Book V, Chapter II, 4

In Silesia, land held by noble tenure is taxed three per cent. more heavily than land held by base tenure. His Prussian majesty had probably supposed that the honors and privileges attached to the former would adequately compensate its proprietor for a small increase in the tax, while the humiliating inferiority of the latter would be eased somewhat by lighter taxation. In other countries, the tax system aggravates this inequality instead of easing it. In the dominions of the king of Sardinia, and in those French provinces subject to what is called the real or predial taille, the tax falls entirely on land held by base tenure. Land held by noble tenure is exempt.

A land tax assessed by a general survey and valuation, however equitable at first, must become unequal within a fairly short time. Preventing this would require the government to pay constant, painstaking attention to every change in the condition and produce of each farm in the country. The governments of Prussia, Bohemia, Sardinia, and the duchy of Milan do in fact devote themselves to such attention. It is so ill-suited to the nature of government that it is unlikely to continue for long; and if it does continue, it will probably cause taxpayers far more trouble and harassment in the long run than it can ever save them.

In 1666, the generality of Montauban was assessed for the real or predial taille on the basis, it is said, of a very exact survey and valuation. [Memoires concernant les Droits, etc. tom. ii p. 139, etc.] By 1727, the assessment had become thoroughly unequal. To remedy this inconvenience, the government found no better expedient than to impose an additional tax of a hundred and twenty thousand livres on the whole generality. This additional tax is apportioned among all the districts subject to the taille according to the old assessment. But it is collected only from districts that the old assessment under-taxes in present circumstances, and used to relieve those that it over-taxes. Suppose, for example, that two districts ought now to pay nine hundred and eleven hundred livres respectively, but under the old assessment each pays a thousand livres. Under the additional tax both are assessed at eleven hundred livres each. Yet the additional tax is collected only from the undercharged district and applied entirely to the relief of the overcharged one, which consequently pays just nine hundred livres. The government neither gains nor loses from the additional tax: all of it goes to correcting inequalities created by the old assessment. Its application is largely governed by the discretion of the generality’s intendant and must therefore be largely arbitrary.

Taxes Proportioned Not to the Rent but to the Produce of Land.

Taxes on the produce of land are in reality taxes on rent; although the farmer may initially advance them, the landlord ultimately pays them. When a certain portion of the produce must be paid as tax, the farmer calculates as best he can what that portion is likely to be worth on average from year to year, and makes a corresponding deduction from the rent he agrees to pay the landlord. Every farmer estimates beforehand what the church tithe, a land tax of this kind, will probably amount to on average.

The tithe, like every other land tax of this kind, appears perfectly equal but is very unequal: the same share of the produce represents a very different share of rent in different circumstances. On some very rich land, the produce is so abundant that half of it is quite enough to replace the farmer’s capital spent on cultivation, along with the ordinary profits on farming stock in the neighborhood. Without a tithe, he could afford to pay the other half, or its value, as rent to the landlord. But if a tenth of the produce is taken as tithe, he must demand a reduction of one-fifth in his rent; otherwise he cannot recover his capital and ordinary profit. In this case the landlord’s rent will be not half, or five-tenths, of the total produce, but only four-tenths. On poorer land, by contrast, the produce is sometimes so small and cultivation so costly that four-fifths of the entire produce is needed to replace the farmer’s capital with ordinary profit. Even without a tithe, the landlord’s rent could then be no more than one-fifth, or two-tenths, of the produce. But if the farmer pays a tenth of the produce as tithe, he must demand an equal reduction in the landlord’s rent, leaving it at only one-tenth of the total produce. The tithe may thus tax the rent of rich land at no more than one-fifth, or four shillings in the pound, while on poorer land it may tax rent at one-half, or ten shillings in the pound.

As the tithe is frequently a very unequal tax on rent, so it is always a powerful deterrent both to the landlord’s improvements and to the farmer’s cultivation. The landlord cannot venture to undertake the most important improvements, which are generally the most expensive; nor can the farmer grow the most valuable crops, which are generally the most expensive too, when the church, paying none of the costs, takes so large a share of the profit. For a long time the tithe confined the cultivation of madder to the United Provinces. As Presbyterian countries exempt from this destructive tax, they enjoyed something like a monopoly of this useful dyeing plant over the rest of Europe. The recent efforts to introduce its cultivation into England were made only because of the statute providing for a payment of five shillings an acre in place of every kind of tithe on madder.

