Taxing Rental Versus Taxing
Salable Value of Land

Harry Gunnison Brown

[Reprinted from the Journal of Political Economy,
Vol. 36, No. 1 (February, 1928), pp. 164-168]

A question which is, in the opinion of the present writer, worthy of some discussion is whether a tax on the rental value of land is the exact equivalent of a tax (at, of course, a sufficiently lower rate)[1] on the salable value, and, if not, whether there is any significant difference in effect between such taxes.

The first point to be made is one with which the reader is probably quite familiar. It is based on the recognized relation between the rental and the salable value of land. That the salable value of a piece of land is arrived at by the process of capitalizing its expected future rents is generally recognized. A tax on rent high enough to take all the rent land was yielding, and which was confidently expected to continue to take all the rent throughout the future, would make the salable value of the land zero. Hence, no finite rate of taxation on the salable value of land can possibly be high enough to take all the rent. The indicated solution would seem to be, in case it is desired that taxation shall absorb all the rent, to base the tax on the rent or rental value, (at a rate of 100 per cent) and not on the salable value.

Yet it might be administratively possible to levy a tax equal to 100 per cent of the rent while still levying it ostensibly on salable value. There would be, in the market, in the theoretically perfect case, a zero salable value. But assessors could put upon land a constructive salable value to be arrived at through capitalizing the rent which would be received by a private owner if the land were not taxed.

There is, of course, a difference, even in the taxation of rent, between taxing only the rent actually received from a piece of land and taxing its rental value. In the one case, no tax is levied on land held out of use for speculative or other purpose, however high may be the rent which such land would yield if used. In the other case the tax on unused land from which no rent was being received by the owner would be as high as if the land were yielding its entire potential rent. Hence, in this latter case there would be a definite penalty against the holding of valuable land out of use.

The question which is here chiefly to concern us is whether a tax based on salable value would be the same and would have the same effects as one based on rental value. It is obvious that either -- and in the case of rental value the fact has just been commented on herein -- differs from a tax on actually received rent, by virtue of its falling on unused, as well as on used, valuable land.

Clearly there is no difference between a tax of 100 per cent on rental value and a tax on "constructive"[2] salable value levied at a correspondingly high rate. Or, in other words, it would be possible to levy a tax on such "constructive" salable value at such a rate that it would be exactly equivalent to a tax of 100 per cent on the annual rental value.

However, due consideration will disclose a difference between an actual salable-value tax and a rental-value tax if not all but only a part of the rent is taken. For a tax on rental value means that marginal and below-marginal land is not at all taxed, since such land not only yields no rent but has no present rental value. On the other hand, a tax on the salable value of land does mean that land at or below the margin -- or, at least, some of such land -- is taxed. For there is some land which, although not now capable of yielding rent, will, it is confidently expected, yield rent in the future. And this expected future rent is capitalized into a present salable value. Any piece of land, no matter how poor from the viewpoint of present use, may have a salable value based on estimates regarding its future.

It may be thought that in the foregoing considerations lies serious objection to the use of a tax on salable value; that a tax on the salable value of land, since it rests in some degree on marginal and even sub- marginal land, might be shifted, at least in part; and that a tax on rental value is much to be preferred.

The difference in practical effect between a tax on salable and one on rental bare-land value is, however, with certain possible qualifications, to be mentioned at the end of our study, unimportant or negligible. And what difference there is does not seem to be clearly against the tax on salable value. Let us consider the problem point by point. The first consideration seems to tell rather in favor of taxing salable as against rental value. When land is speculatively held, this is likely to be for the reason that its value is thought to be rising. In such a case, the salable value is usually higher than the current rental value will justify, being based largely on the expected larger future rent. To tax salable value, therefore, tends to tax at a somewhat higher rate land held out of use for speculation than to tax rental value. This will the sooner force speculators to disgorge. Of course, where the land held out of use is below or barely at the margin of use, such speculation is, if not entirely harmless, at worst relatively so. And where it is well above the margin a rental value tax, if at a high rate, would sufficiently discourage speculation.

