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offers, on his part, no explanation of the facts. It has been an error to ascribe building activity directly to the increment. It is not the increment which supplies the direct, compelling force. The real cause of early building is the pressure of charges of various sorts, the most important of which are annual taxes. Professor Anderson's article calls attention to this inaccuracy in a very conclusive fashion. But, nevertheless, were it not for the increment, operating in this indirect fashion as the reward which justifies the present sacrifice, the increased building would not take place. The conclusion must be that, under the conditions actually present in many places, the impairment of the "capital" increment by taxation would operate to discourage building operations.

Within limits 1 anything which increases the annual burden or increases the final reward of the man who is attempting to carry land in order to realize on the "capital" increment would, then, from this point of view, encourage building. A tax on the "yield increment" would, at the same time, increase the annual burden and decrease the final reward, for, presumably, the tax would continue after the land has changed hands and would result in the impairment of the "capital increment" for which the individual is striving. The effect upon building operations will depend, therefore, upon the relative strength of these opposing forces.

The statements made in regard to the effects of increment taxes have assumed that the increment is expected and counted upon. This suggests another distinction of possible usefulness. Increases in land values are always imperfectly discounted. If they were perfectly discounted, all would be paid for in the market price of land. Some are paid for in this fashion; some are not. Certainly the rate of increase and the rate of discount are independent of each other. Some increments are, then, expected, discounted and paid for; others are unexpected, undiscounted and unpaid for. The distinction between "expected" and "unexpected"

1 The annual burden could be made too high to be borne, of course.

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2 Moreover the mere fact that an individual expects an increment, does not, of course, earn "the increment. The increment may be entirely " unearned and yet be fully discounted.

increments is of some importance, because many individuals will not object to a plan which takes by taxation only that which has not been expected and paid for, but would object to another form of the increment tax. Obviously the only increment which is of any importance in influencing a decision to build is the increment which is expected and counted upon. A tax could take all this unexpected increment without affecting any decisions to build. If a line could be drawn between discounted and undiscounted increments, a tax could be imposed upon the undiscounted increments without the risk of unfavorable results upon building activity and without incurring the charge of confiscation. The wisdom of the provision of the English increment law, which provides for the exemption from the tax of a ten per cent increase, here becomes apparent. Perhaps such a provision comes as near as possible to a practicable distinction between "discounted " and "undiscounted" increments.

The degree of certainty and the possibility of unexpectedly large returns are the factors responsible for the relatively small return usually received from investments in land. Destroy the possibility of an increased return, through either

capital" or "income " increments, and the rate of return upon land must increase to a level at least as high as that upon other forms of investment.

The objection raised by Professor Anderson, that, because leased land competes with "owned" land in the same market as sites for buildings, the increment cannot be an incentive to building, seems to offer no great difficulties, theoretically. The owner of a piece of land which is rising in value and which is the occasion of expense difficult to meet may find it to his advantage to lease his land to a builder for any sum he can get. No matter how small the return, it will assist so much in aiding the individual to pay his taxes and preserve his title to his land and his future" capital " increment.

A discussion of the effects of other types of land taxes upon building operations cannot be included within the limits of this paper. The first step toward increased land taxation in most of the communities of the United States seems to be

to raise the assessment of vacant land to full value as compared with other real estate. What will be the effects upon building of this step and of the policy of exempting improvements, which is already being adopted, will depend upon a variety of conditions. In most cases, the writer believes, the changes will not be "barren of results," but will stimulate building to some degree.

In this paper, also, the observations "cover only a small part of the points in controversy." It is believed, however, that the main point is an important one. Certainly a debt of gratitude is due to Professor Anderson for demonstrating so conclusively the inadequacy of the currently accepted explanation of the influence of increments upon building and voluntary obsolescence. It is the explanation, however, which has been at fault. The influence is still present. But it is not exercised directly, as has been claimed, but indirectly and in a fashion not recognized. The increment is a reward whose attainment, under ordinary conditions, demands a sacrifice. The form which this sacrifice takes is in cities early building and voluntary obsolescence, and in rural districts early settlement and impoverishment of land.

