Carl Menger: Testimony on the Reform of the Building Tax

Published in 1904, this document records Carl Menger’s expert testimony at the hearing of 26 November 1903, his systematic answers to forty-eight reform questions, and subsequent interventions in discussion. Its three principal divisions examine the formation of rents and building values, the effects of existing taxes, and proposals for reform. Menger connects a differentiated theory of tax incidence with a practical recommendation: substantially reduce Austria’s excessive rental-income tax while preserving the historical continuity of its assessment system. Neither the consequences of taxation nor the justice of reform can be understood independently of local building possibilities and the capitalization of established burdens.

Diese schwierigen und verwickelten Probleme können nicht unterschiedslos, also für alle Wohnungsbezirke, für alle Ortschaften, für alle Gebäude mit einem kurzen, bündigen „Ja“ oder „Nein“ beantwortet werden.

English translation: These difficult and intricate problems cannot be answered indiscriminately—that is, for all residential districts, all localities, and all buildings—with a short, categorical “yes” or “no.”

The decisive distinction is between districts with abundant vacant building sites and districts where practically all sites are occupied. In the former, competition from new construction keeps building values connected to production costs, including land, and rents connected to the customary return on investment. In built-up districts, restricted supply allows rents and property prices to diverge sharply from historical expenditure. Menger acknowledges transitional cases; his categories isolate different mechanisms rather than describe an absolute geographical division.

Where construction remains possible, a new tax reduces prospective net returns and postpones development until rents make building profitable again. Rents consequently stand higher than they would without the tax: transmission occurs through delayed supply, not through an owner’s unilateral power to recover expenses. Existing buildings initially lose capital value, whereas correctly calculated new investments incorporate the burden from the outset. Where supply cannot expand, taxation leaves the fundamental rental-market conditions unchanged and principally reduces property values.

Sie haben den Effekt, den Kapitalswert der Gebäude um den kapitalisierten Betrag der Steuer zu mindern.

English translation: They have the effect of reducing the capital value of buildings by the capitalized amount of the tax.

The questionnaire extends this account into a theory of valuation. Actual or anticipated net rental income, capitalized at the relevant interest rate, governs investment value; expenditure does not guarantee a corresponding return. Construction costs guide the decision whether to build, but cannot retrospectively establish an existing building’s market value. Land values are likewise calculated from anticipated building values after deducting construction expenses. Expectations, risk, saleability, amenities, and owner-use distinguish investments that superficially appear comparable.

This framework also separates market causation from occasions for bargaining. Actual rents can remain above or below the prevailing market range because tenants resist moving and landlords delay renegotiation. A tax increase may prompt adjustment of a previously low rent without itself creating the conditions permitting that adjustment. Conversely, a reduction need not lower rents in a fully built-up centre. The ensuing discussion clarifies “normal rent” as a market-formed benchmark and distinguishes taxes genuinely borne by owners from payments they merely collect for public authorities. Menger also rejects raw house counts as evidence of housing supply: replacing cottages with large apartment buildings changes both accommodation and quality without proportionate growth in the number of buildings.

His reform principles follow from the historical embedding of taxation. Long-established burdens have already altered purchase prices, investment calculations, and patterns of housing consumption. An apparently more uniform system could therefore redistribute wealth arbitrarily.

Unsere Hauszinssteuer ist eine Objektsteuer; sie trifft den Reinertrag der ihr unterworfenen Gebäude, ohne Rücksicht auf den Reinertrag, welcher den Eigentümern der Gebäude aus denselben zufließt.

English translation: Our rental-income tax is a tax on the property itself; it taxes the net yield of the buildings subject to it, irrespective of the net income that accrues to their owners from those buildings.

The distinction between taxing an object’s yield and taxing its owner’s income explains why mortgage indebtedness does not determine liability. It also grounds Menger’s correction of “amortization”: what occurs is deduction of the capitalized tax from the acquisition price, not gradual repayment. Successor owners pay an established tax from receipts but have generally obtained compensation through a lower purchase price. Reform must take this distributional history seriously.

Menger accordingly opposes replacing actual rental receipts with capital-value assessment or periodically estimated earning capacity. He defends the room-based house-class tax as a practical expedient where reliable rental comparisons are unavailable. Its progression and exclusion of ancillary rooms favour small households, although equally sized dwellings of radically different quality and disparities between neighbouring tax jurisdictions warrant targeted correction.

The overriding proposal is a reduction of the effective rental-income rates from 23⅓ and 17½ percent to 20 and 15 percent. Comparisons with agricultural land taxation support his judgment that urban property is disproportionately burdened. Relief should be financed by forgoing several years’ revenue growth, not by new consumption taxes on poorer households. Although the opening testimony rejects an immediate revenue quota, the questionnaire identifies eventual restriction of the tax’s yield as a longer-term objective.

Temporary exemptions receive similarly conditional approval.

Die Regierung will nicht, daß der Betreffende sich bereichere, sie will, daß gebaut werde.

English translation: The government does not want the person concerned to enrich himself; it wants building to take place.

Exemptions should enable or accelerate desirable construction, not confer excessive gains capitalized into land prices or divert investment into inferior uses. Menger also rejects enforceable guarantees that relief must become lower rents and opposes attaching a selective property-appreciation tax to this reform. Expected appreciation may already have been purchased through a higher acquisition price and lower initial income. The document’s distinctive contribution is thus to make fiscal reform depend simultaneously on prospective supply responses, capitalization, and the inherited distribution of property rights.