Rent, Taxation, Dissipation
[a paper presented at the
Western Economics Assocation, 2 July
I. The issue
The question before us is "how can we prevent the dissipation of
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
- 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.
of rent before the fisc takes it: what and how?
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
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 are competitors.
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
a. Other regulations that mandate
low-grading of subeconomic residuals.
b. Cartel behavior
1. Impact of extreme pro-development psychology
1. One man's cost is another man's income, and they
cancel out, so there are no social costs.
2. Gross product rather than net gain is the objective function
a State should maximize.
3. Export industries are more basic, and have multipliers.
4. Small firms depend on large ones, rather than all activities
are mutually supportive.
5. Discovery is the same as creating land.
6. Discovery creates value by itself; other activities are
7. 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.
2. Mandatory goldplating to appease
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.
3. Overextension of subeconomic feeder lines, cross-subsidized.
4. 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.
5. 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.
6. 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
7. Taxes and lease provisions that twist incentives.
rent via public spending
and lease provisions need not twist incentives.
1. At worst taxes destroy incentives only at the margins:
the "wedge effect."
2. 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
3. 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.
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
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
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, 1982).
7. Etc. A universal principle has universal illustrations.
compromises with the principle.
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 California.
e. Racial discrimination and segregation, as in the old South.
f. Exclusionary zoning.
voters on the benefits of immigration
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 locational
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 industries.
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 constituency.
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.
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.
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 statesmen emeritus.