production 
 of goods to be sold to others, a tax on land rent might 
 eventually involve a considerably heavier burden, since 
 such a tax clearly cannot be shifted (if general), while 
 the tax on buildings very possibly can be, at least to 
 some extent.'* 
 
 The removal of taxation from all capital and its con- 
 centration on land values would of course involve an 
 increased burden to those whose property was chiefly in 
 land values. But the immediate loss to the person who 
 owned both land and capital would be minimized by the 
 fact that he would be enjoying relief from taxation on 
 his capital -^ (the interest from which, if the capital was 
 itself earned and was being used in socially advantageous 
 ways, would be earned), at the same time that he was 
 being made to pay heavier taxes on his land (the situa- 
 tion rent of which was principally unearned). In the 
 end, the removal of taxation on capital would presumably 
 reduce interest rates if the leaving of larger net returns 
 to owners of capital operated to encourage capital ac- 
 cumulation. But for some time the average property 
 
 23 Cf. Henry George, Progress and Poverty, Book IX, Chapter III. 
 
 2* Whether a tax on all the earnings of capital regardless of 
 the line of investment could be shifted and to what extent, would 
 depend on whether and how far such a tax diminished saving. See 
 the discussion of the effect of interest on saving, in The Theory of 
 Earned and Unearned Incomes, Chapter III, § 5 (last three para- 
 graphs of section) . 
 
 25 If the shift in taxation from capital to land were great and 
 sudden, therefore, the rate of interest would be temporarily higher 
 and whatever was left to landowners of site rent would have to be 
 capitalized, for a while, at this higher rate.
 
 15 
 
 92 The Taxation oif Unearned Incomes 
 
 owner would probably be largely compensated in his 
 greater net interest on capital, for the reduction by taxa- 
 tion of his net rent on land. 
 
 In truth, when all is said regarding confiscation, we 
 must recall that government cannot possibly raise reve- 
 nue without taking something from somebody. And 
 if we have to choose between taking an unearned income 
 already being collected by part of us from the rest of us, 
 or allowing part of us to enjoy such an unearned income 
 and taking something more, in taxes for common pur- 
 poses, from the rest of us, the choice should not be 
 difficult. 
 
 To be relieved of the burden of supporting social 
 parasites by rent payments while at the same time sup- 
 porting government out of taxes, and instead to let 
 the rent serve also as the taxes, would mean a clear and 
 large net gain to the classes previously exploited. Yet 
 many of the exploited, understanding little what is 
 happening, and failing to distinguish between property 
 incomes based on service and property incomes purely 
 exploitive, prate pseudo-learnedly of surplus value, the 
 class struggle, and the prospective evolution from cap- 
 italism to socialism. Eternal children in their comprehen- 
 sion of the working of economic forces, unwilling, for 
 the most part, carefully to examine any other economic 
 philosophy than their own, the majority of socialists are 
 ready to follow the Marxian doctrines wherever they may 
 lead, as the dancing feet of the care-free children of 
 Hamelin followed into the dark mountain-side the en- 
 rapturing music of the Pied Piper. The socialistic theory 
 in outline is simple. To the mind unused to analysis it 
 seems to be both a comprehensive and a conclusive ac- 
 count of the nature of exploitation. But its doctrine re-
 
 Ability Theory of Taxation 93 
 
 garding the nature of interest on capital is utterly falla- 
 cious -" and the prospect that its program could be put into 
 effect and made to work is exceedingly dubious. ^^ The 
 classes which profit by privilege, are, in their understand- 
 ing of economic and social phenomena, but little superior 
 to the exploited masses. Were this not the case, and were 
 there not the fear of Bolshevist violence, we might well 
 expect them to be exultant at the relative strength of so- 
 cialism among reform movements. For socialism almost 
 hopelessly diverts the minds of those who might be the 
 principal protestants against the receipt of unearned in- 
 comes into an indiscriminate opposition to earned and un- 
 earned incomes alike. And it therefore serves to prevent 
 recognition of facts the recognition of which by the 
 masses might mean to those who hold economic power 
 based on privilege rather than service, real danger of its 
 loss. The one chief virtue which socialism, as currently 
 preached, does have, is its insistence that evils exist, that 
 present conditions are far from ideal and that the doc- 
 trines and propaganda of the privileged classes are not 
 to be accepted as final truth. 
 
 § 10 
 The Ability Theory of Taxation 
 
 Nor should we be turned back from the taxation of 
 land rent by the contention that the proposal so to raise 
 much or most of the public revenues, does not conform 
 to the ability theory of taxation. It has never been finally 
 
 28 See The Theory of Earned and Unearned Incomes, Ch. Ill, § 5 
 and Ch. IV, § 10. 
 
 2^ See the preceding essay (I), § 2.
 
 94 The Taxation oe Unearned Incomes 
 
 established that taxation ought to be in proportion to 
 abiHty. Taxation ought to be arranged with a view to 
 societal welfare, and this may or may not mean that it 
 should be in proportion to ability. Societal welfare may 
 be better furthered, for instance, by preventing exploita- 
 tion and the consequent receipt of unearned income, 
 than by mathematical precision in apportioning taxes 
 to total income of all sorts. The ability theory of taxa- 
 tion rests upon much the same ground as the theory of 
 charitable relief. In the case of charitable relief it is 
 argued that the sums thus expended have a greater (mar- 
 ginal) utility to the poor and helpless who receive them 
 than to the relatively prosperous who contribute them 
 (voluntarily or otherwise). In the case of taxation it 
 is argued that a large requisition from one who is pros- 
 perous may involve less deprivation and sacrifice than a 
 small requisition from one who is comparatively poor, or, 
 otherwise expressing the same idea, that to take money 
 from the well-to-do, even though they have fairly earned 
 it by giving equivalent service, and to expend it for pub- 
 lic purposes so that a large part of the benefits from its 
 expenditure is received by the relatively poor, will in- 
 crease utility and will increase the sum total of happiness. 
 Assuming wants to be equal, one might with some plausi- 
 bility argue that the maximum of aggregate human hap- 
 piness could only be attained by carrying this principle 
 to the point of equalization of incomes. But long before 
 incomes had been equalized the effects on efficiency of 
 labor, perhaps, also, on the rate of accumulation, and, 
 possibly, on biological selection, resulting from neglect 
 of the principle of making incomes received depend on 
 services rendered, would become serious. The greatest 
 welfare would not be thus secured, m the long run. If,
 
