Taxing Bads, Taxing Rents,
Taxing Land Values

Harry Pollard

[Reprinted from a Land-Cafe online discussion, 25 November, 2006]

All taxes are bad. Where they approach user charges, they are better. But, most don't. They are particularly bad where they are used like a club (obey, or we'll bash you).

Georgists recognize our common right to natural resources. That is, that no-one has more right than another. So, if someone wishes to have more right to a natural resource by (say) putting gunk in our river, he should compensate us for the privilege.

As I have previously posted, Chemical Engineering reported that when meters measuring the gunk in the outflow were installed and the bills presented, before long the effluent was cleaner than the river.

In the High School Program, we go further. We hypothesize that a company wishes to erect a factory in our small town. It will employ 5,000 workers so is very desirable. Unfortunately, it cannot avoid filling the air with a brown non-toxic smog. Won't hurt anyone, but is definitely unpleasing.

The firm offers to put every high school graduate through college if the townspeople allow the factory to be built.

What should they do?

In other words, the question of the commons is something to be negotiated by the owners - a much better attitude than 'tax the bad' that creates enemies rather then friends - and which inevitably expands as coercive types wreak their will on the citizenry.

I don't smoke, and don't like people doing it. Yet, I just voted against a proposed cigarette tax (taxing the bad) that intended to place an additional $2.60 a pack on already heavily taxed cigarettes.

Allow the taxing power into the hands of people who know better than you how you should behave and you will get trouble.

Charge people for their extra use of the commons and that is just.

Now to land-value.

RENT AS LAND-VALUE

We tend to use 'land-value' a bit indiscriminately to mean Rent, rack-rent, and sales price. Rent is a value created by the community that attaches to a location. The community has every right to recapture the value it created by its presence and access.

Also, there should be no objection to paying it back to the community, for it doesn't come out of labor's production. You get it, you pay it back. Someone mentioned - I think on Land Cafe - that some Georgists regard high Rent as being bad. This may be because Rent is equated with tax and people don't like high taxes.

However, when Rent is collected, nothing is taken that is not already supplied. If you can use the advantage of a high Rent, you don't mind paying it. In fact, a high Rent may be considered a good thing - not something bad. If a large community, by its presence and access allows you to make $10 an hour more than you might make (with the same exertion) on less advantaged land then, when you pay the community that $10 as a Rent collection, you are only paying back what you get.

However, when land is held privately a pricing problem develops.

Prices are set by two influences - the alternative and by the market price mechanism.

Ceteris paribus, if you sell widgets and they are going locally at $2, you can't charge $3. The alternative is $2 and that sets the price - or if you wish, the equilibrium.

The second influence is the market price mechanism that hunts around the $2 according to demand. If demand increases, the price may rise to $2.10, if demand slackens, the price may drop to $1.90.

It seems to me that economists spend much time on the fluctuations of the price mechanism around an equilibrium, but little time on what fixes the equilibrium.

Again ceteris paribus, if labor can earn $20 an hour on free land, he is not going to work for less. If he can get $40 an hour on free land, he won't work for less. Free land is the alternative - in the high school course, we call it the Natural Alternative.

As with all prices, this 'equilibrium' wage will rise and fall according to demand, which activity describes the price mechanism.

A favorite example of Georgists is the Golden Age of English Labor - the end of the 15th century as described by Thorold Rogers. An artisan (a blacksmith, or thatcher) could earn enough food for his (no doubt large) family for a whole year with just 10 weeks work. His family also got free accommodation. (Remember that was 500 years ago - so, ask Georgists, why aren't we enormously better off now with the incredible advances in our power to produce?)

What happened back then was that there were several years of mammoth harvests and labor was short. Landholders paid high wages to get labor, thereby defying the severe penalties of the Statute of Laborers - legislation that put a ceiling on wages. Rogers found source documents where the actual wage had been erased to be replaced by the official wage.

You'll note that in half a millennium we have gone from a law to put a ceiling on wages to a law that puts a floor under them. I suppose it's progress.

RACK-RENT AS LAND VALUE

But, as you can see the Golden Age was a price mechanism fluctuation - not a change in the alternative. The laborer had no available free land - before, during, or after the Golden Age. As soon as the harvests returned to normal, wages sank to poverty level again.

For this is the problem - free land provides the laborer with a wage alternative - a natural wage alternative. When there is no free land, the alternative disappears and he is forced to take whatever he can get. When there are plenty of laborers looking for wages, price mechanism action drives wages down to subsistence - barely enough to earn a bare living.

This is the 'rush to the bottom' often referred to by anti- market people. Yet, the point is that the market price mechanism can't work with land. When prices rise, more goods are produced and moved to market which has the effect of reducing prices.

In the case of Rent, no matter how high it rises, it cannot produce more land, nor can it draw more land to market. So, the Rent-cost to the tenant keeps rising.

But, wait a minute! If Rent is a community created value created by the presence and access of the surrounding community, it can only change as the surrounding community changes. Absent any change in the community the rising amount demanded of the tenant by the landholder must be something else.

The amount demanded of a tenant that is greater then Rent has had a name since the distant past.

It is rack-rent, or screw the peasant. I define it as the highest amount that can be demanded from the tenant while maintaining production. Any more and the tenant cannot survive. As it is, he is reduced to barely enough to keep producing (and technically - reproducing).

Where does this extra come from - the difference between Rent and rack-rent? It can only come from wages.

