Rent, Taxation, Dissipation and Federalism
[A paper presented at the Western Economics
Assocation, 2 July 1990]
I. The issue
The question before us is "how can we prevent the dissipation
of resource rents?"
This cuts to the heart of ancient and modern issues of land
tenure, growth management, fiscal Federalism, tax methods, and
II. Sources of rent
I premise we understand "rent" to mean the income
imputable to natural resources, and natural resources means gifts of
nature, fixed and limited in quantity. We understand there are
marginal resources yielding little or no rent, grading up to
superior ones yielding much. We understand there is a dynamic
secular tendency for rents to rise with rising population and moreso
with rising disposable income per capita. There is a tendency for
marginal exhaustible resources to rise in value with the depletion
of superior ones that are normally used up first.
Because land is not produced, rents may be zero or less, and rise
without limit. There is no competition from new production.
I premise resource rents are the joint product of three
distinguishable factors: nature; complementary private activity; and
public works and services, publicly financed.
I premise rent is the most basic and general source of taxable
surplus, especially in an open economy in which other input costs
and product prices are set at world levels in world markets.
Triffin's epigram says "Surpluses are either competed away or
imputed away." Rent is what we call it when they are imputed
away. He might have added, they may also be frittered away: that is
what we seek to avoid.
Imputed rent is the foregone gain of withholding land from the
market, i.e. from others. It is equal to the marginal product of
land. I premise (some others differ) that rent is the prior
distributive claim, not a "residual." Thus, unused
valuable land costs the owner as much rent as though he were paying
cash to a landlord. Failure to realize this rent is imputable to
management, not land as such.
Rent is a levelized concept to give a unitary, commensurable
expression to costs and yields that have variable time patterns.
Selecting time patterns optimally is part of maximizing rent. That
is a fortiori true of exhaustible resources.
III. Dissipation of rent before the fisc takes it: what and how?
A. Dissipation means waste and destruction or suppression.
It means incurring needless costs, or aborting surplus-yielding
activities. Redistribution is not, per se, dissipation. No incentive
is required to produce land, or able to make more be created, so who
collects rent is a distributive choice. However the manner of
collection may twist incentives and interfere with efficient use; so
may the method of tenure, or tenure-creation.
B. How rent is dissipated.
Open access, tragedy of commons. Arthur Young, Scott Gordon,
Garrett Hardin, et al. Simple cases like open range, fisheries,
public parks and beaches, freeways: a principle easily perceived
(although not usually by undergraduates).
C. Open access followed by tenure: rent-seeking institutions.
Rent is dissipated through prematurity of investments. Squatters'
Rights (Preemption Act of 1841), and residence requirement of
Homestead Act (1862), traditional examples. Prior appropriation
doctrine of water rights, simple example. Air routes; broadcast
licenses; extending utility franchises; zoning; offset rights to
pollute; other modern examples.
Offset rights to pollute are doubly effective in dissipating rent.
By generating a nuisance and lowering the value of surrounding land,
a polluter is rewarded by receiving a valuable vested right to
continue the nuisance in perpetuity, or sell it.
Internationally, rent-seeking via warfare, or big-stick policies
threatening warfare, may be seen to dissipate rent when we deduct
the public cost from the private gain.
- Open access to exploration, followed by claims, as in minerals
act of 1872.
- Noncompetitive leasing, (free entry, first-come-first-served)
as in Alaska until fairly recent times.
- Open access for preliminary forms of exploration, followed by
leases for exploratory drilling.
- Leasing on demand ("nomination"), i.e. at the
convenience of the first potential lessee, rather than the lessor.
In conjunction with the bonus bid system, leasing on demand puts a
premium on financial or front-money power as the triggering force.
It also puts a premium on sequestering information and treating it
as proprietary, and forcing as much duplication of effort as there
- Subsidizing exploration. A subsidy, almost by definition,
causes waste in the amount of the subsidy, by causing people to
spend more to produce things than they are worth. With minerals,
subsidies cause submarginal lands to be developed. Submarginal in
this case generally means "premature," since rising
scarcity probably means the submarginal will eventually become
- Direct subsidies
- Tax preferences (a long list). I premise the tax-subsidy
concept, i.e. that those who pay less taxes on the supposed
principle of taxation are being subsidized by others who pay more.
- Unlimited license to acquire leaseholds. Gale Johnson, Stephen
Cheung and others have shown the rational landlord may make a
system of share tenancy work only if he limits the land each
tenant may have. State and Federal lessors generally impose
royalties and other charges on a unit-of-production basis, so
their lessees are share-croppers; but they put no upper limit on
There are time limits on holding without producing, but these may
be met by token compliance.
- Leverage of private investment over public investment and
- Tolerating environmental damage without compensation. Minerals
exploration, transportation, refining and consumption all receive
heavy subsidies of this kind. (However, cf. #14, Goldplating.)
