FOREST TAXATION IN THE UNITED STATES 577 
tax payments should be more than required under the property tax. 
With such adjustments, the property tax form is maintained, in that 
the tax is due annually and is based upon property value, but at the 
same time the tax is brought into conformity with the flow of income 
from the property. It is important to note that a property tax so 
adjusted would normally exert no influence on the rate of cutting or 
the flow of income. No advantage, so far as taxes are concerned, 
would be gained from either increasing the cut or deferring the yield. 
Before proceeding to the task of formulating the specific adjust- 
ments required to bring the property tax into harmony with forest 
property, it will be helpful to rehearse briefly certain fundamental 
economic principles upon which the value of capital depends. 
The value of an instrument of capital is the result of discounting— 
capitalizing—all its expected future incomes and costs. The present 
worth of the expected incomes must be greater than the present worth 
of the expected costs; otherwise the instrument would have no value 
and would not be capital at all. 
Being in the future, these expected incomes and costs are, with the 
lapse of time, constantly coming nearer and from time to time 
materializing in actual events. The passage of time thus brings 
changes in the value of a capital instrument in two principal ways, as 
follows: 
(1) Due to the approach of expected incomes and costs, the value 
of the capital tends to increase, at a rate equal to the market rate of 
pure interest upon the present worth of the capital. This is an 
obvious corollary of the general principle of capitalization. 
It will, of course, be realized that this tendency will not ordinarily cause the 
capital to increase steadily at this rate. This is because the appraisal of expected 
incomes and costs is itself subject to constant change. Everything in the future 
is uncertain. In determining the value of a capital instrument it is necessary, 
first of all, to form an idea of the series of incomes and costs which may possibly 
occur. It is next necessary to estimate the actuarial chances of the occurrence 
of each of these events. If, for instance, a yield of $100 from sale of stumpage is 
expected 5 years hence, it must be recognized that this yield is not absolutely 
certain. If it appears that the chance of obtaining this yield is about 9 out of 10, 
its value would be put at $90 before discounting to determine its present worth. 
Again, there may be the possibility that a conflagration will cause a loss of $1,000, 
but if the chance of such conflagration occurring is only 1 to 50 the loss actually 
discounted should be reduced to one-fiftieth, or $20. Having thus appraised all 
future incomes and costs on the basis of the probability of their occurrence, the 
present worth of the capital is obtained by the process of discount. 
From this point, as time goes on, anticipated events come closer, and it will 
generally be possible to revise the estimates as to their probability. Thus, as the 
years pass, the chance of actually obtaining any expected yield may become 
greater. On the other hand, a series of dry seasons might increase the chance of 
the conflagration. Thus the values of expected incomes and costs are subject 
to constant revision, with corresponding effects upon the capital value. 
(2) As the expected incomes and costs materialize in actual events, 
these changes occur: (a) Upon the receipt of an expected income, 
the value of the capital falls by the amount of such income. This is 
clearly illustrated by the market value of an ordinary bond, which, 
having gradually increased as the interest date approached, drops by 
the amount of the interest received immediately after such receipt; 
and (b) upon the payment of an expected cost, the value of the capital 
rises by the amount of such cost. This principle is the exact converse 
of the preceding. The present value of a capital instrument bur- 
101285 °—35——37 
