Book V, Chapter II, 5

A tax on house-rent, payable by the tenant and proportional to the total rent of each house, could not affect building-rent, at least for any considerable time. If the builder did not earn a reasonable profit, he would have to leave the trade. The resulting increase in demand for building would soon bring his profit back into line with that of other trades. Nor would such a tax fall entirely on ground-rent: it would be divided between the resident of the house and the owner of the land.

Suppose, for example, that someone decides he can afford to spend altogether sixty pounds a-year on housing, and that a tax of four shillings in the pound, or one-fifth, payable by the resident, is imposed on house-rent. A house renting for sixty pounds would then cost him seventy-two pounds a-year, twelve pounds more than he thinks he can afford. He will therefore settle for an inferior house, one renting for fifty pounds, which, with the additional ten pounds he must pay in tax, makes up the sixty pounds a-year he believes he can afford. To pay the tax he sacrifices part of the extra convenience a house costing ten pounds a-year more in rent would have given him. Part, I say, because he will seldom have to sacrifice all of it: as a result of the tax he will obtain a better house for fifty pounds a-year than he could have obtained without it. For by removing this particular competitor from the market for sixty-pound houses, such a tax must reduce competition for them; it must likewise reduce competition for fifty-pound houses, and similarly for houses at every other rent except the very lowest, where it would increase competition for a time. Rents for every class of house facing reduced competition would necessarily fall to some degree. Since none of this reduction could affect building-rent for any considerable time, all of it must ultimately come out of ground-rent. The tax would therefore ultimately be paid partly by the resident, who would have to surrender some convenience to pay his share, and partly by the owner of the land, who would have to surrender some revenue to pay his. It is perhaps not easy to determine the proportion each would bear. The division would probably vary greatly with circumstances, so that a tax of this kind might affect both residents and landowners very unequally.

The unequal burden of such a tax on owners of different ground-rents would arise entirely from the chance inequalities of this division. But its unequal burden on the residents of different houses would arise not only from this, but from another cause. House-rent represents a different proportion of total living expenses at different levels of fortune. It is perhaps highest at the highest level, gradually declines through the lower levels, and is generally lowest at the very bottom. Necessities of life are the poor’s greatest expense. Food is hard for them to obtain, and they spend most of their small revenue on it. The luxuries and vanities of life are the rich person’s principal expense; a magnificent house adorns and displays all the other luxuries and vanities they possess to best advantage. A tax on house-rents would therefore generally fall most heavily on the rich, and there is perhaps nothing very unreasonable in this inequality. It is not unreasonable that the rich should contribute to public expenses not only in proportion to their revenue, but somewhat more than that proportion.

Although the rent of houses resembles the rent of land in some respects, it differs fundamentally in one. Land rent is paid for the use of something productive: the land that pays it produces it. House rent is paid for the use of something unproductive: neither the house nor the land beneath it produces anything. The person paying rent must therefore obtain it from some other source of revenue, distinct from and independent of the rented property. A tax on house rent, insofar as it falls on residents, must come from the same source as the rent itself and be paid from their revenue, whether that comes from the wages of labor, the profits of stock, or the rent of land. Insofar as it falls on residents, it is one of the taxes that fall not on any single source of revenue but indiscriminately on all three. In every respect it is of the same nature as a tax on any other kind of consumable commodity. In general, perhaps no single expense or item of consumption gives a better measure of a person’s overall extravagance or thrift than house-rent. A proportional tax on this particular expense might perhaps yield more substantial revenue than any tax that has yet been drawn from it in any part of Europe. If the tax were very high, however, most people would try to evade it as much as possible by accepting smaller houses and directing most of their spending elsewhere.

House rents could easily be established with sufficient accuracy by the same kind of policy that would be needed to establish the ordinary rent of land. Unoccupied houses ought not to pay tax. Such a tax would fall entirely on the proprietor, taxing him on property that gave him neither convenience nor revenue. Houses occupied by their owners ought to be assessed not by what they may have cost to build, but by the rent that fair arbitration judges they would probably command if let to tenants. If assessed by what they may have cost to build, a tax of three or four shillings in the pound, together with other taxes, would ruin almost every rich and prominent family in this and, I believe, every other civilized country. Anyone who carefully examines the different town and country houses belonging to some of this country’s richest and greatest families will find that, reckoned at only six and a-half, or seven per cent. of the original building cost, the rent on their houses nearly equals the entire net rent of their estates. This is the accumulated spending of several generations on objects of great beauty and magnificence, certainly, but of very little exchangeable value in proportion to their cost. [Since the first publication of this book, a tax nearly upon the above-mentioned principles has been imposed.]