 Ability Theory of Taxation 95 
 
 therefore, we venture to make some partial application, 
 in our tax system, of the principle of equalizing incomes, 
 we must sharply limit our application of this principle 
 in the taxation of earned incomes lest we depart too far 
 from the principle of proportioning incomes received to 
 services rendered. But whether or not there are classes 
 which, because of their poverty, ought to receive from the 
 community in personal incomes and in services from gov- 
 ernment, more than they contribute, in taxes and other- 
 wise, to the community, it seems quite certain that the 
 recipients of situation rent, as a whole, do not constitute 
 such a class. And whatever justification there may be, 
 from the point of view of maximizing utility, in pro- 
 viding that the poor should exploit the rich, it is doubt- 
 ful whether there is any equally plausible justification 
 for provisions which enable the rich to exploit the poor.^^ 
 This, it is believed, is mainly the direction which is taken 
 by the exploitation growing out of our present land sys- 
 tem. If, then, among the owners of land who profit by 
 the exploitation which is inextricably bound up with the 
 present system, are to be found the ubiquitous "widows 
 and orphans" whose anticipated distressful state has been 
 made the basis of opposition to many other necessary re- 
 forms, it is better that society should make special pro- 
 vision for them in those exceptional cases (assuming 
 that there are any such) where the shifting of the tax 
 burden from other values to site values threatens them 
 with poverty, than that it should forever maintain a bad 
 
 28 The writer is not unaware that such exploitation has been 
 suggested as a means by which savings may be made which the 
 poor, having many unsatisfied needs, would not make. See an arti- 
 cle by Alvin S. Johnson, in the Political Science Quarterly, XXIII, 
 pp. 221-241 on "Protection and the Formation of Capital."
 
 96 The Taxation of Unearned Incomes 
 
 system. Indeed there must be many widows and orphans 
 who are victims of this system, of which some of their 
 class may be beneficiaries.' 
 
 § 11 
 
 The Taxation of "Excess Profits" versus The Taxation 
 of Land Rent 
 
 In view of the contemporary popularity of taxes on 
 so-called excess profits, the question ought to be raised 
 whether such profits can advantageously be taxed, year 
 in and year out, on the same basis as site rent. These 
 excess profits, when they are not the fair earnings of 
 superior efficiency in serving the public, must be either 
 the returns of monopoly or the gifts of chance. If they 
 are the returns of monopoly it is, indeed, better to tax 
 them than to allow them to be privately enjoyed, but 
 it is better still to protect the consumers of the monop- 
 olized goods against extortion. If the excess profits are 
 the gifts of chance they must be considered along with 
 chance losses, and when so considered will be seen not 
 to be analogous to land rent. For, as was stated in a 
 previous section,"^ it is incorrect to equate continuous 
 exploitation varying only' in degree (rent of land) with 
 occasional in-excess-of-average pay for services which, 
 on other occasions, may receive less than average re- 
 muneration. 
 
 But there is another important reason for discriminat- 
 ing between excess profits, so-called, and land rent. Large 
 returns in any line of business which is relatively unable 
 to meet the demands upon it for goods or services are 
 
 29§ 7.
 
 Excess Profits Taxes 97 
 
 the means by which, in the competitive system, men and 
 capital are induced to go into such a business. The goods 
 and services produced by the business are temporarily 
 worth more than ordinarily to the community because 
 they are relatively scarce. But the larger returns there- 
 fore received by those in the business in question bring 
 their own correction just because they operate to draw 
 men and capital into the desired line of production and 
 so increase competition.^" Not only is it true, then, that 
 the excess returns tend to be only temporary, but it is 
 also true that to tax them largely out of existence might 
 operate to retard the very readjustment of occupations 
 and investments which is needed. No such objection can 
 be raised to the high taxation of land rent, since such 
 taxation is specifically intended to be independent of 
 the use which any individual chooses to make of his land. 
 But in spite of the differences which analysis makes it 
 possible to point out between land rent and other kinds 
 of incomes, economists of the conservative school will 
 doubtless continue to refuse to see any differences which 
 tend to support special taxation of land rent as against 
 such other incomes. And when asked to suggest, from 
 time to time, how larger revenues may be secured for 
 important governmental services, they will probably con- 
 tinue to look towards almost any other conceivable source 
 rather than to advise increased taxation of rent. 
 
 30 Such evils as result from changes in the general level of prices 
 should be corrected, so far as possible, by stabilizing banking con- 
 ditions and the value of the monetary standard.
 
 98 The Taxation of Unearned Incomes 
 
 § 12 
 
 The Taxation of Inheritances 
 
 Let no one conclude that our argument tells equally 
 against all inheritance on the ground that those who pay 
 interest for the use of capital accumulated by previous 
 generations are paying for a service to persons who did 
 not contribute that service. For it well may be, in the 
 case of inheritance of capital produced by human labor, 
 that the prospect of descendants' reaping return from 
 it is a condition without which, in great part, it would 
 not be saved. If so, the interest is paid for a service 
 which, except for the prospect of interest payment to 
 descendants, might never have been rendered ; it is paid 
 for the use of capital which, except for expectation of 
 reward to descendants, might never have been added to 
 society's equipment. As long as the family affections 
 endure in their present strength much of the happiness 
 of parents will be realized only as they are permitted 
 to work for the future prosperity of their children. Gen- 
 eral welfare and happiness would probably not be fur- 
 thered by a policy which should entirely deprive parents 
 of the privilege of bequest. Nor would the community 
 probably get, in the long run, the use of so much capital, 
 for less would probably be accumulated. A parent will 
 be less likely to save and to invest his earnings in the 
 education of his children if he believes society will ap- 
 propriate all the gain and will not allow his children to 
 .reap a larger income for the larger service which such 
 education enables them to render. And in like manner, 
 a parent will be less inclined to save and invest in capital 
 construction if he believes that society will allow his
 
 Inheritance; Taxation 99 
 
 children to reap no advantage in return for the service 
 from such capital. 
 
 It is, clearly, illogical, then, to abolish the inheritance 
 of wealth without abolishing at the same time all the ad- 
 vantages of nurture and education that the children of 
 thoughtful, thrifty and affectionate parents have over 
 the children of other parents. It is, in short, illogical 
 to abolish the inheritance of wealth unless we also abol- 
 ish the family and make all children wards of the state. 
 
 There is no intention to suggest, however, that inherit- 
 ances should never be taxed or that the law of inheritance 
 is not in need of modification. When, as at present, the 
 state provides for inheritance of the property of intes- 
 tate decedents by remote collaterals who have often been 
 unacquainted with their unconscious benefactors, it can 
 hardly be said that the policy adopted has been dictated 
 by the necessity of encouraging accumulation or by the 
 desirability of giving men and women the happiness of 
 safe-guarding the future welfare of those for whom 
 their affections are strongest. Also, so far as the ex- 
 istence of large estates is the outgrowth of a past 
 when individuals have been allowed to receive large 
 incomes which they have not earned, or so far 
 as such estates may . result from our inability ever 
 completely to prevent the securing of ill-gotten gains, the 
 regulation of the transmission of great estates or their 
 high taxation may be the only means of avoiding the per- 
 petuation of a most undesirable inequality. Even the 
 transmission of estates honestly earned may properly be 
 limited or regulated or the estates heavily taxed if the 
 inequality resulting from their undivided bequeathal is 
 likely to prove a danger to democracy.
 