What, now, of the difference between these taxes in the case of land which is used? In this case, too, the prospect of a higher future than present rental value will make a tax on salable value relatively the higher. (Though, also, a prospect of lower future rent would make it lower.) But this will involve no additional burden to the user of such land, as user, although the owner, as such, pays a somewhat higher tax. The owner cannot charge as rent, to a user, any more in the one case than in the other. Nor will there be any additional burden to any prospective purchaser of the land. For the higher tax, present and prospective, on a piece of land the rental value of which is expected to rise and whose taxable salable value is, therefore, higher, will be capitalized into a somewhat lower salable value for the land than such land would otherwise have. For whenever the expectation of a rise in the value of a piece of land is widespread enough to affect its market value (which is whenever it affects the estimates of two competing potential owners, of whom one may be the actual owner), this expectation must, if assessment is based on actual market value and is known to be so based, carry with it also the expectation of the corresponding future and near-future taxes. The expectation of these higher taxes will keep the land from rising as high in value as it would rise if only the higher future rent, and not the higher taxes due to their being based on the higher salable value of land, were envisaged by owners and prospective buyers of the land. Obviously the very fact of a higher rate of tax on such land will in some degree lower the salable value on which the tax is based, but the capitalization of whatever part of the expected larger future rent is not to be taken in taxation will make the salable value of land the rental value of which is expected to increase, higher than that of land the rental value of which is expected to be constant or to decrease, and will so make the tax on it higher compared to the tax on such other land than if the taxes were based on rental value.

We conclude, then, that to tax salable value instead of rental value cannot discourage the use of land which is expected to yield higher rent in the future and which is therefore assessable at a higher value than its present rental yield would justify. It cannot so discourage the use of such land for, first, it discourages speculation in the land (holding it unused) even more than would a tax on rental value; second, it cannot enable owners to charge more rent to tenants, and, third, prospective purchasers can buy it at a sufficiently lower price, because of the capitalization of the higher tax, to offset the burden of such increased tax.

To tax salable rather than rental value cannot even discourage the use of marginal (i.e., no-rent) land although, in case the land in question were expected soon to be above the margin the former system would cause it to be taxed now and in the near future and the latter not until rent began really to emerge. If the would-be user of such a piece of land is unwilling to buy it, the tax does him neither good nor harm. The owner gains nothing by letting it be used as against holding it out of use, since, the land being marginal, he can charge no rent. But, as we have seen, as soon as the land comes to be the least bit above the margin, to tax it on the basis of salable value (when the entire rent is not taken) puts more pressure on the owner to let his land be used than to tax it on the basis of rental value. And in case the would-be user desires to buy the land before using it, the owner will sell it for a lower price if the tax is on the basis of salable value than he would if it were on the basis of rental value. Nor will it do for a possible objector to say that marginal land is not worth using if the owner must buy it. For the price the buyer is paying is not given for present-use value but is given for the privilege of enjoying rent from the land in the future when, he believes, the land will be above the margin of use.

Our general conclusion can be stated in a very few words: There is a difference between a tax levied according to rental and one levied according to salable value. But in neither case is there any shifting.[3] A tax on salable value, no more than on a tax on rental value, resembles, in this regard, a tax on land according to area (an acreage tax) notwithstanding the fact that a tax on salable value involves some tax on some land which is, at the time, of marginal or lower grade. And neither a tax on rental nor one on salable value discourages the use of land. While both tend to encourage such use by making speculative holding unprofitable, the tax on the basis of salable value, when only part of the rent (considering an average of present and future) is taken, tends to discourage speculation even more than the tax on rental value. On the other hand, objection might be raised to the tax on salable value as being relatively burdensome to owners of marginal or near-marginal land having, thus, no present rental yield or an insignificant yield, but which land, because of real or imaginary speculative possibilities, might have a considerable salable value.


  1. Thus, if rent is capitalized into salable value on a 5 per cent basis, a piece of land yielding, and expected to continue to yield, just $100 a year would be worth, if half the rent were taken in taxation, $1,000. A 5 per cent tax on the salable value would also be a $50 tax.
  2. See above.
  3. See, however, qualifications in the writer's book, The Economics of Taxation, New York (Holt), 1924, pp. 221-32. These qualifications the writer had previously discussed in an article, "Is a Tax on Site Value Never Shifted?" published in the Journal of Political Economy for June, 1924.