FOREST TAXATION IN THE UNITED STATES | 43 
1-percent property tax amounts to 25 percent of the present worth of 
his original capital before the tax in question was considered. When 
capital is so employed that its income is deferred, thereby causing a 
gradual increase in the value of the capital, the property tax takes a 
larger toll of the capital value before tax, as illustrated by the 36.8- 
percent burden in the case of the second brother in the example. 
Finally, those investments which, by securing an income greater 
than the interest, gradually exhaust the capital are favored by the 
property tax. In the case of the third brother, the present worth of 
all his taxes is only 2.5 percent of the value of his original capital. 
The ratios which have occurred in this discussion, 25 percent for 
the first brother, 36.8 percent for the second, and 2.5 percent for the 
third, are called ‘tax ratios.” The term tax ratio as used throughout 
this report is defined as the ratio of taxes to net income before taxes, 
both compounded or discounted, as the case may be, to the same 
point in time, and both covering the same income cycle. It is an 
important measure of tax burden. In the present illustration of the 
three brothers, the present worth of each of the two factors is used, 
the present worth of the net income being the value of the original 
capital. 
EFFECTS OF CAPITALIZATION OF AN ESTABLISHED PROPERTY TAX 
Suppose now that, immediately before the receipt of the three 
bequests, there is announcement of the imposition of a property tax 
like that described above. Assume that the effects of this tax are 
fully known and are fully capitalized in connection with all invest- 
ments. Owing to such tax capitalization, any investment subject 
to this property tax (at the rate of 1 percent; interest being at the 
rate of 3 percent) loses one-fourth of the present value it would have 
had had there been no such tax. Regardless of the character of 
investments to be chosen, each bequest as received is worth only 
$10,000 rather than $13,333. 
The annual income in the first brother’s case is, as before, $400, 
and the annual property tax $100. The tax ratio is 25 percent, but, 
since there is no reduction in original capital value, the first brother 
is not conscious of any burden from this tax. 
As for the second brother, an investment which increases at the 
rate of 3 percent is no longer satisfactory to him, since he must pay 
1 percent annually in taxes. He will demand an investment which 
increases at the rate of 4 percent, and if he does not get it, he will put 
his money into something which will yield an annual or a diminishing 
return. All those people who are situated like the second brother will 
follow the same course, and as a result the demand for deferred-yield 
investments will so diminish that borrowers will have to pay 4 percent 
to secure money on a deferred-yield basis. Suppose that the second 
brother puts his $10,000 in trust so that it will compound at 4 percent 
for 17% years, at which time it will have doubled in value. (The 
reason for the choice of a 17% year period is now apparent, since 
money doubles at 4 percent in approximately such a period. Any 
other period would have served.) The $20,000 capital at the end 
of 17% years is invested in a perpetual annuity of $800 a year, outof 
which $200 must be paid in taxes. The present value, at 3 percent. 