 100 The Taxation of Unearned Incomes 
 
 But whatever may be the advantages to the general 
 welfare of maintaining in considerable degree the right 
 of inheritance and bequest, there appears to be no reason 
 to believe that to keep the major part of ground rent 
 from going into the pockets of individuals would de- 
 crease the amount of land or the amount of any other 
 capital. 
 
 § 13 
 
 Some Probable Effects of Making Land Rent the Chief 
 Source of Public Revenues 
 
 If taxes were removed, for the most part, from other 
 capital and were concentrated on land, several conse- 
 quences would follow. The net returns to owners of 
 capital would be greater, because less taxed, and this 
 would mean a higher rate of interest to them on the 
 value of their capital. If this higher rate of interest re- 
 sulted in increasing accumulation, the rate might even- 
 tually somewhat decline. So long, however, as the net 
 rate of interest remained higher than before, there 
 would be two reasons for a decline in the selling value 
 of land. Land would decline in value because the net 
 rent to its owners would be reduced by the tax. And it 
 would decline also because its future rent would be cap- 
 italized, for a time at least, at a higher interest rate. For 
 the value of land, unlike the value of capital, has no re- 
 lation to its cost of production. Land, as we have here 
 defined it, has no cost of production. Its value can be 
 arrived at only by knowing or estimating its future rent 
 (or surplus yield over interest and wages) and capital- 
 izing this future rent at the market rate of interest.
 
 Efi'Ects of Land Rent Taxation 101 
 
 If, then, a piece of land is expected to yield $100 a 
 year for an indefinite future, in excess of the wages and 
 interest expended in making use of it, and if the market 
 rate of interest is 5 per cent., the land will be valued at 
 $2,000. A tax which should take each year $75 from 
 the $100 previously left to the owner, leaving him a net 
 rent of only $25, would reduce the value of the land in 
 as great a proportion, i.e. to $500. The annual yield to 
 the owner, after the tax, would be as large a percent- 
 age as before of the price at which his land could be sold. 
 Hence he would have no more motive to sell the land 
 than he had before and he would continue to do with the 
 land exactly what he would do with it if there were no 
 tax. The speculative holder of land, however, would 
 find the tax a reason for not holding his land idle and, 
 if he could not use it, would have to let it go to those 
 who could. 
 
 But if the removal of taxation from capital means 
 that the owner of capital enjoys even tempor?.rily a 
 higher net interest than before, because an untaxed in- 
 terest, the fall in the selling value of land will be more 
 pronounced. For the prospective $25 a year of rent left 
 to the owner if the land is taxed, which, if net interest 
 is 5 per cent., makes the land worth $500, will, if net 
 interest is (say) 6 2-3 per cent., make the land worth 
 only $375. 
 
 Let us consider, now, the efifects likely to be produced 
 upon different classes by a change in the tax system 
 which should remove the burden of taxation, in large 
 part, from capital and commodities and concentrate it 
 on land. The belief has been long held by many per- 
 sons that farmers would regard such a system of taxation 
 as bearing more heavily upon them as a class than upon
 
 102 Thk Taxation 01" Unearned Incomes 
 
 city dwellers. What evidence is available, however, seems 
 to show that land values, at least in some of our states, 
 are much larger in proportion to improvement and build- 
 ing values in the cities than in the country.^^ Further- 
 more, many farmers are coming to resent being taxed on 
 their improvements which constitute so large a propor- 
 tion of their total possessions, while they see speculative 
 holders of unimproved agricultural land, who are render- 
 ing to the public no service, paying taxes much lower 
 and often insignificant. 
 
 The typical small farmer would very likely have con- 
 siderable to gain from a system of securing public rev- 
 enues which avoided taxing him on his buildings, ma- 
 chinery, stock, orchards (except the bare land), fences, 
 drainage improvements and the fertility put into the soil 
 by his own efforts,^" which avoided, also, taxing com- 
 
 31 See Fillebrown, T/ie A. B. C. of Taxation, New York (Double- 
 day-Page & Co.), 1909, Chapter IX. 
 
 "2 For the purposes of taxation, it is not to be assumed, however, 
 that the rental value of agricultural land, as distinguished from the 
 interest on capital, necessarily includes only the rental value which 
 the land might have if the exhaustible fertility elements of the soil 
 were entirely withdrawn. In most cases the land would become 
 unusable without some restoration of fertility elements, before this 
 point had been reached. Land which has been so far exhausted 
 that it will not yield to labor and to the capital invested in build- 
 ings, machinery, etc., the ordinary wages and interest, unless its fer- 
 tility is iv/iolly or in part restored, and which would therefore be 
 abandoned if restoration were not feasible, might not be altogether 
 without fertility elements capable of further exhaustion. But no 
 one could afford to live on the produce of his labor on this land, 
 while thus carr3'ing the exhaustion further. The minimum of prac- 
 tically exhaustible fertility has been reached. If, now, a piece of 
 agricultural land exhausted to this degree is so well situated that a 
 would-be tenant could afford to pay rent for it, provided he were
 
 Effects of Land Rext Taxation 103 
 
 modities of which he was a purchaser, and which taxed 
 only the value of the unimproved land. His net annual 
 
 assured either a perpetual lease or, on termination of the contract, 
 the full cost value of his refertilization, this rent would measure 
 the rental value of the land as distinguished from interest on capital. 
 That land which is so far exhausted as not to be practically usable 
 without some degree of restoration, may nevertheless be so well sit- 
 uated as to yield, if restored, something in excess of the wages of 
 labor and the interest of capital employed upon it, including in "capi- 
 tal" the restored fertility of the land, will be readily admitted. Such 
 a yield is clearly rent. 
 
 Gas and oil wells and mines, like farms, are exhaustible. But 
 they differ from farms in that exhaustion is necessarily permanent. 
 The owner never replaces what he takes from them- There is, 
 consequently, no problem of distinguishing between the rental value 
 given by nature and anj- interest return on elements replaced by 
 the owner. The rental value of the ore of a mine as distinguished 
 from the interest on machinery, shafts, corridors, etc., is all, clearly, 
 unearned (except so much as may fairly be conceded as reward 
 to the discoverer of the mine for making it available somewhat 
 sooner than it might otherwise be found — cf. § 5 of this chapter), 
 and may be taxed with justice at a very heavy rate, perhaps up 
 to loo per cent a year. This conclusion need not interfere with a 
 governmental policy designed to conserve mineral wealth for fu- 
 ture generations. Either inducements could be made to owners 
 to conserve, by a policy of remission or partial remission of taxes 
 on unused mines (which policy might, however, offer temptations 
 to speculative holding of some mines so inducing all the greater 
 use of others, or to monopolistic restriction of output), or the gov- 
 ernment could buy mines outright for the purpose of conservation, 
 being able to buy them more cheaply because of this policy of taxa- 
 tion than if private individuals were permitted to appropriate all 
 the income from natural mineral resources. This will be an un- 
 welcome conclusion to the owners of our mines of gold, silver, cop- 
 per, lead, zinc, iron, coal, etc., but from the point of view of the 
 masses it is a just conclusion nevertheless. For that a few men 
 should be permitted to derive tribute from the remainder as a con-
 
