Karl-Theodor von Inama-Sternegg: Testimony on Building-Tax Reform

Published in 1904, this official hearing document records Karl-Theodor von Inama-Sternegg’s expert testimony at the first session of the building-tax reform inquiry on 16 November 1903, together with supplementary answers and a concluding clarification. Its structure follows the ministry’s questionnaire: property valuation, the effects of taxation, and proposed reforms lead into a broader argument about fiscal organization. His central contention is that building taxation cannot be understood through its nominal payer alone. Taxes alter rents, property prices, and returns on capital; reforms that disregard these adjustments may enrich existing owners without relieving tenants.

Inama-Sternegg begins by questioning the questionnaire’s analytical method. Although he follows its sequence, he objects to isolating economic factors that operate together:

Der Fragebogen ist zum Teile angekränkelt — ich bitte, das Wort nicht im schlimmen Sinne zu verstehen — von der theoretischen Nationalökonomie, welche sehr stark mit Isolierungen arbeitet, während andererseits die Isolierung doch auch irreführt.

English translation: The questionnaire is partly afflicted—I ask that the word not be understood in a bad sense—by theoretical political economy, which works extensively with isolations, whereas isolation also leads astray.

This methodological objection organizes the testimony. He distinguishes three adjustment processes: amortization, whereby a tax depresses capital value; capitalization, whereby an exemption increases value; and shifting, whereby the burden passes to tenants. These are interacting responses, not independently observable effects. Owners seek to preserve ordinary returns, and other economic changes can conceal the adjustments attributable to taxation. His comparison with securities taxation emphasizes that an initial holder may suffer a capital loss while subsequent purchasers receive the prevailing return.

For valuation, the decisive movement runs from rental income to building value, not from construction costs to rents. Comparable premises, neighboring properties, and location establish expectations of income. Permanent changes in interest rates affect valuation, whereas brief fluctuations cannot readily reshape an illiquid property market. Nor does prior ownership of the building site fundamentally change its economic function. Charitable institutions and municipalities can nevertheless offer lower rents because their objectives and indefinite ownership horizons allow them to exclude speculative gains.

Temporary tax exemptions are especially problematic: a brief incentive to construction can become a capitalized windfall when extended over many years. At expiry, rents, profitability, or property value must adjust, even if simultaneous developments obscure the change. A numerical example then follows a property through taxation, depreciation, shifting, and repeal. Its point is that abolishing a tax need not reverse the rent increase associated with its introduction: owners may retain the higher income while property values rise to restore the normal percentage return.

The reform discussion therefore separates benefits to owners from benefits to the population:

Die Anregung der Bautätigkeit könnte unter Umständen sehr nützlich für die Gesamtheit sein, aber auch sehr schädlich.

English translation: Stimulating building activity could, under certain circumstances, be very useful to the community as a whole, but also very harmful.

Construction is beneficial when it answers housing needs, not simply because fiscal incentives accelerate it; forced expansion can produce building crises. Similarly, better housing depends partly on inhabitants’ expectations and cultural standards, not automatically on lower taxation. Inama-Sternegg expects modest tax reductions to leave rents unchanged. Guaranteed reductions would require binding rent controls, since otherwise landlords could terminate tenancies and demand higher rents from replacements. He rejects financing owners’ relief through indirect taxes that already weigh heavily on poorer people.

His account also extends beyond municipal boundaries. A metropolis influences the prices of land and accommodation throughout its supply and transport hinterland; railway connections can matter more than continuous settlement. Consequently, changing one locality’s tax regime affects neighboring interests. Existing rate differences may crudely recognize differential urban rents. Among more practicable reforms, he favors assessment by capital value with frequent revision and suggests representative buildings as a basis for estimating maintenance deductions.

His strongest institutional proposal emerges from the limits of piecemeal reform:

Schon das, was ich zuletzt gesagt habe, zeigt, daß nach meiner Meinung die Reform der Gebäudesteuer im Zusammenhang steht mit der allgemeinen Steuerreform.

English translation: What I have just said already shows that, in my opinion, reform of the building tax is connected with general tax reform.

He proposes transferring building taxation to municipalities and other autonomous bodies, whose dependence on supplementary levies currently complicates reform. The state would require replacement revenue through income taxation distinguishing asset-backed from earned income, supplemented by a wealth tax reaching both individuals and wealthy institutions. His hostility to the house-class tax rests particularly on rural buildings’ function as necessary instruments of agricultural production. He also distinguishes an inequitable transaction tax used merely to replace building-tax revenue from a levy capturing unearned appreciation when sale or mortgage makes increased value realizable.

The supplementary interventions clarify both the provisional character of this program and its conceptual boundaries. He discusses villas as indicators of taxable capacity and tentatively suggests a land-tax supplement for rural residential buildings. On mortgages, he acknowledges that available registers cannot establish the aggregate burden reliably. More importantly, indebtedness belongs to personal income assessment, not to an object-based building tax:

Daß er in der Gebäudesteuer die Schulden nicht in Abrechnung bringen darf, ist darin begründet, daß das keine Personalsteuer, sondern eine Realsteuer ist, deren Umwälzungs- und Anpassungsvorgang ich Ihnen früher schon auseinandergefeht habe.

English translation: That he may not deduct debts in assessing the building tax is explained by the fact that it is not a personal tax but a tax on property, whose process of shifting and adjustment I have already explained to you.

Finally, he corrects any suggestion that his illustrative debtor represented property owners generally: mortgage growth reflects adverse conditions and capital’s penetration of landed property, not simply individual recklessness. The testimony’s lasting significance lies in connecting tax incidence, urban land markets, taxable capacity, and the division of fiscal responsibilities.