- Subsidizing consumption.
- Providing highways below cost.
- Underpricing gas and power at the margins, by melding and
- Subsidizing energy-intensive water projects.
- Etc., not quite ad infinitum.
- Slowing down use and extraction of minerals once discovered. In
tandem with incentives to premature exploration, this generates an
unduly capital-freezing industry. It attracts capital too soon,
and releases it too slowly. In the Austrian sense, it becomes too
Freezing up capital is not free. To justify each year capital is
frozen, interest must be paid. This wasted interest comes out of
rent, in the form of lower bids for leaseholds.
- Severance taxation
- MER-based regulation of production
- Other regulations that mandate low-grading of subeconomic
- Cartel behavior
- Impact of extreme pro-development psychology
- Gross product rather than net gain is the objective function a
State should maximize.
- Export industries are more basic, and have multipliers.
- Small firms depend on large ones, rather than all activities
are mutually supportive.
- Discovery is the same as creating land.
- Discovery creates value by itself; other activities are
- Economies of scale are all that matter, and all activities are
like newspaper publishing in this regard. This does tend to affect
the attitude of editors who sway opinion.
- Mandatory goldplating to appease organized groups.
Environmental protection, like other good things, may be carried
to excess in specific cases like the Wilmington Basin. That is no
basis for generalizing, however, and it is obviously underfinanced
in other cases like tanker spillage.
- Overextension of subeconomic feeder lines, cross-subsidized.
- Selling at the wrong time. A good deal of early Alaska oil was
sold, not that long ago, for $1/bbl netback to the wellhead.
- Looting. Looting per se is only redistributive in the short
run, but its destructive incentive effects are obvious.
- Looting is sporadic, but the total ongoing cost of guarding
against crime is an enormous drain.
- Rent control in cities; price control at the wellhead. Both
these are redistributive in intent and effect, but highly
destructive of good incentives.
- Wellhead price control of gas has been turned into a subsidy
for exploring for new gas, via melding costs in gas rate
- Taxes and lease provisions that twist incentives.
IV. Dissipating rent via public spending
A. Taxes and lease provisions need not twist incentives.
- At worst taxes destroy incentives only at the margins: the "wedge
- Taxes may be structured to zero in on taxable surplus while
sparing the margins. An obvious and well-discussed case is a tax
based on land value, or putative rent, imposed as a flat charge
unaffected by landowner production.
- Taxes in excess of benefits received have positive incentive
effects on landowners.
a. The wealth effect
b. The liquidity or cash-drain effect.
c. The effect of offsetting credit discrimination and rationing
(land is cheaper to buy, hence less credit is needed, and taxes are
or may be non-discriminatory among potential owners.)
So it is not taxation per se that dissipates rent, even though
ill-structured taxes do destroy some rent.
B. Public spending of tax proceeds may dissipate rent.
Jurisdictions with higher rents/capita may support public services
at a higher level, and so attract immigrants. This distorts
locational decisions, attracting people to low- productivity,
low-paying jobs where they may benefit from higher public services.
C. History of recognition of this spending effect
We are not the first to have noticed!
1. James Madison. U.S. Constitution blocked direct taxes on land
at Federal level, allowed it at state and local. Also guaranteed
free migration among and within states.
Madison's rationale was the self-interest of local voters would
then keep them from redistributing rents.
2. Edwin Cannan. Around 1900 the ideas of Henry George were
powerful in the U.K., and adopted by the Liberal Party. George, of
course, spoke and wrote in favor of rent-sharing via tax and
spending policy. Cannan wrote in the EJ that heavy local taxes on
land rents, used to provide superior public services, would distort
locational incentives and cause overpopulation in London.
This is a tragedy-of-commons once-removed. Land remains tenured,
but schools, parks, welfare, streets, libraries, public restrooms,
public ambiance, etc. are open to all.
Alfred Marshall seconded Cannan, shifting the argument however to
the suburbs which he thought would become overpopulated. Marshall,
by the way, came around to favoring a national land tax, in spite of
Stigler's resurrection of his acrimony with travelling agitator
Henry George at Oxford.
Neither George, Cannan nor Marshall got into exclusionary local
zoning, a later and highly relevant development.
3. Half-brothers Austen and Neville Chamberlain, arch-foes of land
taxation, adopted the Madison principle of stifling it by relegating
it to local jurisdictions only, letting forces of local
particularism limit its use.
4. Upton Sinclair learned the force of this principle in 1933. In
his How I ran for Governor of California and How I got Licked he
reports his EPIC campaign nearly won until the enemy found the
formula of anti-Okie-ism.
5. B.C. offsets the magnet of Vancouver's location and public
facilities by costly Provincial efforts to subsidize less attractive
cities at Vancouver's expense. Nationally, Canada does the same with
Alberta oil revenues.