 104 Thi3 Taxation of Unearned Incomes 
 
 returns would frequently be larger, although the selling 
 value of his property would be smaller. Considered as 
 a potential land speculator he would be worse off. But 
 considered as a farmer who intended to remain such and 
 to pass the farm on to his children, he and they would 
 be better off. Such a farmer, if he owned his farm free 
 of debt could accumulate wealth the more rapidly be- 
 cause of the assumed change. And if, previous to the 
 tax change, the farm had borne a mortgage, the new 
 system would enable the farmer more easily to get out 
 of debt. Indeed, there seem to be a very large percent- 
 age of farmers who, with good management and indus- 
 try, can hardly get incomes which amount to fair wages 
 for their labor and interest on the cost value of their 
 improvements. Such farmers get no land rent at all, or 
 an insignificant rent, and, therefore, zvould pay no tax at 
 all if no property but land zvere taxed or would pay 
 a merely nominal tax of a fczv cents an acre. Those 
 economists who favor confining increase of taxation of 
 the rental value of land, to cities, for local purposes, 
 might well be objects of suspicion to such farmers. For 
 it appears often to be in the cities that the receipt of large 
 incomes from the rental values of land is most important ; 
 
 dition precedent to the enjoyment by the latter of nature's subter- 
 ranean gifts, tends neither toward equality of opportunity nor to- 
 ward general wellbeing. 
 
 In passing, attention may be called to the fact that there is noth- 
 ing in the scheme to tax land rent which need at all militate against 
 the forestation of land. Under this scheme idle lands can be the 
 more cheaplj' secured by government for forestation purposes. Under 
 it, the additional value due to an individual's forestation goes un- 
 taxed. And under it, as now, special exemptions from taxation can 
 be given, if it is believed that private forestation is of general 
 benefit, to encourage such forestation.
 
 EFFECTS OF Land Rent Taxation 105 
 
 and it is very clear that the high values of the city lots 
 from which these incomes are drawn are sometimes due in 
 great degree to the growth of environing farm commun- 
 ities. At all events, it may properly be asked why 
 the large rental incomes from city lands may not be 
 taxed to meet the cost of state functions in the benefits 
 of which farmers share, as well as for purely local ex- 
 penses. 
 
 But let us consider the case of the prospective farmer, 
 or of the tenant farmer who desires to become a farm 
 owner. To him there is a still greater benefit as to 
 which there can be absolutely no question. For a tax 
 on land or land rent causes land to be obtainable more 
 cheaply than before. A farm the net rental value of 
 which is $100 a year is worth, capitalized on a 5 per 
 cent, basis, $2,000. But, as we have seen, a tax upon it 
 of $75 per year, leaving the owner $25 while raising 
 the rate of interest (unless and until the stimulus to 
 greater saving again lowered the rate) to 6 2-3 per cent., 
 would reduce the selling value of the land to $375. The 
 purchasing farmer would, to be sure, have to pay each 
 year thereafter the $75 in taxes, but this he could pay 
 and more than pay out of the interest on his saving of 
 $1,625 in the purchase price, even if this interest re- 
 mained only 5 per cent. For 5 per cent, on a saving of 
 $1625 would be $81^. And besides this, it is to be noted 
 that the farmer would now get not 5 per cent, but, for 
 a while at least, a net return of 6 2-3 per cent, on his 
 investment in capital. Let it be noted that just as the 
 acquisition of farms would be facilitated in the country 
 so would be facilitated the acquisition of homes in the
 
 106 The Taxation oi^ Une;arned Incomes 
 
 cities. ^^ But half measures will not suffice. To tax 
 only future increases of land values is not very appre- 
 ciably to cheapen land and so make the acquisition of 
 
 33 There is no intention to argue that all land ought to be used 
 when it is not all needed. Neither is it intended to deny that the 
 holding of well-situated land out of use for a few years may some- 
 times render easier the possibility of a better use (See Fisher, The 
 Nature of Capital and Income, New York, Macmillan, 1906, pp. 
 253-4), that speculation in city lots may yield a service by preventing 
 land from being built on too soon and so saving it for prospective high 
 buildings without necessitating the tearing down of old and lower 
 ones. But if any economic waste is ever so avoided it is probably 
 more than equalled by the waste involved in constructing longer 
 streets, in walking and riding longer distances past vacant land by 
 thousands of city dwellers and in transporting goods farther from 
 store to store and from stores to homes than would otherwise be nec- 
 essary. Individual estimates of gains and losses do not tend to result 
 in the most economical arrangements when the gains and losses do not 
 accrue to the same person. Furthermore, in practice, the notion 
 that money can be made by speculation in real estate, probably op- 
 erates as would a partial combination among holders of vacant 
 land, thus forcing up rents and the price of land. Also, such unused 
 land is raised in value not only by road and street construction but 
 also by other improvements and services paid for from community 
 funds. Hence to tell the owners of land that the improvements 
 will be paid for chiefly by those owners who build upon and use 
 their land, is not merely to avoid discouraging the speculative 
 holding of land. It is to offer a distinct encouragement to such 
 holding. As to those economists who argue that the free play of 
 individual speculation in land will usually keep land from present 
 use only if there are probabilities of a better future use (which the 
 poorer present use is assumed to negative), would any of them 
 deny that when owners who build on and use their land are there- 
 fore forced to pay higher taxes which in part are so spent as to in- 
 crease the value of idle land, the tendency will be for land to be 
 uneconomically and wastefully held out of present use?
 
 Effects of Land Rent Taxation 107 
 
 farms and homes more easy. It is simply to prevent such 
 acquisition from becoming more difficult. If such a 
 tax is moderate it may not, in the long run, accomplish 
 even this. In connection with this problem, attention may 
 be called to a serious objection to the extensive use of the 
 now very popular income tax. In so far as the income tax 
 is largely relied upon as a source of revenue, land values 
 tend to be relieved of taxation. As a result, the salable 
 value of land is high ; ownership of farms and homes 
 becomes difficult except for the well-to-do ; and tenancy 
 is unnecessarily accentuated. Thus, indirectly, may the 
 income tax, zvhich many have hopefully advocated as an 
 aid to the attainment of economic democracy, prove to be 
 an obstacle. 
 
 To sum up, the change here discussed would remove 
 heavy tax burdens some of which rest in large degree 
 on wages ; it would add to the net returns on capital ; it 
 would discourage speculative holding of land; it would 
 make more easy the acquiring of land for production or 
 for homes and so would facilitate the change from ten- 
 ancy to ownership. Those who were ambitious to get 
 farms and homes for themselves would have larger (be- 
 cause untaxed or less taxed) earned incomes to buy 
 with, and they would not have to pay in advance, in a high 
 price of land, the capitalized value of exploitation, al- 
 though only in case all rent were taken in taxation would 
 even unimproved land be obtainable for nothing. It may 
 be added that a population of home owners would be a 
 substantial bulwark against such irrational revolutionary 
 economic changes as are advocated by many radical so- 
 cialists. On the other hand, in a country where the few 
 own nearly all the wealth and the many are but ten- 
 ants or laborers possessing nothing except their labor,
 
 108 The: Taxation of Unearned Incomes 
 
 a parasitic class can maintain the status quo under the 
 forms of democracy only by corrupting the voters or 
 their elected servants or by controlling the avenues of 
 information. 
 
