Land and Markets

Edward J. Dodson

[Reprinted from the Georgist Journal, Summer, 1992]

The exchanges between Fred Foldvary and Ian Lambert highlight the complexity of markets, a circumstance that frustrates efforts to quantify with certainty what is occurring (particularly over the short and intermediate terms). How this debate relates to Henry George's political economy, it seems to me, is two-fold. First is the ongoing assessment of George's closed system of production and distribution and whether the laws he developed really do explain what happens in the real world. George understood that these laws are driven by human behavior as laws of tendency. Second, the power of externalities to influence, halt or redirect our behavior is not only great but constant.

Mr. Lambert indicates that his primary objective has been to support the conclusion reached by George that the natural tendency of wages is to hover at subsistence. He does this by using available data and statistics to suggest that real wages have not really increased over time. Global statistics give a mixed picture; however, the most powerful examples in support of George are found in countries where population growth has not been matched by the adoption of participatory government, widespread education and medical care or some degree of equity in taxation. Mr. Foldvary has (as I do) some trouble with the concept of domestic rent that Mr. Lambert has come up with. I think the most important observation Mr. Foldvary makes is that "every good or service one buys has a rent component." For those who are quantitatively oriented, the challenge is determining just what that rent component is.

We know that the globalization of production has frustrated efforts by governments to impose taxation based on the locations at which revenue is received and profits earned. Transnational corporations are several steps ahead of the taxing authorities when it comes to the transfer of inter-company revenues and costs. I see the nature of the problem Mr. Lambert raises as being associated for imputed rents not accounted for.

IMPUTED RENTS

Some corporations involved in real estate development will acquire farmland they believe is in the natural path of an area's residential and commercial growth, then lease the land back to the tenant farmers for far less than the true market rental value. By doing so the land generally remains zoned agricultural and is valued as such for tax purposes. The developer does not really care whether the fertility of the soil is degraded; moreover, the difference between the rent collected and full potential rent (for agricultural use) is inconsequential. In the short run the tenant farmer is benefiting from low land costs, receiving imputed rent as part of the total revenue generated by the sale of production. The cost to society is that the land is not brought into its highest and best use.

Obviously, the market price for this land has no relation to a capitalization of rent by the rate obtainable from alternative investments. A natural extension of this concept is requiring business owners to have their land holdings reappraised periodically. The question remains as to whether this change will tell us much about the extent and direction of the movement of rent. The same sort of question arises when we look at land prices generally; in a market economy dominated by purchases and sales of land as opposed to leaseholds, calculating the full rental value of land is an exercise in futility for any one seeking specificity. I will try to explain.

Very many externalities contribute to what the owner would accept as an offer for purchase -- not the least of which is the owner's own financial reserves, weighted against the annual carrying cost of holding, weighed against the rate of appreciation and the owner's confidence in the longer-term average rate of appreciation and other intangibles. For most businesses, however, their land holdings are not viewed as a source of future revenue but as part of their start-up costs. As reason would suspect -- whether we talk about housing, warehouses, commercial, office or retail space -- the first group to experience squeezed profit margins are those who lease their land and their facilities. They have no reserve of imputed rent. If they acquired their space at the right time (e.g., when vacancy rates were high), they may have a long-term lease that limits escalations.

A LAFFER CURVE FOR RENT

So then, with all this complexity going on, how would an assessor come up with the potential rental value of any given site for purposes of taxation? Do we really need to have a widespread leasehold market to use as the basis, or will the rate of taxation impose inevitable downward pressure on the selling price of land? All things being equal I believe the Laffer Curve provides the answer. The rate of taxation should be gradually increased until that point where any further increase yields less revenue than previously. At this point, the taxes collected will have equaled even the speculative rental that deep pocket investors are willing to pay to gain access to given sites even though they do not plan to use them right away.