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The big question, of course, is "who is entitled to the surplus?" Much rides on how we answer this question. America's traditional answer is that the landlord gets it, supplemented by some other goodies.
Do you remember the story, perhaps apocrypal, from the early days of computerization that computer programmers in a few banks initially arranged things so that the fractional cents of interest which would have been applied to individual customers' accounts would be "harvested" into their own accounts? Well, the social surplus is a lot more than rounding error. It is more like the difference between the cost of living in rural Alabama and the cost of living in Manhattan. Who is it that is entitled to that? The landlords, or all of us? Our society's current answer seems to be that the landlord is entitled, just as the slaveholder of the 19th century was entitled to what his slaves produced. Georgists see that the privatization of the common treasure is a source of many of our most troubling — and supposedly intractible — social and economic problems.
Henry George had a better answer — one that acknowledges that the landlord is not "God's Eldest Son" and that we are all created equal, and are thus equally entitled to what the earth and the community provide. This sounds as if it would be good in theory but difficult to implement, but it turns out that it is very simple to implement.
municipality in America already assesses property values. Some do
it more accurately than others, but with the advent of CAMA
(Computer-Aided Mass Assessment), it is possible to do more accurate
assessments, particularly of land values, which tend to vary with some
fairly predictable patterns. (See Assessment, Land
Every microeconomics textbook shows the “producer surplus” as the area between the supply curve and the price. But no textbook that I have seen, with the exception of David Friedman (1996), has thought to ask who receives the surplus. If the industry is perfectly competitive, firms being price takers, there is no economic profit, yet the surplus is a return beyond costs. The surplus does not go to the owners of the firms, but, as Friedman states, flows through to the input factor owners. Going beyond Friedman, it should be clear that if markets for labor and capital goods, too, are perfectly competitive, they too have no super-normal returns, so the only other place the surplus can go to is to geo-rent. In a fully perfectly competitive model, “producer surplus” does not go to producers at all; it is a payment to landowners who have never produced a thing. It is really the non-producer surplus. Read the entire article
Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent
... I have already observed that the chief peculiarity of the land of a country was that its value was never stationary, that it was always progressive and rising, that in fact it increased in a direct ratio with the growth of the population and the advancing progress of the industry of the nation.
It would seem as if Providence had destined the land to serve as a large economical reservoir, to catch, to collect and preserve the overflowing streams of wealth that are constantly escaping from the great public industrial works that are always going on in communities that are progressive and prosperous. ...Read the whole letter
Michael Hudson: The Lies of the Land: How and why land gets undervalued
Turning land-value gains into capital gains
Hiding the free lunch
Two appraisal methods
How land gets a negative value!
Where did all the land value go?
A curious asymmetry
Site values as the economy's "credit sink"
Immortally aging buildings
Real estate industry's priorities
THE FREE LUNCH
* Its cost to citizens
* Its cost to the economy
... Of course, investing most surplus income and wealth in land has been going on ever since antiquity, and also pledging one's land for debt ("mortgaging the homestead") that often led to its forfeiture to creditors or to forced sale under distress conditions. Today borrowing against land is a path to getting rich -- before the land bubble bursts. As economies have grown richer, most of their surplus is still being spent acquiring real property, both for prestige and because its flow of rental income grows as society's prosperity grows. That's why lenders find real estate to be the collateral of choice. ... read the entire article
Mason Gaffney: The Taxable Capacity of Land
Another attractive feature of land taxation is its interesting positive effect on the economic base of a city. It strengthens it by its tendency to hit absentee owners harder than resident owners. The land fraction in real estate is generally highest in the CBD of any city, so that is a favorite place for absentees to buy and hold. They like the steady income, and the "trophy" quality. The surplus in real estate is what attracts outside buyers, and land is what yields the surplus. About 2/3 of downtown Los Angeles is owned by non-resident aliens, for example. In a more workaday city, Milwaukee, the absentee owners consist of former residents, or their heirs, who grew too rich to abide the harsh winters.
Consider the effect on your balance of payments. When you get more tax money from absentees, money that used to flow to Tehran, Zurich, or Palm Beach now flows into your local treasury to pay your local teachers and city workers, and relieve your builders and building managers. In this way taxing land actually acts to undergird the value of its own base. ... Read the whole article
Clarence Darrow: How to Abolish Unfair Taxation (1913)
What is Land Rent?
John Houseman, an actor perhaps most widely known as Professor Kingsfield in the long-running TV series, The Paper Chase, later became the pitchman for Smith Barney. In that advertisement, his tag line was "We make money the old-fashioned way -- we earn it."