 There is no intention to argue that every farmer would 
 find his tax burden lightened if land rent were made the 
 principal or the exclusive source of public revenue. Some 
 farmers there doubtless are whose incomes are in con- 
 siderable degree made up of rent. But these are farm- 
 ers who realize a good surplus above fair returns for 
 their work and their investment in capital. These are 
 farmers who can, as a rule, easily bear a heavier tax 
 burden. Under our present system of taxation we tax 
 the earned incomes — interest and wages — of farmers and 
 of all other persons. We diminish the profitableness of 
 making improvements in soil and drainage, of erecting 
 buildings, of planting orchards, of accumulating machin- 
 ery and stock. But we tax land rents so lightly as to 
 leave land values, i. e., capitalized prospective rents, high, 
 and so make it seem easy and relatively worth while for 
 discouraged users of land whose labor and interest in- 
 comes are highly taxed, to sell their land and live out 
 their money. In brief, our policy of taxation gives al- 
 most the maximum encouragement to speculation in land, 
 keeps the price of land high and so makes it hard to ac- 
 quire except by the wealthy few, keeps earned incomes 
 derived from the use of land relatively low and tempts 
 users of land to sell. We pretend to desire widespread 
 ownership. We repeat unctiously the dictum of Arthur 
 Young that "the magic of property turns sand into 
 gold." But we adopt a policy which works in the direc- 
 tion of tenancy.
 
 Effects of Land Rent Taxation 109 
 
 Even those property owners whose personal pecuniary 
 interests cause them to object to putting taxes chiefly 
 upon land rent might well, perhaps, give thought for a lit- 
 tle while, to the interests of their sons and daughters in 
 case, as often happens through the mistakes, miscalcula- 
 tions and accidents of life, their family fortunes come to 
 be dissipated and their children fall into the tenant class. 
 Do such property owners wish to make economic rehabili- 
 tation and home ownership for their children, under such 
 circumstances, as difficult as possible? Yet this is the 
 consequence to be expected from high salable value of 
 land. And just as it is much to be preferred that no one 
 of us should be permitted to own slaves, rather than that, 
 in case of misfortune, our children should be able to sell 
 themselves into slavery, so likewise it is better far that 
 the landed property of each landowner should have a 
 smaller salable value than that the children of many of 
 them should be able to sink into a tenancy made hope- 
 less by high land prices. 
 
 Before quitting the general topic of this section, let 
 us inquire what would be the effect, in any large com- 
 munity which should first adopt it, say the State of Mis- 
 souri, of a tax system such as the foregoing argument 
 suggests. Clearly, the value of land, as such, would rap- 
 idly fall. The mere speculative holder of idle land would 
 not be able to collect the toll he now collects from those 
 who desire to build homes or to launch business enter- 
 prises. The ownership of homes and farms would be 
 made easier. The return on capital investment would be 
 increased. Persons in other states who had accumulated 
 capital would be more inclined to invest or lend it in 
 Missouri. The inflow of capital would tend to an in- 
 crease in the number of buildings and in the amount
 
 110 Thu Taxation of Unearned Incomes 
 
 of machinery, fruit trees, cattle, etc. The increase 
 of buildings would eventually tend to reduce the charges 
 to tenants. The increase of capital in general would tend 
 to make labor more effective and to raise wages. Mis- 
 souri would perhaps first become a more desirable state 
 for the average capitalist to invest his capital in; but it 
 would quickly become a more desirable state for the aver- 
 age non-capitalist to live in. The inflow of capital and of 
 population, together with the force of example, would 
 then be likely to start a movement for a similar tax re- 
 form in those neighboring states from which the capital 
 and the population were flowing. 
 
 § 14 
 
 Summary and Conclusion 
 
 At the beginning of this essay it was shown that 
 land rent is fixed by the marginal productivity of land and 
 is a surplus over the interest to waiting and the wages 
 of labor, a surplus the amount of which cannot be in- 
 creased by the owners of land to make up for the tak- 
 ing by taxation of any per cent, of it. The attempt was 
 then made to distinguish briefly between rent of land 
 and interest on other capital. The situation rent of land 
 we found to be an absolute amount, not determined by the 
 value of the land or by its cost of production, but an es- 
 sential element in the determination of the value of the 
 land. The value of reproducible capital, however, was 
 found to be directly determined, in large part, by cost 
 of production, analyzable into alternative returns of the 
 productive factors used. The productivity of capital ap- 
 peared to be an important influence, perhaps the most 
 important direct-acting influence, fixing the rate of inter-
 
 Summary and Conclusion 111 
 
 est. It further appeared that the interest on capital, 
 when this capital is produced and saved by effort and 
 waiting respectively, and when it is used in socially de- 
 sirable ways, is earned. The interest is earned in the 
 sense that the effort and waiting done by the producer 
 and saver of the capital secure for the community as 
 much of wealth as the capitalist receives in interest. On 
 the other hand, the situation rent of land appeared to 
 be a payment for benefits due to natural conditions or 
 to social growth and not for services brought into exist- 
 ence by the owner of the land. Thus, the rest of the 
 community is perpetually under taxation to support a 
 class of landowners from whom, as such, no equivalent 
 return is received. The landowner who has bought his 
 land, though he has given an equivalent for it in value 
 of something else, nevertheless cannot be said to give a 
 service to those from whom he derives rent, which would 
 not equally have been available had neither he nor any 
 other landowner ever lived. When one person buys land 
 of another, he simply buys the privilege of collecting a 
 periodic income from the landless masses without giving 
 any service in return. So far as these masses are con- 
 cerned, the purchase of land by one person from another 
 is but a change of masters, a change of parasites of 
 which the landless masses are the multitudinous collec- 
 tive host. Hence the private receipt of rent violates the 
 utilitarian principle that each should receive remunera- 
 tion or income only in proportion to service rendered to 
 those by whom the remuneration or income is paid. 
 