ROBERT MURRAY HAIG.

COLUMBIA UNIVERSITY.

TWO RATE DECISIONS OF IMPORTANCE

Two rate decisions have recently been made, both noteworthy because of the importance of the questions at issue. One was rendered by the Massachusetts Public Service Commission, and considers the obligation of the state towards securities which it has approved; the other is by the New Jersey Court of Errors and Appeals, and deals with the problem of franchise values.

The Massachusetts decision considers whether and how far the approval of securities by a public utilities commission

means that a corporation will be allowed to charge a rate which will permit a fair return upon such securities. As yet there has been no authoritative judicial determination of this question. The United States Supreme Court in the Consolidated Gas case1 refused to permit the rate for gas in New York City to be lowered beyond the point where a fair return would be assured upon all the capitalization which had previously been authorized (indirectly) by the state legislature. In 1884 the legislature had sanctioned the merger of manufacturing companies, authorizing the consolidated corporations to issue capitalization which should not exceed the value of "the property, franchises and rights" of the separate companies. Several gas companies of the city soon merged under this act, forming the Consolidated Gas Company, and capitalizing its franchises and rights at approximately $8,000,000. The Supreme Court held in 1909, that since it did not appear that this was an over-valuation of the franchise in 1884 and since the capitalization of the franchises was under authority from the legislature, such capitalization should be included in the valuation of the property for rate-making purposes. The Court said: "We think that under the above facts the Court ought to accept the valuation of the franchises fixed and agreed upon under the act of 1884 as conclusive at that time. The valuation was provided for in the act, which was followed by the companies, and the agreement regarding it has always been recognized as valid, and the stock has been largely dealt in for more than twenty years past on the basis of the validity of the valuation and of the stock issued by the company."

Altho the point was not directly in issue, the logic of the Consolidated Gas decision would seem to lead to the establishment of the principle that authorization of stocks and bonds by a state establishes a capitalization upon which a return must be permitted by the state.

In spite of this decision, most of the states which have recently undertaken the control of capitalization are proceeding upon the theory that securities approved by them need

1 Wilcox v. Consolidated Gas Company, 212 U. S., p. 19.

not necessarily be taken into consideration in making rates. Indeed, the new public utility laws in some of the states specifically provide that the approval of securities by the commission, or any other acts of the commission, are not to be taken as a guarantee on the state's part of stocks or bonds issued under the act. Such provisions are contained in the laws of Arizona, California, Pennsylvania, and Illinois. Further, practically all of the new state commissions authorize the issue of securities but proceed to base rates upon the reproductive or present value of the property, permitting only such a rate as will provide a fair return upon this value. That is, the value of the property, so defined, is used as the basis for rates, regardless of the outstanding capitalization or the securities approved. By the use of this method the commissions plainly indicate that holders of securities approved by them have no assurance that rates will be such as to give a fair return upon such securities.

The Massachusetts decision above referred to rejects the present value theory as a basis for rates, and takes a different attitude on the obligation of the state as to the securities which it has authorized. This decision was in the Middlesex and Boston Rate Case, decided October 28, 1914.1 The Middlesex and Boston Street Railway Company had applied to the Public Service Commission for authority to increase its fares. The advance in rates was protested against by the towns through which the line passes. The Commission was compelled to face the question as to the basis upon which a fair return must be reckoned. Counsel for the patrons urged the view generally adopted by courts and commissions, that the present value of the property was the only amount upon which the company could claim a return.

In reply to this contention the Commission said: "Undoubtedly in rate cases and other cases involving the conflicting rights of the rate-paying public and the investing public, the cost of reproduction may frequently be a fact desirable to be ascertained, and sometimes it illuminates

1 Middlesex and Boston Rate Case. Report and Order, Massachusetts Public Service Commission, 1914, 553.

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