Yet, this rack-rent is the so-called "market" price, which is why I look askance at Georgist statements that Rent is found by the market.

It isn't. Our land monopoly 'market' finds rack-rent.

However, there is an advantage to collecting rack-rent. This much higher extraction allows the dispensation of a Citizen's Dividend. We take the wages of labor and then generously give them back as a Dividend.

Remember Churchill's remark: "All government does is take some money from one pocket and transfer it to another pocket. Along the way some of it falls on the ground."

The rack-rent total is also a good one to use to show how 'rent' can take the place of many other taxes. I rather think that real Rent collection will provide just enough to pay for infrastructure and perhaps police. In fact, there seems to be a relationship between Rent and infrastructure needs in Georgist "self-supporting cities".

So, what is land-value - Rent, or rack-rent?

It sometimes seem to depend on the moment and who is talking.

I must say I think Henry George made an error in not emphasizing that while Wages and Interest are price mechanism controlled - Rent isn't.

I am discussing a free market system, but price mechanism control comes into play in practically all circumstances - but that's another discussion.

LAND VALUE AS SALES PRICE

So, we come to the final "land-value" - the sales price.

The Austrians really blew this. They assumed that real estate prices (land prices) acted in the free market just like any other prices. Yet, essential to the best action of the market is that in response to price change, goods are drawn to market - or kept away.

Therefore, said von Mises, people will react to demand by selling for the best price. He did not equate selling milk quickly before it goes bad with holding land for half-a- century as its sale price remorselessly rises.

His view of the landholder "allocating land to its best use" is a triumph of dogma over commonsense. But then, he refused to admit that "land value" could be effectively separated from "improvement value" - even though it is done all the time.

Land use regulations become the culprit for the Austrians. They are right that such regulation increases costs - but they fail to see the real problem.

Mason would come up with a fuller and better analysis than mine.

A completely free market is one in which increasing demand causes a rise in production which moves to market and brings the market back to equilibrium. But, as we know, land can neither be produced, nor moved to market, so the market mechanisms don't work. Yet, land is essential for everything. I'll repeat that.

Land is essential for everything.

So, are land sales prices capitalized income?

Well, not really.

If you have something that is always needed, that is increasing in price every day, why get rid of it. If the interest rate is 5% but you see an increase in your land- value of 7%, why sell? Hang on, and on, and on, while licking your lips at the tax advantages.

So, land becomes a collectible. I won't dig deeply into the collectible market, but if you have a collectible, you don't care much about income. You watch the increasing value of your collectible and decide you won't sell. You would never use your antique desk. You wrap it in plastic and hide it in the bedroom. If you have a painting, you might show it, but you take care it maintains its pristine quality.

In similar fashion, you hang on to land. You try not to commit in case the bonanza arrives next week. You won't invest much in it, because the investment would be lost if it was sold. So, you cash-crop.

Your site might incur costs, such as a small property tax. This might lead you to a temporary use that will bring in an income without affecting the the price you expect eventually to enjoy.

You pay the property tax by blacktopping the site and making it a place to park cars. Or, you make it a service station that can be removed in half a day. This is equivalent to not letting a collectible book become dog-eared, nor allowing your collectible beer can to become scratched (disaster).

Then, uninterested in the car park or service station, you can watch your mostly untaxed "collectible" increase in land value.

There is a phenomenon peculiar to the collectible market. It doesn't require exchanges to set values. Collectors work on "anticipated values". The collectible market exists in the collectors' minds. If you own a tiger maple desk - circa 1600 - when you hear that a similar article has exchanged for $10,000 more than your assumed value, you raise the mental value of your desk by $10,000 - no by $15,000, for hasn't it been going up for a century or more?

In similar fashion, you raise the 'anticipated price' of your land continually - far above any free market price. And each time another landholder sells for a huge sum, it only buttresses your certainty that an even greater fortune awaits - if you don't sell.

About 40 years ago I was having dinner with David Friedman and a couple of friends. On a question of value, he took the pants off me. I was demolished even though I was using Georgist thinking.

Then, I read of a collectible auction during which a Rosalie Beer can was sold for $4,000. As the buyer left the room, he was offered $10,000. I blinked. What kind of market is this? So, my collectible theory of land price was born.

I looked at the price of a Rosalie beer can several years ago and it was going for $10,250. The auction buyer should have sold for $10,000. But he didn't, and it's the same mental block that stops land sales - I would say. The prospect of future gain outweighs the immediate sale.

I would like someone to do a study of why landholders sell. I suspect mostly they sell for an outside reason - a death in the family, a tax demand, a business loss. In the normal market, goods flow smoothly from producer to consumer. In the land market, many locations would be held for ever, if that were possible. The 'anticipated' price next year is always better than the price now.

And this is the final "land value" - which introduces another difficulty. Georgists are likely to capitalize downward from these inflated prices to find "rent" - particularly if they want to fund Iraq, or provide womb to tomb welfare. Thus, an enormous and fictitious "rent fund" with which to do good.

You are right, Chuck. Our purpose is to collect Rent, a value we create and a value that should be returned to us.

But, another point raises its ugly head.

What if the Rent is very low, because along the way privilege has cut into it? George pointed out that it doesn't matter what robbers are stealing from you as you walk down the lane - that is if there is a final robber at the end of the lane who takes everything that is left - the rack- renter. But, what if there is no 'robber at the end of the lane'?

How little is left to you when you reach the end?

We must condemn not just the major privilege of landholding, but all privilege.

But that's yet another discussion.