 In the course of our study, however, it became neces- 
 sary to make certain criticisms. The so-called rent of 
 land is not all an unearned income. Part of it is really in- 
 terest on the cost of street-cutting, paving, etc., usually
 
 112 The Taxation of Unearned Incomes 
 
 met in whole or in part by special assessments on owners 
 of contiguous land. Since these owners of land chiefly 
 benefit through a resultant increase in the rental and sal- 
 able value of their land, it seems just that they should bear 
 special assessments. But the justification of their hav- 
 ing to pay these special assessments depends upon their 
 being allowed to receive, in higher rental value of their 
 land, a return on the cost of the assessments. Various al- 
 leged services of city landowners, such as exercising 
 control over the class of tenants in any locality, or seek- 
 ing out, developing, and advertising new sites, were next 
 considered. The first did not seem to be a service for 
 which we are necessarily dependent on landowners, or, in 
 any case, a service so costly to them in efifort as to justify 
 very much of rent. The seeking and advertising of new 
 sites and bringing them into use at an earlier date than 
 their advantages would otherwise be realized may some- 
 times be a service to the present generation, but is not 
 clearly a service to later generations who would eventu- 
 ally, with growth of population, have taken up this land 
 anyway. Hence, if this is a service justifying rent pay- 
 ment, it can justify such payment only for a limited time. 
 It is like the service of an inventor who gives us, some- 
 what sooner than we might else have it, the benefit 
 of a new idea in mechanics, and to whom we give a defi- 
 nitely terminable right to receive royalties. So, also, we 
 were unable to conclude that the early settlers in the 
 American West had rendered any such economic services 
 as to entitle their descendants and successors to receive 
 rent for all future time from the descendants of later 
 comers. For there seemed no clear indication that any 
 benefit was received or is being received by the later 
 comers or their descendants, from either the present
 
 Summary and Conclusion 113 
 
 or the former owners of the land. If the "benefit" of 
 rising land values was "diffused" in any sense, the dif- 
 fusion was not clearly to those of the present generation 
 who now have to pay rent to use the land. They may 
 well regard themselves, if they choose to recognize the 
 authority in the matter of those who did it as "sold out" 
 by a previous generation. 
 
 Nevertheless we concluded that increased value of land 
 resulting from increasing population which forced down 
 the margin of production ought not to be made an ex- 
 cuse for so taxing land rent as to leave with incomes 
 smaller than their previously earned incomes families 
 which, to avoid overcrowding their own land, had re- 
 frained from rapid multiplication. The increase of 
 those whose habits or ideals would eventually tend toward 
 general misery ought not to result in so reducing the 
 available space for cultivation or in so increasing the 
 tax on the land owned, as to greatly reduce the incomes 
 of a non-parasitic class with ideals of a different sort. 
 This last consideration, however, seemed to tell with 
 but little force against the high taxation of city or near- 
 city land, or of any land in a country not unduly crowded, 
 since the value of such land is due mainly to increase of 
 its special advantages rather than to a lowering of the 
 margin of production. 
 
 A consideration of the probable effects of high taxation 
 of rent indicated that such a policy would tend in the 
 direction of wide distribution of home ownership and 
 away from tenancy. Ownership cannot be stimulated 
 by a policy which makes land high in price. 
 
 The argument that taxation of land values should not 
 be much emphasized because there are other differential 
 and unearned incomes, we concluded has little force.
 
 114 The: Taxation of Unearned Incomes 
 
 Most other unearned incomes, such as those secured by 
 monopoly and by industrial free-booting, require to be 
 terminated, rather than to be continued in order that 
 their recipients may be taxed. If there are other in- 
 comes of an analogous sort to land rent, the possibilities 
 of taking them in taxation and the social utility of taking 
 them should be separately considered. And in the mean- 
 while, the possibility of there being other unearned in- 
 comes is no more an adequate objection to taxing a kind 
 of incomes we know to be unearned, than is the possibility 
 of there being gentler ways of stealing, a reason why 
 we should allow highway robbery to go on until we have 
 reached an agreement about the proper way to deal with 
 all forms of dishonesty. Let us not be too afraid of a 
 transition period when we may somewhat discriminate 
 between different sorts of unearned incomes. As to 
 whether or how far it may be desirable, during a tran- 
 sition period, to levy sharply progressive inheritance 
 taxes for the purpose of mitigating the inequality which 
 has resulted in part from our long continued policy of 
 permitting the private receipt of unearned wealth, or as 
 to whether wholesale evasions of such taxes could be 
 prevented, no opinion is here expressed. 
 
 To avoid the objection of infringement on "vested 
 rights," some advocates of land-value taxation have pro- 
 posed that only future increases in the value of land 
 should be specially taxed. But this proposal seems to 
 ignore the fact that purchasers often pay a higher price 
 for land in the expectation of these very future increases. 
 How then, can special taxation of these increases be any- 
 thing else than an infringement of "vested rights?" In 
 truth, however, too great a respect for the "vested 
 rights" of individuals comes perilously near to meaning
 
 Summary and Conclusion 115 
 
 no rights for society. It might be interpreted to mean 
 that society could never modify any poHcy in the expecta- 
 tion of the continuance of which individuals had acted, 
 without giving compensation. It might be interpreted to 
 mean that when we undertake to regulate monopoly price, 
 we must compensate the purchasers of monopoly stock, 
 and that when we choose to remove tariff protection we 
 must compensate holders of the stock of protected in- 
 dustries. If society is not bound to do these things, nei- 
 ther is it bound to go on, through all future time, pay- 
 ing landowners for services which not they but nature 
 and society render. The community has frequently dis- 
 criminated, in taxation, among different kinds of com- 
 modities and, therefore, among consumers of such com- 
 modities. It is under no pledge never to discriminate 
 between land and other property. In some places a cer- 
 tain amount of such discrimination has already been prac- 
 ticed. Purchasers of land should be presumed to have 
 bought their land on the understanding that tax sys- 
 tems may be changed in this direction at the option of the 
 public. It may be desirable — as it is certainly altogether 
 likely — that any great change should be made gradually, 
 but that society, or the non-landowning part of society, 
 because it has paid in the past for no service received, 
 must either go on doing so forever or must buy itself free 
 with no expense or loss to landowners, is a doctrine which 
 even those who favor it prefer not to state, and doubt- 
 less will not now state, frankly and without equivoca- 
 tion.
 
 APPENDIX 
 
 § 1 
 
 Suggestion for Legal Enactment or Constitutional 
 
 Amendment, Especially in States Having the 
 
 Initiative and Referendum 
 
 Whereas, the possession by the few of great landed 
 estates beyond the possibiHty of their own use is a prin- 
 cipal source of inequality and a danger to democracy, 
 and 
 
 Whereas, the value attaching to land apart from im- 
 provements is due rather to population growth than to the 
 efforts of the individual owners, and 
 
 Whereas, the holding of land out of use for specula- 
 tion or to aid monopoly operates to make land and home 
 ownership difficult for the many, to diminish production, 
 to lower wages, and to cause involuntary idleness, and 
 
 Whereas, taxes on buildings and improvements, in- 
 cluding fertility put into land by the owner, and on 
 other goods which are produced by labor, discourage 
 improvement, increase rents, restrict the supply of the 
 taxed goods and raise their prices ; while taxes on the 
 value of land force idle land into use, encourage improve- 
 ment and production, reduce rents, enlarge earned in- 
 comes and increase the number of home owners, and 
 
 Whereas, taxes on the shares of stock of corporations, 
 held by individuals, are almost uniformly evaded ; while 
 taxes on the mines, gas and oil wells, valuable sites and 
 other landed property of these corporations would effect- 
 ively reach their stockholders, therefore 
 
 (117)
 
 118 The Taxation of Unearned Incomes 
 
 It is hereby enacted that all taxes on buildings, ma- 
 chinery, cattle, fruit trees, growing crops, fertility put 
 into the land by any owner or occupier and not yet prac- 
 tically exhausted, drainage improvements, stocks and 
 bonds, money, and all other taxes except taxes on land 
 shall be immediately reduced 20 per cent and thereafter 
 by a like amount each year until they are completely 
 abolished, and that the necessary revenues for state, 
 counties, cities, towns, villages, school districts and other 
 units shall be secured by a tax on the rental value of 
 land exclusive of the value of improvements in, over or 
 under such land ; but, however small its value, no land 
 held out of use shall be entirely untaxed, and 
 
 It is further enacted that all previous constitutional 
 limitations on the rate at which land may be taxed, are 
 hereby repealed. 
 
