Do Taxes on Labor and Capital
Reduce Location Rent?

Harry Pollard

[Reprinted from a LandCafe online discussion, 31 January, 2007]

Back in the 1970, the annual conference of the Henry George school took place in Miami. ...At the Conference I was making a presentation on my great discovery. I had found that all taxes come out of Rent. I was attacked from all parts of the audience. Dear old Henry George Foundation Secretary Percy Williams angrily confronted me. "So you're saying that we don't need land value taxation because other taxes will collect Rent anyway!" -- he thundered.

Over the coming months, many or most Georgists began to agree with the contention. I think Steve Cord was about the first. I did hear that someone called Mason Gaffney had suggested a similar argument. George Collins said it rather better by changing it to 'taxes are paid at the expense of Rent'.

So I had carried out a kind of minor revolution in thinking among Georgists.

The only problem was that I was dead wrong.

As I’ve said many times before, the Rent of a location is a community construct -– it wouldn’t exist if surrounding community didn’t exist and have access to it. That is the ethical underpinning of Rent collection -– the community is simply recovering the values it creates.

If the community doesn't change and its ability to access a location doesn't change, then the Rent of that location will remain the same. This, no matter what taxes may be levied on the production of Labor and Capital. Or, for that matter if Rent is collected either by a private landholder or by the community.

The ability of a location to add $100 a day to the production of the person occupying a location is there whether or not the occupier does anything at all. And, for that matter, it remains no matter the taxation burden that may fall on the head of the hapless producer.

The problem arises in our failure to distinguish Rent from rack-rent.

The engine of the market is price mechanism control. The action of the market is continually to move toward higher quality at a lower price. The returns to both Labor and Capital are controlled by the market. The return to Land is not.

We all know how the price mechanism works. When there is an increasing demand for something the price rises. This has two effects. It dampens the enthusiasm of buyers even as it increases the enthusiasm of producers.

To take advantage of a higher price, factories produce more and rush it to market. Fresh goods arriving at market satisfy demand and prices return to equilibrium. (What fixes the equilibrium is of great interest to Georgists. We may be the only ones to raise the question.)

However, factories cannot produce more land and rush it to market. The amount of land is fixed and it cannot be moved around. There is no way to bring land prices back to equilibrium. So, in response to continuing demand, land prices keep moving upward.

Let us look at the landholder. Professional real estate people make their money by moving land and improvements. The more they move the greater their commissions. The landholder is in possession of something that steadily increases in price. Why should he sell?

Once he sells he is no longer a landholder. The position of landholder carries its own cachet. Further, he is getting a steady increase in price and he doesn't have to do very much. What can he invest in that might provide as good an income with similar low risk?

(Mason argues that this increase is income and should be taxed as such. That would be interesting.)

So our landholder holds on for further increases. So do they all hang on with the inevitable result that prices continue to rise, thereby confirming the correctness of their decision.

We are in positive feedback, the opposite of the negative feedback exhibited by the market.

Let's return to Rent.

Just as prices rise, so does the 'rent' demanded of a tenant. If land was plentifully available, the tenant would quickly be off elsewhere. As it happens there is no elsewhere -- he is caught. And the amount demanded increases and increases, and over centuries has been known as rack-rent.

Webster uses Rent and rack-rent synonymously an appropriate recognition of reality.

Tenants do not pay Rent -- they pay rack-rent.

There is a limit to the rack-rent that can be charged. The tenant must be left with enough to keep him alive (technically, and reproducing). In fact, this necessary minimum is what determines rack-rent. In the tremendously fertile Mekong Delta, rack-rents reached 90% of the crop. When American troops cleared the Delta of Vietcong right behind them came the cousins of the landlords to collect their 90%.

This was known as winning the hearts and minds of the people.

So we tax the landholder's production, or impose sales taxes on everything the tenant buys and the existing rack rent cannot be maintained. These taxes are paid at the expense of rack-rent.

Thus, the landholder gets less rack-rent.

But, Rent is not affected. The value, created by the presence and access of the surrounding community, has not changed.

Over the years we've fallen into the trap of treating rack-rent as if it were Rent. Aggregate rack-rent is very much larger than aggregate Rent and produces a more desirable revenue for all the things we want to do with the “Rent” we collect.

The difference between Rent and rack-rent has only one source and that is wages. It is a thoroughly Georgist notion that wages belong to the person who produced them. If we collect rack-rent we collect wages.

It is not right to collect the wages of Labor and redistribute them in some fashion.