As the church is supported mainly by a tax on land produce rather than rent in most of Europe, so the state is supported in this way in many countries of Asia. In China, the sovereign’s principal revenue is a tenth of the produce of all the empire’s land. This tenth, however, is estimated so modestly that in many provinces, it is said, it does not exceed a thirtieth of ordinary produce. The land tax or land rent formerly paid to the Mahometan government of Bengal, before the country passed into the hands of the English East India company, is said to have amounted to about a fifth of the produce. The land tax of ancient Egypt is likewise said to have amounted to a fifth.

In Asia, a land tax of this sort is said to give the sovereign a stake in improving and cultivating the land. Accordingly, the sovereigns of China, of Bengal under the Mahometan government, and of ancient Egypt are said to have been extremely attentive to building and maintaining good roads and navigable canals. Their aim was to increase both the quantity and the value of every part of the land’s produce as much as possible by securing for it the widest market their dominions could offer. The church tithe is divided into such small portions that none of its proprietors has any such interest. A parish priest could never find it worthwhile to build a road or canal to a distant part of the country to enlarge the market for the produce of his own parish. When such taxes support the state, they have some advantages that may partly offset their inconvenience. When they support the church, they bring nothing but inconvenience.

Taxes on land produce may be collected either in kind or in money according to a particular valuation.

A parish priest or a man of modest means living on his estate may sometimes benefit from receiving his tithe or his rent in kind. Both the amount to be collected and the area of collection are small enough for each to oversee personally the collection and disposal of all that is owed him. A wealthy man living in the capital would risk losing much through the negligence, and more through the dishonesty, of his factors and agents if rents from an estate in a distant province were paid to him in this way. The sovereign would necessarily lose much more through the abuses and depredations of his tax collectors. The servants of even the most careless private individual are perhaps watched more closely by their master than the servants of the most careful prince. A public revenue paid in kind would suffer so much from collectors’ mismanagement that only a very small part of what was collected from the people would ever reach the prince’s treasury. Some of China’s public revenue, however, is said to be paid this way. The mandarins and other tax collectors will no doubt see the advantage of preserving a form of payment so much more open to abuse than payment in money.

A tax on land produce collected in money may be based either on a valuation that changes with every change in the market price, or on a fixed valuation—for example, always assigning a bushel of wheat the same money price, whatever the market conditions. The revenue from a tax levied in the first way will vary only with changes in the land’s actual produce, as cultivation improves or declines. The revenue from one levied in the second way will vary not only with the land’s produce but also with changes in the value of precious metals and in the amount of those metals contained at different times in coins of the same denomination. Revenue from the first will always bear the same proportion to the value of the land’s actual produce. Revenue from the second may bear very different proportions to that value at different times.

When a fixed sum of money, instead of either a share of the land’s produce or the price of such a share, is paid in full settlement of every tax or tithe, the tax has precisely the character of England’s land tax. It neither rises nor falls with the rent of the land. It neither encourages nor discourages improvement. The tithe in most parishes that pay what is called a modus in place of every other tithe is such a tax. Under the Mahometan government of Bengal, a modus—and, it is said, a very moderate one—was established in most districts or zemindaries in place of payment in kind of a fifth of the produce. In some provinces, servants of the East India company have exchanged this modus for payment in kind, claiming to restore public revenue to its proper value. Under their administration, this change is likely both to discourage cultivation and to create fresh opportunities for abuses in collecting the public revenue, which has fallen far below what it was said to be when the company first took charge of it. The company’s servants may perhaps have gained from the change, but probably at the expense of both their masters and the country.

Taxes on the Rent of Houses.

The rent of a house may be divided into two parts. One may properly be called building-rent; the other is commonly called ground-rent.

Building-rent is the interest or profit on the capital spent constructing the house. For building to be on a level with other trades, this rent must be sufficient, first, to pay the builder the interest he would have earned by lending his capital on good security; and second, to keep the house in constant repair, or, what amounts to the same thing, to replace within a certain number of years the capital used in building it. Building-rent, or the ordinary profit of building, is therefore everywhere governed by the ordinary interest on money. Where the market interest rate is four per cent., a house whose rent, after paying ground-rent, yields six or six and a-half per cent. on the entire building cost may perhaps give its builder a sufficient profit. Where the market rate is five per cent., it may require seven or seven and a half per cent. If, compared with interest on money, building at any time yields much greater profit than this, it will soon attract enough capital from other trades to bring that profit down to its proper level. If it yields much less, other trades will soon draw away enough capital to raise it again.