 Provided, however, that in any year for a period of 
 fifteen years following this enactment, any person whose 
 real estate is improved, is occupied as a residence, and 
 does not exceed, in such year, $10,000 in assessed valua- 
 tion, or $20,000 if it is agricultural real estate actually 
 worked or operated as a farm, may, at his or her option, 
 in lieu of the tax hereinbefore provided for, pay a tax 
 on all his or her property which would be taxable under 
 the previous law, at a rate, on the first $5,000 of such 
 property, of 8-10 the average rate paid by him or her to 
 the various governmental units, state, county, etc., dur- 
 ing the last years preceding this enactment; at a 
 
 rate, on the second $5,000, equal to 9-10 of such previous 
 average rate ; and at a rate, on the rest of his or her prop- 
 erty, equal to such average rate. But no option in taxa- 
 tion shall be given to any corporation, nor shall any op- 
 tion be given to any natural person as to payment of taxes
 
 Appendix 119 
 
 on land held substantially out of use, notwithstanding 
 such person may live on such land in a tent or shack for 
 less than two-thirds of the year. Nor shall any natural 
 person have such an option as to more than an acre of 
 land used for residence only, as distinct from farming, or 
 as to two or more non-contiguous pieces of land. 
 
 And provided, further, that nothing herein contained 
 shall operate to prohibit such taxation of estates trans- 
 ferred by bequest or inheritance, including gifts made 
 in anticipation of death, as the legislative body may think 
 desirable. 
 
 Rcaso)is for Proposed Program 
 
 The average man does not know much political econ- 
 omy. He persists in thinking that a scheme to substi- 
 tute a tax on the rental value of land for other taxes 
 is a scheme to burden the farmer and the small home 
 owner and to relieve of taxation persons of wealth; 
 and the classes interested in maintaining the existing sys- 
 tem play upon this belief so as effectively to prevent re- 
 form. Proposals to exempt altogether from taxation 
 small farm and home owners, violate fundamental prin- 
 ciples and are undesirable. Such proposals, indeed, 
 would probably meet popular opposition rather than 
 favor. The very success of land value taxation in break- 
 ing up large estates and throwing land into the possession 
 of many small holders might, in such a case, so reduce 
 the number of taxable properties as to make impossible 
 the securing of sufficient revenue. So, too, proposals 
 for permanent exemption of any landowners, even of a
 
 120 The Taxation of Unearned Incomes 
 
 partial nature, are undesirable. We do not know what 
 the governmental needs of future generations may be. 
 But those persons whose studies have brought them to 
 the conclusion that a tax on the rental value of land 
 would be a lighter burden on small farmers and home 
 owners than present taxes, cannot very consistently ob- 
 ject to an enactment which, in effect, merely gives assur- 
 ance that the proposed new system will, in its inception, 
 so operate. And it can be no objection to such an assur- 
 ance, that it may make a desirable reform possible 
 through preventing the misrepresentation of its probable 
 results by an interested privileged class. Unless, indeed, 
 advocates of land value taxation are willing to include 
 some such assurance, in their program, to the small own- 
 ers who are still numerous in America, and who are not, 
 and cannot be expected to be, political economists, it is 
 doubtful whether this most essential of all economic re- 
 forms can be secured for generations, if ever. And a 
 mere assurance of a special rate of taxation for such per- 
 sons, would not do, even if it were desirable. The assur- 
 ance must be to the effect that their taxes under the pro- 
 posed system will not be burdensome in comparison with 
 their taxes under the present system. But if advocates 
 of the taxation of the rental value of land are willing to 
 include such assurance as a prominent part of their pro- 
 gram, success may be near. The advocate of land value 
 taxation need not then do all the explaining. His oppo- 
 nents will have the task of trying to explain to per- 
 sons of common sense, that a reduction in their taxes will 
 hurt them. How far will these opponents get in persuad- 
 ing home owners and working farmers that they should 
 pay high taxes and the land speculators low taxes in 
 order that land may be kept out of use and in order that
 
 Appendix 121 
 
 land prices may be kept high? If the owners of the 
 sources of iron ore, the coal mine owners, and other big 
 landed interests succeed for a while in blocking the way, 
 it may be necessary to offer larger or longer-continued 
 concessions to the small home owner and farmer. When, 
 however, it becomes evident to these large interests that 
 they are bound to lose and that delay may only make their 
 loss the greater, their opposition is likely to weaken. At 
 any rate, if some such program is adopted as has been 
 above suggested, the politicians who choose to oppose the 
 reform cannot successfully pretend to be so doing in the 
 interest of workingmen, home owners, and small farmers, 
 but must, tacitly if not frankly, admit that they are the 
 spokesmen of the large landowners, including the pow- 
 erful corporations which control our mineral resources.
 
 INDEX. 
 
 Assessments, on landowners, for 
 street construction, etc., in re- 
 lation to justification of land 
 rent, 60 — 63. 
 
 B 
 
 Brown, Principles of Commerce, 
 cited, 79; Tht Theory of 
 Earned and Unearned In- 
 comes, cited, 8, 19, 51, 93. 
 
 Clark, The Distribution of 
 
 JVealth, cited, 68. 
 Class interests, fhe conflict ol, 
 
 3-8. 
 
 D 
 
 Davenport, H. J., article by, cit- 
 ed, 69, 90; Exercises, cited, 90. 
 
 E 
 
 Excess profits, the taxation of, 
 versus the taxation of land 
 rent, 96 — 97. 
 
 Eugenics, relation of, to inequal- 
 ity, 13- 
 
 Fillebrown, The A B C of Tax- 
 ation, cited, 102. 
 
 Fisher, The Nature of Capital 
 and Income, cited, 55, io6n. 
 
 George, Progress and Poverty, 
 quoted, 28 — 34; cited 87, 91. 
 
 H 
 Hadley, Economics, cited, 65. 
 
 Income, the rent of land as an 
 unearned, 56 — 60. 
 
 Incomes, earned and unearned, 
 15 — 41; earned and unearned, 
 inequality and taxation, 3 — 
 49; inequality of earned, 41 — 
 45 ; unearned, contention that 
 there are others not associated 
 with land, 76 — 81. 
 