That we should earn our money rather than live off the efforts of others seems a simple enough moral tenet. But it seems to have lost its cogency in contemporary economic thought. More than a century ago John Stuart Mill noted that
Landlords grow richer in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.(1)
Today, on the other hand, the unearned surplus which classical economists called rent attaches to monopoly titles -- largely the scarce goods and services of nature like locational sites, and has totally disappeared from economic calculus. Yet this is the primary vehicle by which wealth is captured by economic elites. If government recaptured the socially-created economic rent from land sites that comes from the investment of the collective community, we could eliminate other taxes that are both more onerous and create a drag on the economy that makes us all poorer. There are many websites that explain how this can be done, ways that not only beget greater economic efficiency but also bring about economic justice.(2) The surplus economic rent that derives from community effort is its rightful entitlement.
Where does economic rent most tend to lodge? In the center of cities where people are. And also proximate to heavy social investments -- such as railroad and metro stations, public and office buildings, hotels and conference centers, and anywhere there is high traffic in personal or market exchanges. The land value in New York City is higher than all the rest of the New York state combined, even though it is only a minute fraction of the area. One 9-acre site south of the United Nations Building was recently sold to a developer intent on building luxury condominiums facing the East River. That site sold for $680 million, and would have been higher had the existing structure, an obsolete power plant, not have to be razed.(3) Land values in any given area tend to rise and fall together, and tend also to form a contour somewhat comparable to a topographical survey map. In a city's center are the highest value locations, analogous to a mountain peak. Once one departs from that center, land values fall in direct proportion to the value of their use, made more or less attractive by whatever social attributes are provided in the proximate areas. Two illustrations from small and medium sized cities in the United States illustrate the point. ... read the whole article
Mason Gaffney: How to Revive a Dying City
One reason we remember Henry George is his pioneering study of how cities work and the good they do. Previous economists showed limited understanding of location value and its causes. Even von Thunen, father of location theory, approached cities in an antiseptic way that left out what today we call urban linkages and synergy. George was a mensch, seeing cities in human, interactive terms.
George saw cities as foci of civilization's basic mechanisms. People with mutual access, associating on equal terms, expedite cooperation and specialization through the market. Multivariate interactions are synergistic. Indeed, while each parcel is developed in the stage of decreasing returns, the composite city is generally in a stage of increasing returns, thanks to synergy: the whole exceeds the sum of its parts, and increases to the whole yield more than the sum of increases to the parts. Synergistic surplus, said George, lodges in urban land rents. Thus he explained a phenomenon which other economists overlooked: the unparalleled rise in urban rents and land prices, and in owners' wealth and power.
Sharing the Surplus
Because urban rents are a social surplus, not a payment for anyone's making or supplying land, parties other than the landowner have a claim. A good deal of American politics deals with how to assert that claim and share in the surplus.
Dividing a big pie seems a pleasant enough task, but Confucius knew better: "It is easier to face a common enemy than to share a surplus." The common ways of sharing surplus are clumsy, divisive, and destructive; they bear some responsibility for dead cities. With too much quarreling over spoils, there are no spoils to dispute. Consider how spoils are shared, and how we might do better. ... read the whole article
Mason Gaffney: Land as a Distinctive Factor of Production
Land rent is a taxable surplus
a. Relative elasticities.
Land rent is nearly identical with taxable surplus. This follows from simply observing that the supplies of labor and capital are highly elastic, while the supply of land (within any given taxing jurisdiction ) is totally inelastic, because a "jurisdiction" is defined as a specific area of land.
François Quesnay and the “Physiocrats,” and their fellow-traveler A.R. Jacques Turgot, deduced from the above that almost all taxes, whatever the nominal base, are shifted to land rents, and lodge there. Market forces tend to equalize all AFTER-tax returns to labor and capital, because of their mobility or, in the case of some labor, the inability of humans to survive on less than subsistence wages.
As a corollary, if there is no rent there is nothing to tax. E. R. A. Seligman in one of his exhortations against the single tax, warned that a marginal community --one on land of no value -- can have no tax base if it taxes only land. However, this hypothetical community can have no tax base anyway. Whatever labor or capital it tries to tax will leave, or never arrive, because their supplies are elastic.
Capital will only appear to bear a tax if it can shift it to land in the form of lower rent, or a lower purchase price. If rent and land values are already zero, there is nowhere to shift a tax. Mobile factors will not bear it, but turn away. Customers will not bear it, but buy elsewhere.