Whatever portion of a house’s total rent exceeds what is needed to yield this reasonable profit naturally becomes ground-rent; where the owner of the land and owner of the building are different people, it is in most cases paid in full to the former. This surplus rent is the price the resident pays for some real or imagined advantage of the location. In country houses far from any large town, where there is plenty of land to choose from, ground-rent is scarcely anything, or no more than the land beneath the house would yield if farmed. For country villas near a large town, it is sometimes considerably higher, and the special convenience or beauty of their location is frequently well paid for. Ground-rents are generally highest in the capital, and in those particular parts of it where demand for houses is greatest, whatever drives that demand—trade and business, pleasure and society, or mere vanity and fashion.

In Silesia, land held under noble tenure is taxed three per cent. more heavily than land held under base tenure. His Prussian majesty probably thought the honors and privileges attached to noble tenure would make up for the slightly higher tax. Meanwhile, taxing base tenure less would somewhat ease the humiliation of its lower status. Elsewhere, taxes make this inequality worse rather than easing it. In the lands of the king of Sardinia, and in the French provinces subject to the real or predial taille, only land held under base tenure pays the tax. Land held under noble tenure is exempt.

A land tax based on a general survey and valuation may be fair at first, but will become unequal within a fairly short time. Preventing this would require the government to keep close and constant watch on changes in the condition and output of every farm in the country. The governments of Prussia, Bohemia, Sardinia, and the duchy of Milan do pay this kind of attention. But this work is so ill-suited to government that they are unlikely to keep it up for long. If they do, it will probably cause taxpayers much more trouble and aggravation in the long run than the relief it can offer.

In 1666, the generality of Montauban was assessed for the real or predial taille using what is said to have been a very accurate survey and valuation. [Memoires concernant les Droits, etc. tom. ii p. 139, etc.] By 1727, the assessment had become thoroughly unequal. To fix this, the government could find no better method than to assess an additional hundred and twenty thousand livres across the whole generality. Each district subject to the taille is assigned a share of this extra tax according to the old assessment. But the government collects it only from districts that the old assessment now undertaxes, and uses it to help those the old assessment overtaxes. Suppose two districts should now pay nine hundred and eleven hundred livres respectively, but the old assessment charges each a thousand livres. The additional tax rates each at eleven hundred livres. Yet it is collected only from the undercharged district, and is used entirely to help the overcharged district, which then pays just nine hundred livres. The government neither gains nor loses from this extra tax. All of it goes toward correcting the inequalities of the old assessment. Its distribution is largely left to the discretion of the generality's intendant, so it must be largely arbitrary.

Taxes Proportioned to the Produce of Land Rather Than Its Rent.

Taxes on the produce of land are really taxes on rent. The farmer may pay them first, but the landlord pays them in the end. When a fixed share of the crop must be paid as tax, the farmer estimates, as well as he can, what that share is likely to be worth over the years. He then reduces the rent he agrees to pay the landlord by a corresponding amount. Every farmer estimates in advance what the church tithe, a land tax of this kind, is likely to cost him on average.

The tithe and other land taxes of this kind appear perfectly equal, but are actually very unequal. The same share of the crop may represent very different shares of the rent in different places. On some very rich land, half the crop is enough to repay the farmer's cultivation capital and give him the usual profit on farming stock in the neighborhood. Without a tithe, he could pay the other half, or its value, to the landlord as rent. But if he must give one-tenth of the crop as a tithe, he needs a reduction of one-fifth of his rent. Otherwise he cannot recover his capital and usual profit. The landlord's rent is then four-tenths of the crop, rather than a half, or five-tenths. On poorer land, by contrast, the crop can be so small and cultivation so costly that four-fifths of the crop is needed to repay the farmer's capital and usual profit. Even without a tithe, the landlord's rent could then be no more than one-fifth, or two-tenths, of the crop. If the farmer must pay one-tenth of the crop as a tithe, he needs the landlord's rent reduced by the same amount. That leaves the rent at only one-tenth of the whole crop. The tithe on rich land may therefore amount to just one-fifth of its rent, or four shillings in the pound. On poorer land it may amount to half the rent, or ten shillings in the pound.

The tithe is often a very unequal tax on rent, and it always strongly discourages both the landlord's improvements and the farmer's cultivation. The landlord cannot risk making the most important improvements, which are usually the most expensive. Nor can the farmer risk growing the most valuable crops, which are usually the most expensive too. In both cases, the church pays none of the costs yet takes a large share of the profit. For a long time, the tithe confined the growing of madder to the United Provinces. As presbyterian countries, they were free of this damaging tax and had a kind of monopoly on this useful dyeing plant against the rest of Europe. Recent attempts to grow it in England were made only after a law provided for payment of five shillings an acre instead of any tithe on madder.

