How to Eliminate Speculative Rents

Harry Pollard

[Reprinted from a Land-Theory online discussion, 7 May 2006]

We won't know how much Rent there is until we collect it.

Meantime we have to work with what we have, which is probably a mixture of revenue income (rack-rent) and collectible prices. However, if our theory is correct, the application of a heavy land value tax should reduce these. If it is high enough, people will begin to unload their land holdings. The mere fact of additional land arriving on the market will produce a positive feedback that should drop land prices severely.

The amount of city and suburban land that will hit the market is probably huge. Every city has a large area of land that is vacant or underused - yet it all carries a sales value. So long as the tax burden is small, these lots will be carried on the books at full speculative land-value. It's a fake value for many (most) of them will never attain full use.

When the Regional Plan Association of NYC did its study of land use 50 years ago, it used as its guide "unimproved for urban use". If there was a billboard or a shack on the lot, it was in that class. You'll recall that in that large area of Metropolitan New York some 79% of the area was considered unimproved (86% of the gross area).

I fear that now anything is considered "use". The five acres lot in amid the downtown Los Angeles skyscrapers served as a dumping ground for some steel girders. I bet that would be considered an urban use - as is the parking lot that replaced it.

The point is that although so much land in every city is unused, every inch carries a collectible price. Let's say there are 10,000 lots each carrying a $50,000 collectible price -- but with perhaps 50% of them unused, or underused.

The land-value for the area will be $500,000,000.

It's enough to make a land-value taxer's mouth water. All this value can be taxed to provide revenue for infrastructure, citizen dividends, donations to the Henry George School, and parks (we'll give 'em parks whether they want them or not).

Yet, if the land-tax burden is heavy enough, the holding of land for its appreciation will lose its allure. The important characteristic of holding a collectible is that it costs little or nothing to hold. (You can forget the so-called "opportunity cost" of lost interest. It doesn't apply, though temporary 'taxsavers' may offset some carrying costs if they don't affect a possible future sale to a Trump clone).

Again the parallel with other collectibles is clear. You wrap your collectible in plastic and hide it in the bedroom. You don't use your 16th century tiger maple desk in your living room. You won't allow anyone to interfere with your mint first edition of Ovid's Media. You certainly won't let the kids have it.

You might spread some blacktop, or erect a 'temporary' gas station', but you'll do nothing that might interfere with its prospective use as a skyscraper base.

I put 'opportunity cost' in quotes because this is another economics superstition about which I have my doubts. But, that can be discussed another time.

But, all bets are off when a land-value tax is imposed. An eventual pension is no longer so attractive when today you must pay. All these $50,000 lots that may never actually carry improvements will flood the market and that collectible $50,000 will become a market $40,000, $30,000, $ 10,000 - $2,000. I've said the collectible market has a positive feedback characteristic - the price increases because the price increases.

Positive feedback would again on Land's descent toward free market values - people will sell because people are selling.

How cheap will lots get? Well, in my example above, I suggested there were 10,000 lots of which 5,000 were not used. I suspect the lots will not cost much.

We will have reached the Golden Age of really affordable housing with manufacturing locations that don't bleed the producer white.

But, hold it! What has happened to our mammoth tax collection? It seems to have disappeared and we can't have that. Better keep the land-tax far less than would be necessary to collect all the Rent.

Perhaps we could call it 'two-rate'.

I know. That's the unkindest cut of all.

You suggest: "Thus, since the rack-rent is paid anyhow, why not divert most of it to substituting for the currently high taxes on actual productivity?"

I think you miss the point here. Rent is the community created value of a location and can be recaptured quite ethically by the community. However, in a non-price mechanism controlled land market, prices rise in response to demand but there is no way to bring them down. (by producing more land and rushing it to market)!

So, the cost of land to the producer rises far above its Rent. You'll recall I define rack-rent as the highest amount that can be extracted from the tenant while maintaining production. Where does this additional amount come from?

It can only come from Labor -- the producer. So, you are exchanging one tax on productivity for another!

Not a good path for Georgists!