Ironically, Canada's effort is still too little to placate Quebec,
giving a notion of the limits of purely fiscal measures to overpower
cultural factors. While this may discourage the purely allocative
economist, it contains a seed of hope for those interested in ethics
and justice, indicating narrow pecuniary self-interest is not
everything. There is some pleasure in contemplating a people who
will not sell out so cheaply (and perhaps not at all).
6. Alaska, of course, lost out to the ghost of Madison when it
gave a social dividend to all residents with five years in the
State, and was successfully sued (Zobel v. Williams, 102 USSC 2309,
7. Etc. A universal principle has universal illustrations.
D. Successful compromises with the principle.
1. Barriers to immigration or sharing.
a. Ethnic political machines.
b. Theocracies with a religious test for entry.
c. Building up heritage funds to abate future taxes.
d. Excluding non-citizens from benefits, where relevant. This is
what Kuwait does, e.g. California cannot exclude U.S. citizens
directly, but can exclude them indirectly by using illegal Mexican
labor for stoop and sweatshop labor, excluding Mexicans from public
benefits while the Mexicans keep out eastern U.S. immigrants from
e. Racial discrimination and segregation, as in the old South.
f. Exclusionary zoning. 2. Selling voters on the benefits
a. Henry George was apparently elected Mayor of New York City in
1886 (but counted out by Tammany). He was not selling an ethnic
machine (the Irish Catholic hierarchy opposed him.) He sold the
benefits of growth. Immigrants would not dilute rents as much as
they augmented them, a central point George underscores in his major
work, Progress and Poverty.
George also brought out a countervailing point the critics have
overlooked, in their exclusive concern with protecting high central
rents from invasion. Taxes on the use and improvement of marginal
land sterilize said land, "and tend to drive population and
wealth from them to the great cities." That is not the last
word on the subject either, but shows there is more to the subject
than Cannan began to disclose. As George maintained, aborting rent
on marginal land, not just rent-sharing on superior land, distorts
b. Chambers of Commerce have generally followed the same tack as
George, touting the gains of growth. They often support tax
increases, just as the California establishment lined up for Prop.
111 this year. They recognize the role of infrastructure in
promoting economic development. Chambers of Commerce, however, put
much more emphasis on attracting capital than George did, and
emphasize capital-intensive and land- intensive, even land-raping
c. Public schools and universities have been a screening device
attracting an especially desired form of immigrant.
E. Less successful compromises with the principle
1. Public works. These enhance the value of specific private lands
and so attract support from specific benefited landowners. At the
same time they link new lands with old markets and, in the
aggregate, increase the amount of land that is usable in more
intensive forms, e.g. for urban housing, and thus have some
redistributive effect in favor of non-owners. This makes for a wide
Because they are durable capital they appear to represent real
assets. However many are heavily subsidized or cross-subsidized and
cost far more than their benefits to anyone. In the aggregate they
freeze up too much of the nation's limited capital stock.
Services are not inherently wasteful, and capital is not
inherently economical. Economy is the key in either case. (When
debt-financed, however, there should be capital resulting.)
Capital is the more wasteful when we consider it is taken from the
margins of alternative uses where it may be very scarce today.
Labor, on the other hand, is in surplus.
Anti-growth movements burgeoning today manifest growing disbelief
in the benefits of subeconomic extensions of infrastructure. A small
but growing element is increasing awareness of the high degree of
absentee and alien ownership, highly concentrated, of the benefited
Squandering the Alaska surplus is a splendid case in point. A
social dividend would have been efficient, and respectful of
consumer sovereignty. James Madison's dead hand stopped it (in
part). (Zobel v. Williams.)
2. Subsidized public works in tandem with exclusionary zoning.
Through revenue-sharing with categorical grants, many localities
have built expensive public works, e.g. sewer plants, designed to
accommodate higher populations. Then they turn around and impose
exclusionary zoning, to limit the benefits to a few.
In the B.C. Ferry Service the main lines make a little money and
the branch lines to small islands are heavily cross-subsidized, some
making $1 of revenues for $12 of costs.
Residents of those islands, having sought and secured the service,
are now alarmed at the influx of population and are zoning it out.
Here we have public works turned into pure giveaways to a few
landowners, with no tokens for any wider constituency.
3. Hocking the revenues
Borrowing to spend worsens the public works problems. Worse yet is
borrowing to pay for current services, with some admixture of graft,
as the NYC bankruptcy illustrated, and much 3d-world borrowing
illustrates today on a wider canvas.
A. Socialize rent at the national level.
B. Limit benefits to citizens per se (not to landowners per se).
C. A social dividend to citizens is the obvious route.
D. Return rents to local school districts in inverse proportion to
local tax base per capita (the Colin Clark principle).
E. Promote James Madison and Neville Chamberlain to elder