Across most of Europe, the church is chiefly supported by a land tax based on the produce rather than the rent. In many Asian countries the state is supported in the same way. In China, the ruler's main revenue comes from a tenth of the produce of all the empire's land. That tenth is valued so modestly, however, that in many provinces it is said to come to no more than a thirtieth of the usual produce. Before Bengal came under the English East India company, the land tax or land rent paid to its Mahometan government is said to have been about a fifth of the produce. The land tax of ancient Egypt is also said to have been a fifth.

In Asia, this kind of land tax is said to give the ruler an interest in improving and cultivating land. Accordingly, the rulers of China, of Bengal under the Mahometan government, and of ancient Egypt are said to have taken great care to build and maintain good roads and navigable canals. These would give every part of the crop the widest market their lands could offer, increasing both its quantity and its value as much as possible. The church tithe is divided into such small shares that none of its owners has an interest of this kind. A parish minister could never find it worthwhile to build a road or canal to a distant part of the country just to widen the market for his own parish's produce. Taxes of this kind have some benefits that may partly offset their drawbacks when they support the state. When they support the church, they bring nothing but drawbacks.

Taxes on the produce of land can be collected either in kind or in money at a set valuation.

A parish minister receiving his tithe, or a man of modest means living on his estate and receiving its rent, may sometimes benefit from payment in kind. The amount and the area involved are small enough for each to oversee personally the collection and use of everything owed to him. But a wealthy man living in the capital could lose much through his agents' neglect, and more through their fraud, if rent from an estate in a distant province were paid this way. A ruler would inevitably lose still more through abuse and theft by tax collectors. Even the most careless private owner's servants may be watched more closely than those of the most careful ruler. Public revenue paid in kind would suffer so much mismanagement during collection that very little of what the people paid would ever reach the ruler's treasury. Some Chinese public revenue is nevertheless said to be paid this way. The mandarins and other tax collectors no doubt benefit from keeping a payment method much more open to abuse than payment in money.

A tax on land's produce collected in money can be based on a valuation that changes with market prices, or on a fixed valuation. Under the latter, for example, a bushel of wheat is always valued at the same money price, whatever happens in the market. Revenue from the first type changes only when the land's actual produce changes through improvements in cultivation or its neglect. Revenue from the second changes not only with the amount produced, but also with changes in the value of precious metals and in the amount of metal contained at different times in coins of the same denomination. The first tax always takes the same share of the value of the land's actual produce. The second may take very different shares at different times.

Suppose a fixed sum of money is paid instead of either a share of the produce or the price of that share, as full payment of all taxes or tithes. This tax then has exactly the same nature as England's land tax. It does not rise or fall with land rent, and it neither encourages nor discourages improvement. The tithe in most parishes that pay what is called a modus instead of all other tithes is such a tax. Under Bengal's Mahometan government, most districts or zemindaries established a modus, said to be very moderate, instead of paying a fifth of the produce in kind. In some provinces, East India company servants have replaced this modus with payment in kind, claiming to restore public revenue to its proper value. Under their administration, this change is likely to discourage cultivation and create new opportunities for abuse in collecting public revenue. That revenue has fallen far below what it was said to be when the company first took charge. The company's servants may have gained from the change, but probably at the expense of both their employers and the country.

Taxes on the Rent of Houses.

House rent can be divided into two parts. One is properly called building-rent, and the other is usually called ground-rent.

Building-rent is the interest or profit on the capital spent building the house. For building to pay as well as other trades, this rent must do two things. First, it must pay the builder as much interest as he would have earned by lending his capital on good security. Second, it must cover the house's ongoing repairs, or equivalently repay the capital spent on construction within a certain number of years. Building-rent, or the usual profit on building, is therefore governed everywhere by the usual interest rate. Where market interest is four per cent., a house that yields six or six and a-half per cent. on its full construction cost, beyond its ground-rent, may give the builder enough profit. Where interest is five per cent., the house may need to yield seven or seven and a half per cent. If building offers a much greater profit relative to interest, it will soon attract enough capital from other trades to bring profit down to its proper level. If it offers much less, capital will move into other trades until building profit rises again.

Whatever part of the total house rent exceeds what is needed for this reasonable profit naturally becomes ground-rent. When the landowner and the building owner are different people, almost all this excess usually goes to the landowner. It is the price the resident pays for some real or imagined advantage of the location. In country houses far from a large town, with plenty of land to choose from, ground-rent is almost nothing. At most it is what the land under the house would earn in farming. In country villas near a large town, it can be much higher. People there often pay well for a location's special convenience or beauty. Ground-rents are generally highest in the capital, especially in its areas where demand for houses is greatest. It makes no difference whether that demand comes from trade and business, pleasure and company, or simply vanity and fashion.