 Increment, of land values, in re- 
 lation to the settlement of the 
 American West, 67 — 76 
 
 Increments, of land value, taxa- 
 tion of future, 81 — 84. 
 
 Inheritances, taxation of, 98 — 
 
 ICX3. 
 
 Inequality, of earned incomjs, 
 41 — 45 ; in relation to the 
 price system, 10 — 15. 
 
 Interest, on capital, explained 
 and justified, 19 — 24. 
 
 Johnson, A. S., article by, cited, 
 95. 
 
 Land. See Rent, Taxation. 
 
 M 
 
 Mill, J. S., advocacy of taxation 
 of future increases in land 
 values, cited, 82. 
 
 Physiocrats, doctrine of, regard- 
 ing shifting of taxes, 54n. 
 
 Price system, and specialization 
 of producers, 8 — 15. 
 
 Profits, wages and, 15 — 19. 
 
 (123)
 
 124 
 
 Index 
 
 R 
 
 Rent of land, o.stinguished from 
 interest on capital, 24 — 26, 
 54 — 56; fair taxation of, in 
 case of undue increase of 
 population, 73 — 76; how it 
 arises, 28 — 34; impossibility 
 of preventing private receipt 
 of, except by taxation, 
 36 — 38; as a marginal pro- 
 duct of land, 51 — 54; some 
 probable results of making it 
 the chief source of public rev- 
 enues, loo — lie; in relation 
 to services of city landowners, 
 63 — 67; in relation to special 
 assessmen's for street construc- 
 tion, etc., 60 — 63 ; tax on, not 
 shiftable, 38 — 41, 53 — 54; and 
 its taxation, 51 — 115; taxa- 
 tion of "excess profits" versus 
 taxation of, 96 — 97; as an 
 unearned income, 56 — 60. 
 See Taxation. 
 
 Seager, Principles of Economics, 
 cited, 18. 
 
 Seligman, Principles of Econo- 
 mics, cited, 27- 
 
 Speculation in land, alleged ad- 
 vantage of, discussed, io6n; 
 effect of taxation of land val- 
 ues upon, 41, 53, 77, loi. 
 
 Specialization, of producers, the 
 price system and, 8 — 15. 
 
 Socialism, 9 — 10; view of, re- 
 garding interest, stated and 
 criticized, 19 — 24; retardation 
 of sane economic reform from 
 growth of influence of, 92 — 93. 
 
 Tax. See Taxation. 
 
 Taxation, ability theory of, 93 — 
 96: earned and unearned in- 
 comes, inetjuaiity and, 3 — 49; 
 
 of "exceso profits" versus of 
 land rent, 96 — 97; of future 
 increments of land value, 81 — 
 84; of inheritances, 98 — 100; 
 as only means of preventing 
 private receipt of land rent, 
 36 — 38; proposal for reform- 
 ing enactment, 117 — 119 (Ap- 
 pendix) ; reasons for specific 
 reform proposal, 119 — i2i 
 (Appendix) ; rent of land and 
 its, 51 — 115; of land rent, can 
 not be shifted, 38 — 41, 53 — 
 54 ; of land rent, in case of 
 undue increase of population, 
 73 — 76 ; of land rent, effect of, 
 on amount of tenancy, 105 — 
 109; of land rent, effect of, on 
 community development, 109 — 
 no; of land rent, effect of, on 
 farmers, loi — 108; of land 
 rent, some probable effects of 
 making it the chief source of 
 public revenues, 100 — no; of 
 land values, effect of, on spec- 
 ulative liolding of land, 41, 53, 
 77, loi ; of land values, in re- 
 lation to the theory of vested 
 rights, 84. — 93- 
 
 Taussig, Principles of Economics, 
 cited. 82. 
 
 Tenancy, effect of land value 
 taxation in reducing, 105 — 109. 
 
 U 
 
 Unearned incomes, contention 
 that there are others not as- 
 sociated with land, 76 — 81. 
 
 Vested Rights, land value taxa- 
 tion 'n relation to the thenrv 
 of. 84-0^- 
 
 W 
 
 Wages, and profits, 15 — 19. 
 Walker, Political Economy, Ad- 
 vanced Course, cited, 82.
 
 The following pages contain a description of and quo- 
 tations from reviews of the author's book on The Theory 
 of Earned and Unearned Incomes.
 
 THE THEORY OF EARNED AND UNEARNED 
 INCOMES 
 
 In these days of Bolshevism and syndicahsm on the one 
 hand and of reactionary influences on the other, it is 
 perhaps more than ever important that students of eco- 
 nomics should get a thorough understanding of the prin- 
 ciples underlying our economic organization. The The- 
 ory of Earned and Unearned Incomes, by Harry Gunni- 
 son Brown of the University of Missouri, aims to pre- 
 sent these principles. It sharply distinguishes types of 
 incomes which the Marxian theory of socialism lumps 
 together as "surplus value" and which ought not to be 
 dealt with alike. Yet its discussion of unearned incomes 
 will be as little pleasing to conservatives as to Bolshevists 
 and other Marxians. 
 
 We are of the opinion that Professor Brown's book 
 is well adapted for use in college and university courses 
 on Economic Theory and on the Theory of Distribution 
 and in courses devoted to a critical examination of eco- 
 nomic reform movements. The theoretical student will 
 be particularly interested, we believe, in the exhaustive 
 discussion of the causes of and the rate of interest. This 
 discussion is a further elaboration of articles contributed 
 by the author to the Quarterly Journal of Economics and 
 the American Economic Review. The "roundaboutness" 
 of production, the productivity of capital, "impatience" 
 or "time-preference," fluctuations in the general price 
 level, and the significance of changes in bank reserves 
 are all given consideration. Besides the forces determin- 
 ing interest, those determining wages are also studied, 
 and very considerable attention is given to the theory of 
 the rent of land and its taxation.
 
 The late William Marion Reedy said of this book, in 
 Reedy's Mirror : "The volume is as interesting a book on 
 economics as I have read in many years. It is a singularly 
 well articulated, closely knit, logical performance." The 
 Public said of it : "This book should be welcomed not 
 only by philosophic radicals but by all who seriously 
 wish to understand the nature of the germ behind the 
 fever of discontent which now threatens the life of our 
 civilization." The Duluth-Herald has asserted that "it 
 is like a breath of fresh air in the musty realm of eco- 
 nomics and sociology." 
 
 CHAPTER TITLES 
 
 Introduction — The Point of View. 
 
 Chapter I. The Determination of Value. 
 
 Chapter II Ultimate Determinants of Value. 
 
 Chapter III. The Causes of Interest. 
 
 Chapter IV. The Rate of Interest. 
 
 Chapter V. Wages and Population. 
 
 Chapter VI. The Rent of Land and Its Taxation. 
 
 THE THEORY OF EARNED AND UNEARNED 
 INCOMES 
 
 Cloth, 8vo, 258 pages, $2.50. 
 
 THE MISSOURI BOOK COMPANY, 
 
 614 S. 9th ST., COLUMBIA, MO., 
 
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