Seligman does not consider the interesting possibility that public services paid by taxation might create the very rents that are taxed to support the public services. That complex question would make an interesting book, but one too long to insert here.
b. The surplus is much more than usually stated.
The writer has dealt with this elsewhere (Gaffney, 1970, 1993), and is currently writing a book on the subject. Cf. also B-12. The failure of modern economists, whether neo-classical or heterodox, to acknowledge the Himalayan Range of land values in their faces, and to reckon its role in theory and policy, is denial and delusion on a scale at which one can only marvel. ... read the whole article
Mason Gaffney: Introduction: The Power of Neo-classical Economics (Introduction to The Corruption of Economics, London: Shepheard-Walwyn, 1994)
7. George's land tax lets a polity attract people and capital en masse, without diluting its resource base. This is by virtue of synergy, the ultimate rationale for Chamber-of-Commerce boosterism. Urban economists like William Alonso have illustrated the power of such synergy by showing that bigger cities have more land value per head than smaller ones. (Land value is the resource base of a city.) Urbanists like Jane Jacobs and Holly Whyte have written on the intimate details of how this works on the streets. Julian Simon (The Ultimate Resource) philosophizes on the power of creative thought generated when people associate freely and closely in large numbers. Henry George made the same points in 1879. ... Read the whole article
Mason Gaffney: Land Rent in a Tax-free Society (Outline of remarks by Mason Gaffney, for use at Moscow Congress, 5/21/96)
1. Rents are a taxable surplus. I estimate that this taxable surplus constitutes 35% or more of the national income in most nations with market economies, and more in resource-rich nations. ...
2. The value of rent is huge. Every economy produces a large excess over wages. To be sure, not all of it is surplus. Some of it goes to replace capital that wears out each year. This is not part of the net surplus, nor income to the capitalist; it is a return of capital. ...
3. Rent will become huger yet when you abate taxes presently levied on production and exchange, because these now depress the rent of land. That is, in a tax-free market economy, the benefit of abating present taxes will lodge mainly in land rents. The taxable surplus simply shifts from one form to another.
This is more than a simple shift of a fixed amount. When you substitute land revenues for existing taxes, the surplus actually grows, as if by synergy. You gain more revenue base than you lose, because existing taxes now suppress much latent production. Payroll taxes directly drive workers from taxable jobs to untaxed gains from crime. Abating those taxes will unleash suppressed economic giants, along with all the new surplus values their latent production will generate. "Monetarists" warn you that "there are no free lunches." In fact, however, good policy creates lots of "free lunches." It makes the whole greater than the sum of its parts. Imagine the benefits, alone, of turning people from destructive careers in crime to useful jobs producing goods.
4. Some of the benefit of abating existing taxes will lodge in higher after-tax wage rates, rather than higher rents. ...
5. Many varieties of natural resources generate rents. City land is the greatest single source. For example, one city, Vancouver, contains half the value of taxable property in B.C. - a province of 934,000 sq. kilometers, or 70% larger than France. ... read the whole article
Mason Gaffney: Oil and Gas Leasing: a Study in Pseudo-Socialism
Distributive Socialism, in contrast to Managerial, means tapping surpluses in the private sector and using them for the public good. The revenues may
This becomes Distributive Socialism when the enhanced land rents are tapped to recoup more than the allocated expenditure. (If only expenditures are recouped, it is more like a contract between the state and the landowners.) ...
Thus, to define Distributive Socialism we need to define "surpluses." These are primarily rents from lands and resources given by nature. In an open tax jurisdiction, labor and capital are mobile and their supply is elastic; only land is fixed. Land rent is the basic taxable surplus. Where there is no land rent, an attempt to levy any tax can only abort production and land use, rather than collect the tax. Where is there no land rent?
The statement above expresses "The Physiocratic Doctrine" of tax incidence, harking back to Francois Quesnay, and even earlier writers like John Locke and Jacob Vanderlint. The Doctrine has staying power: it is used, for example, by Bogart, Bradford, and Williams writing in the National Tax Journal, December, 1992, on tax incidence in New Jersey.... Read the whole article
Mason Gaffney: The Taxable Surplus of Land: Measuring, Guarding and Gathering It (for the Duma Hearings in Moscow, 1999)
Net Product of
Land is the Taxable Surplus
The higher use, A, produces more goods, makes more jobs, and yields more Net Product: it is clearly the higher use. The tax on G [Gross Revenue], however, turns A into a lower use than B, in the eyes of the landowner or manager. A 10% tax on G is a 100% tax on the N from use A, wiping out the entire incentive to put land to use A. It is a 40% tax on the N from use B, leaving 60% of the Net Product for the landowner. The landowner would choose use A in the absence of taxes, or with a tax on N; but the tax on G forces him to choose use B, which is socially inferior. This, in a nutshell, expresses the damage done by imposing taxes on bases other than N, the Net Revenue of land.