Ground-rents are an even better subject for taxation than house rents. A tax on ground-rents would not raise house rents: it would fall entirely on the owner of the ground-rent, who always acts as a monopolist and demands the highest rent obtainable for the use of his land. How much he can obtain depends on whether his prospective tenants are richer or poorer, and whether they can afford to indulge their preference for a particular site at greater or lesser cost. In every country, the capital has the greatest number of wealthy prospective tenants and therefore always has the highest ground-rents. A tax on ground-rents would not increase their wealth in any way, so they would probably not be willing to pay more for the use of the land. Whether the resident or the landowner advanced the tax would matter little. The more the resident had to pay in tax, the less he would be inclined to pay for the land; thus the entire final burden would fall on the owner of the ground-rent. Ground-rents on unoccupied houses ought not to be taxed. Both ground-rents and ordinary land rent are forms of revenue that their owners often enjoy without any effort or attention of their own. Taking part of this revenue to meet the state’s expenses would not discourage any kind of industry. Society’s annual produce from land and labor—the real wealth and revenue of the great majority of its people—might be the same after such a tax as before. Ground-rents and ordinary land rent are therefore perhaps the forms of revenue best able to bear a special tax.

In this respect, ground-rents appear an even better subject for special taxation than ordinary land rent. In many cases ordinary land rent owes something, at least, to the landlord’s attention and good management. A very heavy tax might discourage that attention and management too much. Ground-rents, to the extent that they exceed ordinary land rent, owe everything to good government by the sovereign. By protecting the industry either of the whole people or of the inhabitants of a particular place, it enables them to pay much more than the land’s actual value for the ground beneath their houses—or to give its owner far more than compensation for any loss caused by this use of it. Nothing could be more reasonable than specially taxing a fund that owes its existence to the state’s good government, or requiring it to contribute rather more than most other funds to maintaining that government.

Though taxes on house rents have been imposed in many European countries, I know of none in which ground-rents have been treated as a distinct subject of taxation. The designers of taxes have probably found some difficulty in determining which portion of the rent should count as ground-rent and which as building-rent. It does not, however, seem very difficult to distinguish the two.

In Great Britain, what is called the annual land tax is supposed to tax house rents in the same proportion as land rent. The valuation used to assess each parish and district never changes. It was extremely unequal from the beginning and remains so. In most of the kingdom this tax still falls more lightly on house rent than on land rent. Only in a few districts that were originally assessed highly and where house rents have since fallen considerably is the land tax of three or four shillings in the pound said to equal that proportion of actual house rent. Though unoccupied houses are legally subject to the tax, in most districts assessors exempt them as a favor. This exemption sometimes produces small variations in the rate for individual houses, though the district’s rate is always the same. Increases in rent arising from new buildings, repairs, etc. help pay off the district’s assessment, causing still more variation in the rates on individual houses.

In the province of Holland, [Memoires concernant les Droits, etc. p. 223.] each house is taxed at two and a-half per cent. of its value, regardless of its actual rent or whether it is occupied. There seems to be hardship in requiring a proprietor to pay tax on an unoccupied house that yields him no revenue, especially so heavy a tax. In Holland, where the market rate of interest does not exceed three per cent., two and a-half per cent. of the house’s total value must in most cases exceed a third of the building-rent, perhaps even of the entire rent. The valuation used to assess houses, however, though very unequal, is said always to be below their actual value. When a house is rebuilt, improved, or enlarged, it is valued anew and taxed accordingly.

Those who devised the various taxes imposed on houses in England at different times seem to have thought it very difficult to determine the actual rent of every house with reasonable accuracy. They therefore based their taxes on something more readily observed that they probably thought would generally bear some relation to the rent.

The first such tax was hearth-money, a tax of two shillings per hearth. To determine how many hearths a house contained, the tax collector had to enter every room. This offensive visit made the tax itself offensive. It was therefore abolished soon after the Revolution as a badge of slavery.

The next such tax was two shillings on every inhabited dwelling-house, with four shillings more for a house with ten windows and eight shillings for a house with twenty windows or more. The tax was later changed so that houses with twenty windows but fewer than thirty paid ten shillings, and houses with thirty windows or more paid twenty shillings. Windows can usually be counted from outside and can always be counted without entering every room of the house. The tax collector’s visit was therefore less intrusive under this tax than under hearth-money.

That tax was later repealed and replaced by the window tax, which has since been twice altered and increased. As it now stands (January 1775), beyond the duty of three shillings on each house in England and one shilling on each house in Scotland, the window tax imposes a duty on every window. In England this rises gradually from twopence, the lowest rate on houses with no more than seven windows, to two shillings, the highest rate on houses with twenty-five windows or more.

The principal objection to all these taxes is their inequality—and inequality of the worst sort, because they often fall much more heavily on the poor than on the rich. A house renting for ten pounds in a provincial town may sometimes have more windows than a house renting for five hundred pounds in London. Though the resident of the former is likely far poorer than the resident of the latter, insofar as their contributions are set by the window tax, the former must contribute more to the support of the state. Such taxes therefore directly violate the first of the four maxims mentioned above. They do not appear to violate any of the other three seriously.

A tax on house rent paid by the tenant and proportional to each house's total rent could not affect building-rent for long. If builders could not make a reasonable profit, they would leave the trade. The resulting demand for construction would soon bring their profit back in line with other trades. Nor would the whole tax fall on ground-rent. It would be shared between the house's resident and the landowner.

Suppose, for example, a person decides he can spend sixty pounds a-year in total on house rent. Now suppose residents must pay a house-rent tax of four shillings in the pound, or one-fifth. A house renting for sixty pounds would then cost him seventy-two pounds a-year, twelve pounds more than he can afford. He will settle for a worse house, renting for fifty pounds. The additional ten pounds in tax will bring his total cost to the sixty pounds a-year he can afford. To pay the tax, he gives up some of the extra convenience he could have had in a house costing ten pounds a-year more in rent. I say some, because he will rarely have to give up all of it. Because of the tax, fifty pounds a-year will buy him a better house than it would without the tax. By removing this particular bidder, such a tax reduces competition for houses renting for sixty pounds. It also reduces competition for those renting for fifty pounds, and likewise for all other rental levels except the lowest, where competition would rise for a while. Rents must fall to some extent in every class of houses where competition declines. But none of this reduction can affect building-rent for long. In the end, it must all come out of ground-rent. Thus the house's resident ultimately pays part of the tax by giving up some convenience, while the landowner pays part by giving up some revenue. It may not be easy to say how much each pays. The division would probably vary widely with circumstances. Depending on those circumstances, such a tax could affect both residents and landowners very unequally.

For owners of different ground-rents, the uneven burden of this tax would come entirely from differences in how that burden is divided. For residents of different houses, it would come both from that division and from another cause. The share of total living expenses spent on house rent differs at different levels of wealth. It may be greatest for the very rich and then decline step by step, generally reaching its lowest point among the poor. Necessities are the poor's main expense. Food is hard for them to obtain, and most of their small revenue goes toward it. Luxuries and displays of status are the rich's chief expense. A grand house enhances and shows off all their other luxuries and displays. A house-rent tax would therefore generally weigh most heavily on the rich. This kind of inequality may not be unreasonable. It is not unreasonable for the rich to contribute to public expenses not only in proportion to their revenue, but somewhat more.

House rent resembles land rent in some ways, but differs in one essential respect. Land rent pays for the use of something productive. The land paying that rent produces it. House rent pays for the use of something unproductive. Neither the house nor the land beneath it produces anything. The person paying the rent must therefore get the money from another source of revenue, separate from the house itself. To the extent a house-rent tax falls on residents, it comes from the same source as the rent: their revenue from wages of labor, profits of stock, or rent of land. To that extent it falls across all three sources of revenue, rather than only one. In every respect, it works like a tax on any other consumer good. Perhaps no other expense or purchase shows more clearly how freely or sparingly a person spends overall than his house rent. A proportional tax on this expense might produce more substantial revenue than any house tax collected so far anywhere in Europe. But if the tax were very high, most people would try to avoid it as much as possible by choosing smaller houses and spending more on other things.

House rents could be determined accurately enough through a policy much like the one needed to determine the usual rent of land. Empty houses should pay no tax. Such a tax would fall entirely on an owner who receives neither convenience nor revenue from the house. Houses occupied by their owners should be assessed according to the rent that a fair arbitrator thinks they would bring if rented to tenants, not their construction costs. If they were assessed on construction costs, a tax of three or four shillings in the pound, on top of other taxes, would ruin nearly all the great and rich families of this country and, I believe, every other civilized country. Look closely at the town and country houses of some of this country's wealthiest and greatest families. A rental return of only six and a-half, or seven per cent. on their original construction costs would nearly equal the entire net rent of their estates. These houses contain the accumulated spending of several generations. They may be very beautiful and grand, but their market value is very small compared with their cost. [Since the first publication of this book, a tax nearly upon the above-mentioned principles has been imposed.]

Ground-rents are an even better subject for taxation than house rents. A tax on ground-rents would not raise house rents. It would fall entirely on the owner of the ground-rent, who always acts like a monopolist and charges the highest rent he can get for use of his land. He can get more or less depending on how rich the competing buyers are and how much they can afford to spend on their preference for that particular site. In every country, the capital has the most wealthy bidders, and so it always has the highest ground-rents. A tax on ground-rents would not make those bidders any richer, so they would probably not be willing to pay more for the land. Whether the resident or the landowner initially paid the tax would matter little. The more the resident had to pay in tax, the less he would be willing to pay for the land. The whole tax would ultimately fall on the owner of the ground-rent. Ground-rents from empty houses should not be taxed. Both ground-rents and the usual rent of land are types of revenue that owners often receive without any effort or attention. Taking part of that revenue to pay state expenses would not discourage any industry. The society's yearly produce from land and labor, the real wealth and revenue of most people, could remain unchanged. Ground-rents and ordinary land rents are therefore perhaps the types of revenue best able to bear a special tax.

Ground-rents are in this respect an even better subject for a special tax than ordinary land rents. Ordinary land rent is often partly the result of a landlord's care and good management. A very heavy tax might discourage that care and management too much. Ground-rent above the ordinary rent of land comes entirely from good government. By protecting the work of the people generally, or of those in a particular place, the ruler enables them to pay far more for the land under their houses than its real value. They thus pay the landowner far more than compensation for any loss from putting it to that use. It is entirely reasonable for a fund created by good government to bear a special tax, or to contribute more than most other funds toward supporting that government.

Many European countries have taxed house rents. But I know of none that has treated ground-rents as a separate subject of taxation. Those who designed the taxes have probably had trouble determining how much rent is ground-rent and how much is building-rent. Still, distinguishing the two parts should not be very difficult.

In Great Britain, what is called the annual land tax is supposed to tax house rents at the same rate as land rents. Every parish and district is always assessed using the same valuation. That valuation was very unequal from the beginning and remains so. In most of the kingdom, the tax still weighs less heavily on house rents than on land rents. Only in a few districts, where the original assessment was high and house rents have since fallen considerably, is the land tax of three or four shillings in the pound said to equal that share of actual house rent. By law empty houses are taxed, but assessors excuse them in most districts. This exception sometimes produces small differences in the rates paid by particular houses, though the district's rate remains unchanged. Rent increases resulting from new construction, repairs, etc. reduce the district's burden, creating further differences in the effective rates on individual houses.

In the province of Holland, [Memoires concernant les Droits, etc. p. 223.] each house is taxed at two and a-half per cent. of its value. Its actual rent and whether it is occupied do not matter. It seems unfair to make an owner pay tax on an empty house that gives him no revenue, especially such a heavy tax. In Holland, market interest is no more than three per cent. A tax of two and a-half per cent. of the house's full value must usually exceed one-third of its building-rent, perhaps even of its total rent. The valuations used for the tax are said to be very unequal, though always below true value. A rebuilt, improved, or enlarged house is valued again and taxed accordingly.

The designers of the different house taxes imposed at various times in England seem to have thought it very hard to determine the actual rent of every house with reasonable accuracy. So they based their taxes on more obvious features that they probably thought would usually reflect the rent to some degree.

The first such tax was hearth-money, a charge of two shillings on every hearth. To count the hearths, the tax collector had to enter every room in the house. This hated inspection made the tax hated too. It was therefore abolished soon after the Revolution as a mark of slavery.

The next tax of this kind charged two shillings on each occupied home. A house with ten windows paid another four shillings, while one with twenty windows or more paid eight shillings. The tax was later changed so that houses with twenty but fewer than thirty windows paid ten shillings, and those with thirty windows or more paid twenty shillings. Windows can usually be counted from outside, and always without entering every room. The collector's visit was therefore less offensive than under hearth-money.

This tax was later repealed and replaced with the window-tax, which has since been changed and raised twice. As it stands now (January 1775), the window tax charges three shillings for every house in England and one shilling for every house in Scotland. In England it also charges for each window, at rates rising gradually from twopence for houses with no more than seven windows to two shillings for houses with twenty-five windows or more.

The main objection to all these taxes is their inequality, of the worst kind: they often weigh far more heavily on the poor than the rich. A house renting for ten pounds in a country town may have more windows than one renting for five hundred pounds in London. Its resident is probably much poorer than the resident of the London house, yet pays more toward supporting the state when his contribution is based on windows. Such taxes therefore directly violate the first of the four maxims mentioned earlier. They do not appear to violate the other three to any significant extent.