Chapter 2f, Part 2: Article 1: Taxes on House and Ground Rent
House rents have two parts:
- The Building-rent
- The Ground-rent
The building-rent is the interest or profit on the capital spent in building the house.
- To put the builder's trade at level with other trades, this rent should be enough to:
- Pay him the same interest which he would have gotten if he lent out his capital
- Maintain the house or to replace the capital employed in building it within a certain term of years
- The building-rent is the ordinary profit of building.
- It is everywhere regulated by the ordinary interest of money.
- If the market interest rate is 4%, the building-rent requires 6% or 6.5% on the building's total cost.
- This might afford enough profit to the builder.
- If the market interest rate is 5%, it may require 7% or 7.5%.
- If the builder gets more profit than this, much more capital will be drawn into building.
- It will reduce its profit to its proper level.
- If he gets much less than this, so much capital will leave.
- This will again raise that profit.
The house-rent in excess of the building-rent naturally goes to the ground-rent.
House Rent = Building Rent + Ground Rent
69 A tax on house-rent, payable by the tenant, could not affect the building-rent.
- If the owner of the ground and the building are different persons, the ground-rent is paid to the ground owner.
- This surplus rent is the price which the house dweller pays for the location.
- Distant country houses have plenty of ground.
- Their ground-rent will not be worth anything.
- It will pay no more than what that ground would pay if used in agriculture.
- In country villas near a great town, the ground-rent is sometimes much higher.
- The convenience or beauty of its location is frequently very well paid for.
- Ground-rents are generally highest in:
- the capital, and
- places with the greatest demand for houses whether for:
- trade and business
- pleasure and society
- vanity and fashion
- If the builder did not get his reasonable profit, he would quit building.
- This would raise the demand for building.
- In a short time, it would bring back his profit to its proper level with other trades.
- Such a tax would not all fall on the ground-rent.
- It would fall:
- partly on the house dweller and
- partly on the ground owner.
For example, if a person rents a house for £60 a year.
- The house-rent tax is 4 shillings in the pound or 20%.
- A house of £60 rent will cost him £72 a year. [60 * 1.2]
- It is £12 more than what he thinks he can afford.
- He will content himself with a worse house with £50 rent which only has £10 tax, totalling £60 a year.
- He will give up the convenience afforded by £10 but will seldom give up the whole £60 convenience.
- This tax reduces the competition for houses of £60 and £50 rent but increases the competition for houses with the lowest rent.
- The rents for those houses with less competition would then get reduced.
- However, this reduction could affect the building-rent.
- All of it must fall on the ground-rent in the long-run.
- The final payment of this tax would fall partly on:
- the inhabitant of the house
- To pay his share, he would give up some of his convenience.
- the ground owner
- To pay his share, he would give up some of his revenue.
- How this final payment would be divided between them is not very easy to ascertain.
- The division would probably be very different in different circumstances.
- This kind of tax might affect the house-dweller and the ground owner very unequally.
The inequality of this tax on the owners of ground-rents would come from the accidental inequality of this division between tenant and ground owner.
- Its inequality of this tax on the tenants would arise from:
- the inequality of this division and
- the lifestyle cost
- The proportion of the house-rent to the cost of living varies with the tenant's wealth.
- It is highest in the wealthiest state and lowest in the poorest state.
- Basic necessities make up the main expence of the poor.
- Most of their little revenue is spent on getting food.
- Luxuries make up the main expence of the rich.
- A magnificent house embellishes all their other luxuries.
- A tax on house-rents would fall heaviest on the rich.
- This inequality is reasonable.
- It is reasonable that the rich should contribute to the public expence more than in proportion to their revenue.
The house rents resemble land rents, but is essentially different in one respect.
- Land rents are paid for their productive use.
- House rents are paid for their unproductive use.
- Neither the house nor its ground produce anything.
- The house rent must be paid from some other source of revenue independent from the house.
- A tax on house rents falls on the tenants.
- It must be paid from their revenue whether from wages, profits, or land rent.
- Such a tax would fall very indifferently on wages, profits, or land rent.
- It has the same nature as a tax on consumable commodities.
- In general, house-rent is the best indicator of a person's spending ability.
- A proportional tax on house rents might produce a bigger revenue than any European tax on consumables.
- If the tax was very high, most people would evade it by:
- renting smaller houses, and
- spending on other things.
House rents might easily be ascertained accurately in the same way ordinary land rents are ascertained.
74 Ground-rents are a better tax subject than house-rents.
- Uninhabited houses should pay no tax.
- Such a tax would all fall on the proprietor.
- He would be taxed for something which did not give him convenience nor revenue.
- Houses inhabited by the proprietor should be rated to its possible revenue if leased to a tenant.
- It should not be taxed according to its building cost.
- If rated according to the building cost, a tax of 15-20%, with other taxes, would ruin all rich families.
- The house rent of the richest families in Great Britain is only 6.5% or 7% of the original building cost.
- It is nearly equal to the whole net rent of their estates.
- It is the accumulated expence of several generations spent on great beauty and magnificence.