... The taxable surplus available from taxing the Net Product of land goes on forever, and grows as land rents grow. It is not like the false "revenue" that comes from privatizing land, which the IMF et al. would have you do. Selling the title to land gives money to the government currently in power, which this government is prone to treat as current income and spend right away: but it is not permanent income, any more than you would call it income when you sell your farm or home. To have income, permanent income, you must reserve the right to tax land forever, and use that income for public purposes or social dividends.
If you think you need cash immediately, in excess of current taxable surplus,
you can always borrow on the security of the tax revenue you have reserved
for your government. There are certain dangers in mortgaging your public
revenues like that, and I would counsel prudence and caution; but these dangers
are small and uncertain compared with the certain disaster that will follow
if you sell land forever, without
reserving any power to tax it in the future.
Ted Gwartney: Estimating Land Values
When considering world-wide economics, most people think that land rent contributes only a small insignificant portion of value. But as societies progress, land has become the predominant force in determining the progress or poverty of all people within a community. Land in major or cities is so costly that people are forced to move further away and travel great distances in order to get to work and social attractions. In the more developed countries of the world, land rent represents more than 40% of gross annual production.
Since land is fixed in supply, as more land is demanded by people the rent will increase proportionally. Demand is the sole determinant of land rent. Changes in land rent and land taxes have no impact on the supply of land, because the land supply is fixed and cannot be significantly expanded. Labor and capital are variable in supply. A higher price for commodities causes more labor and capital to make itself available. Labor and capital are rewarded for their work. A high price is an incentive to work harder and longer, while a low price is not an incentive to work harder and longer.
The rent of land, however, serves
no such incentive function,
because the supply of land is fixed. The same amount is available no
matter how high or low the price. Buildings are not a part of land
rent. Land rent results from the desire made by everyone who lives
within a community to use land. Economic rent is the only source of
revenue that could be taken for community purposes without having any
negative effect on the productive potential of the economy.
Economists consider rent to
be a surplus payment which is unnecessary
to ensure that land is available. When a community captures
for public purposes, both efficiency and equity are realized. ... Read
the whole article
A Strategy for Economic Development
Economic theory recognizes that when government places taxes on production and on commerce the net result is a reduction in those activities. The reason this occurs is that these taxes add to the cost of production and to the cost of doing business. The ideal public policy would be to reduce taxes on production and commerce and raise public revenue from non-distorting revenue sources.
That non-distorting revenue source is land and natural resources. The central problem which limits the operational success of the economy is the failure to procure the public value which is created by the community.
This value ought to be reserved for the community to pay for public improvements. However, this value is to a large extent diverted into private pockets by speculation in land and natural resource values. The correct approach is to create a system in which no-one, except the citizenry as a whole, is rewarded by the collection of publicly created values.
Economists can agree that the
economically efficient public
finance system is one in which revenue is drawn from the rent that
people pay for the use of land and natural resources. These payments
do not distort economic activity. Land rent, because it is pure
surplus, could be taken and used for any purpose and there would be
no negative consequences for the allocation of labor and capital, or
in the use of land and natural resources. If this surplus is invested
in needed infrastructure and other public services, it will in turn
increase land values for future public investment. ... Read the
Frank Stilwell and Kirrily Jordan: The Political Economy of Land: Putting Henry George in His Place
The concept of rent needs further explication precisely because it is so foreign to 20th century students, even those who have been schooled in economics at it is currently taught. Land rent has no relationship to the word rent as it is used in contemporary vernacular, that is, when one rents a car or an apartment. Rather, rent is a surplus, defined as the return on investment above and beyond what is minimally required to bring a service into production. To take just an elementary example, consider that there are three parcels of land available for farming and three farmers of equal ability and enterprise. But suppose the parcels differ in their productive capacity, due perhaps to their fertility, access to water, and so on. If planted with similar quality seed, the three parcels will yield different quantities of harvest, the one with the highest quality land having the best return. The one with the lowest quality land would in like fashion have the lowest return. Economic rent is defined as the amount of surplus harvest qualitatively measured by the difference between the parcel with the highest return and that with the lowest return. ... read the whole article
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper