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THE INCIDENCE OF URBAN RATES. II.1
THE circumstances which for our purpose differentiate a local rate from an imperial tax are mainly two: (1) that a rate is beneficial in such wise as not to reduce the demand for the rated houses at all, or to the same extent as a purely onerous tax of the same magnitude; (2) that rates differ in different districts between which occupiers have a choice. Suppose for a moment that the first attribute is absent, and that all rates are purely onerous, and as a further simplification, suppose at first that there are only two districts, A and B, between which occupiers have a choice. And, the onerous imposts in both equalling, or rather equilibriating each other initially, let a new rate be imposed on houses in A. At first sight it might appear that ground rents in A would be diminished exactly to the extent of the new burden. But this would occur only in the case of a fixed burden on the production or enjoyment of premises in A:e.g. a “ Church rate,” not of the ordinary kind, but of the nature of a fixed charge levied on the owner, or a payment by each occupier for an indispensable right (or rather“ servitude ') of way. But the rate which we are considering varies ad valorem with the value of the house. Accordingly, as above shown, building will be discouraged in A, and if A were an isolated region, there would be simply a reduction of demand in A attended with a diminution of ground rent. But A being in rivalry with B, there will also be a fall 3 of demand in A owing to the diversion of occupiers to B, while from the same cause there will be a rise of demand in B, with a corresponding readjustment of invested capital. In the result ground rents will have decreased in A, and will have increased in B. It is conceivable that the increase in B should be greater than the decrease in A. But it is not probable. The presumption is that on balance ground rent will be reduced by an onerous impost which checks production.
* See the June number of the ECONOMIC JOURNAL, p. 172. ? Ante, pp. 184, 193.
3 “ Reduction” is here distinguished from “ fall” in accordance with Professor Sidgwick's proposal (Political Economy, Book ii., ch. 2, & 2) that the former term should mean the change in the amount demanded-say x-of a certain commodity consequent on the change in the price of that commodity, the latter term the change in the amount demanded consequent on a change in the law or curve of demanddx as distinguished from 8x in the symbols proper to the Calculus of Vanations. In the case of correlated demand with which we are now dealing, the contrast is
The conditions on which the extent of this effect depends may be investigated by introducing several circumstances each by itself ceteris paribus. Thus (1) let the absolute magnitude of the rate in A be increased, then each of the terms which make up the total diminution of ground rent, viz. (decrease in A minus increase in B) being correspondingly increased, it may be presumed 3 that in general the total diminution will be greater. Again, (2) let the elasticity of demand for housing in general in either district be increased, then by parity of reasoning with that employed in the simple case, the decrease in A of ground rent becomes greater, and for a like reason the increase in B becomes greater. Therefore by a parity of presumption the total diminution becomes, in general, greater. Next, (3) instead of two unequal rates in A and B let an average equal rate be imposed on both. Ground rent as a whole might be affected, but there seems no general reason why it should be increased rather than diminished.
Generalising, we may say that, if a system of onerous rates be imposed on a set of districts more or less in competition with each other, the consequent reduction of ground rent will be greater the heavier the average imposts are, and the more elastic the general demand for housing. The imposition of a uniform rate forming a mean of the percentages or shillings in the pound that originally prevailed, would in all probability not materially affect the sum total of ground-rent, supposing that there was originally no correlation between high rents and high rates.
This is a conception very different from the representation made on behalf of the landed interest, that the imposition of a rate in a district causes a reduction of ground rent which may be measured by the amount of the rate, or at least its excess above a certain level common to all districts. It seems to be imagined
between dp (m) and dp (1x) where p, and p, are the prices of x and the correlated article respectively.
i See preceding note. 2 See Giornale degli Economisti, 1897, p. 318, referred to ante, p. 184, note 2. 3 See preceding note.
* Cf. Marshall, Mem. (Memoranda published by Royal Commission on Local Taxation, C. 9528), p. 119.
that the natural advantages of a district and their economic equivalent (rent + rates) form a constant quantity, like the height of the district above the sea. But we ought not to conceive the relative values of different sites as thus “in fluctuation fixed”; the demand-surface with which we have to deal may rather be likened to a sort of an air cushion of which some parts are originally more elevated than others; but when you press down some others go up, and accordingly the total depression caused by certain pressures at different points is not to be expressed by any simple formula.
Thus the reduction of ground rents is much less than appears at first sight even if we could suppose that all the rates were onerous. But it is time to restore the fact that all rates are not onerous; the better opinion is that “ those rates which are truly onerous are less in amount and vary less from place to place than is commonly supposed.”' 1. But in so far as imposts are beneficial the demand of the occupier is increased to the full extent of the impost,” and accordingly there is no relaxation in the demand for sites. The supposition that all rates fall ultimately on ground rents becomes twice removed from the truth. .
These propositions are in general accordance with the testimony of the "experts.” The esseritial differences between a local rate and an imperial tax are noticed by almost all. The tendency of onerous rates to be shifted on to owners is attested by a great number—with less qualification perhaps than might be recommended.
Sidgwick, p. 104:—“In this case (that of old rates, nearly but not quite corresponding to our category of new houses] it seems clear that the whole burden of the differential rate, so far as it is onerous, must fall on the owner of the ground value, provided that in spite of this burden the land remains still more valuable for the purpose of house building than for any other purpose. ...."
Marshall, p. 120:—“He [the occupier] transfers most of them (rates other than .rates, the current expenditure of which gives full value to the occupier'] rather quickly to his immediate landlord.”
Bastable, p. 141:-" Where different amounts of rates are levied in different parts of the same district, the [onerous] : extra rates are shifted back to the
1 Marshall, Mem., p. 118.
? It may be worth observing that, though the demand is said to be unaltered by a beneficial impost, this can rarely be true of the demand.curve; and, accordingly, hough the effect on the superior interests of a beneficial impost is, ceteris paribus, nil, it does not follow that the effect of a beneficial impost, plus an onerous one, is the same as that of an onerous one alone-except in the sense that it may be either greater or less for all we know.
3 This attribute is implied by the exclusion of “rates, so far as their outlay is reproductive, in addition to the value of houses in the district."--Ibid.)
house owner, and in the case of new building tend to lower ground rent." ... "In specially faroured situations, where building sites command a high, or what is usually called a monopoly, value, the ultimate incidence of rates is clearly on the ground owner."
Cannan, p. 170:-" The consequence, then, so far as distribution is concerned, of rates being for unproductive purposes higher in one place than another, is to cause less creatable immovable property to exist in the high rated and more in the low rated places than would be the case if the rates were equal in all places."
* Everything which tends to discourage the investment of capital in immovable property in a district tends to diminish the demand for "unimproved land' or space in that district, and this diminution in the value of space of course mitigates the effect of the discouragement to investment."
Price, p. 181:-“ Some amount of movement, at least, is possible from more to less highly rated districts, and thus the burden of the rates may be partly shifted from the shoulders of the occupiers."
Sargant, p. 213:—“. Differential rates,' so far as onerous, and so far as existing or anticipated at the date of the development of land for houses or trade premises, are, in respect of both site and structure, thrown by anticipation on the owner or successive owners of the land at the time when it comes to be developed, and operate by way of diminution of the price or rent obtained by him or them.” 1
The answer to Question II. 2 contained in the preceding paragraphs relates primarily to the case of leasehold tenure, which may be taken as typical of Great Britain. But the statements may be transferred with little alteration to the case of freehold tenure which prevails in many, perhaps most, parts of England. The price which building capitalists are willing to give for freehold will be affected by a tax on occupation-rent in the same sense as the ground-rent on the former supposition. The demand of the occupier will be affected as before. The consequence to the ground landlord and the occupier would not be materially different in a régime where the occupiers are freeholders who buy land on which to build their own houses.
When we pass from dwelling-houses to houses used for purposes of production, including sale, the scene of consumption is transferred from the house itself to the commodities which are produced in or by the house. The relations between the consumer at one end, the ground landlord at the other end, and the intermediate producers are not materially different. As before, beneficial rates are “paid by no one" in the phrase of Mill
1 As to the extent of the reduction Mr. Sargant's authority cannot be claimed. ? Ante, p. 173.
3 This estimate appears to be justified by the particulars concerning the distri. bution of building tenures given in the Report of the Select Committee on Town Holdings, 1889, No. 251, pp. 6-9. No. 39.–VOL. X.
adapted by Professor Bastable. “The advantages resulting from a proper expenditure of rates may either recompense the traders, or so attract consumers as to allow of higher prices being maintained." 2
A uniform ad valorem onerous impost on the rent of all premises employed for production would result in a change of the final utilities of buildings, not only as between different places, as in the case of dwelling-houses, but also as between different industries. Those commodities for which the demand is particularly inelastic would tend to be raised in value. Thus, if the demand for bread varies with the price less than the demand for bonnets, the bakers may employ nearly as extensive premises before as after the imposition of the tax which will be almost entirely shifted to the consumer; while the milliners meet the burden by some diminution in the size of their establishments as well as some rise in price. The value of food as compared with finery would be raised pro tanto, if abstraction might be made of the law of increasing returns. There is also now a disturbance of the margins of production which in the case of dwelling-houses seemed not sufficiently important to deserve notice. There will be a pressure on “those trades which happen to require large buildings in proportion to their net returns.”' 4
Another effect of more importance in the case of business premises than dwelling-houses is that on the renewal of the occupier's lease the owner is more able to take advantage of the special utility above the market-value which the premises may have for that particular occupier, not a mere pretium affectionis in the case of the shopkeeper, but a consequence of the “goodwill ” created by his own exertions.
An onerous rate on both dwelling-houses and business premises would disturb the marginal utility, and accordingly the quantity produced and the value of the two kinds of building, theoretically, even if the impost on both kinds were of the same magnitude, and a fortiori when, as in the case of the Inhabited House Duty, it is different.
As between different places the displacement caused by difference in onerous rates will vary ceteris paribus with the capacity of one place to act as a substitute for 1 Mem., p. 141.
3 Above, pp. 340-1. 4 Marshall, Mem., p. 113.
5 Let us hope that, as witnessed before the Select Committee on Town Holdings, 1889 (Report, p. 11), such cases of exaction are rare.
6 Cf., Marshall, Mem., p. 120, par. 3-4.