- Its value is very small compared to what they cost.
- A tax on ground-rents would not raise house-rents.
- It would all fall on the owner of the ground-rent.
- He always acts as a monopolist.
- He exacts the highest rent for the use of his ground.
- Its value varies with the wealth or poverty of his competitors.
- The most rich competitors are in the capital.
- Thus, highest ground-rents are always found there.
- The wealth of those competitors would not be increased by a tax on ground-rents.
- They would probably not be disposed to pay more for the use of the ground.
- It is unimportant whether the tax was paid by the inhabitant or by the ground owner.
- The more the inhabitant pays for the tax, the less he would pay for the ground.
- The final payment of the tax would all fall on the owner of the ground-rent.
- The ground-rents of uninhabited houses should pay no tax.
Both ground-rents and ordinary land rents are a revenue which the owner enjoys without any care of his own.
- Taxes on such rents would not discourage industry.
- The national annual produce of society might be the same after such a tax as before.
- Ground-rents and ordinary land rents are, therefore, revenue which can be best taxed.
Ground-rents are a more proper subject of taxation than ordinary land rents.
- Ordinary land rents depend partly on the good management of the landlord.
- A very heavy tax might discourage this good management.
- Ground-rents which exceed ordinary land rents all depend on the good government of the sovereign.
- By protecting the industry of the people, he:
- enables them to pay more than the real value of the ground which they build their houses on
- compensates the ground owner more for the loss of letting others use it for housing.
- It is most reasonable to tax a fund which owes its existence to the good governance by the state.
- Such a fund contributes more towards supporting that government than other funds.
I do not know of any taxes on house-rents in which ground-rents were a separate subject of taxation.
- The tax contrivers probably found in difficult to ascertain which part of the house-rent should be ground-rent and which should be building-rent.
- It should not be very difficult to distinguish those two.
In Great Britain, house-rent is taxed in the same proportion as land rent by the annual land-tax.
- The valuation in each parish and district is always the same.
- Then and now, it is extremely unequal.
- This tax is lighter on house-rents than on land rents.
- In some few districts where house rents have fallen considerably, the land-tax of 3 or 4 shillings in the pound has an equal proportion of the real house rents.
- Untenanted houses are subject to the tax.
- In most districts, these are exempt from it by the favour of the assessors.
- This exemption sometimes creates some little variation in the rate of particular houses though that of the district is always the same.
- Improvements of rent, by new buildings, repairs, etc. go to the discharge of the district, which occasions more variations in the rate of particular houses.
In Holland, every house is taxed at 2.5% of its value without regard to:
- the rent it actually pays or
- it being tenanted or untenanted
It seems difficult to oblige the proprietor to pay a tax for an untenanted house from which he can derive no revenue.
- In Holland, the market interest rate does not exceed 3%.
- 2.5% of the house value is more than 1/3 of the house rent.
- The house valuations are very unequal and is always below the real value.
- When a house is rebuilt, improved, or enlarged, there is a new valuation, and the tax is rated accordingly.
The contrivers of house taxes in England thought that it was very difficult to determine the real rent of every house.
English House Taxes
- They regulated their taxes according to more obvious circumstances which they imagined to be proportional to the rent.
The first tax of this kind was hearth-money.
- It was a tax of 24 pence on every hearth.
- To determine how many hearths were in the house, the tax-gatherer entered every room.
- This odious visit rendered the tax odious.
- After the revolution, it was abolished as a badge of slavery.
The next tax was a tax of 24 pence on every inhabited dwelling-house.
- A house with 10 windows was to pay 48 pence more.
- A house with 20 windows and more was to pay 96 pence.
- This tax was then so far altered that houses with 20-29 windows were ordered to pay 120 pence.
- Those with 30 or more windows were to pay 240 pence.
- The number of windows can be counted from outside without entering the house.
- The tax-gatherer's visit was less offensive than the tax of hearth-money.
This tax was afterwards repealed and replaced with the window-tax.
- It had many revisions and additions.
- At present (January 1775), the window-tax lays a duty of:
- 36 pence on every house in England and
- 12 pence on every house in Scotland.
- In England, this tax increases gradually from:
- 2-pence, the lowest rate for houses with seven windows or less, to
- 24 pence, the highest rate for houses with 25 or more windows
Such taxes are the worst and most unequal.
- They fall heavier on the poor than the rich.
- A house of £10 rent in a country town may have more windows than a house of £500 rent in London.
- The dweller in the house with £10 rent is likely poorer, yet the window-tax makes him pay more.
- Such taxes are directly contrary to my first maxim of taxation.
- They do not offend much against the other three maxims.
The window-tax and all house taxes naturally reduce rents.
- The more a man pays for the tax, the less he can pay for the rent.
- However, since the imposition of the window-tax, house rents have risen.
- The increase in house demand was so great that it raised the rents more than the window-tax could sink them.
- This demand is proof of:
- the country's great prosperity, and
- the increasing revenue of its people.
- Without the tax, rents would probably have risen higher.
Next: Chapter 2g: Profit Taxes