Land and Taxation E-Book

Nicolaus Tideman,

• Herausgeber: Shepheard Walwyn Publishers
• Kategorie: Geisteswissenschaft
• Serie: Shepheard Walwyn Classics
• Sprache: Englisch
• Veröffentlichungsjahr: 2022

Seitenzahl: 316

Beschreibung

With an updated introduction by Fred Harrison, Shepheard Walwyn has now published this classic book as an eBook.

Economists know that the optimum conditions for private enterprise are achieved when taxes on the earned incomes of labour and capital are reduced to zero but, because neoclassical economic theory insists on treating land as capital, they dismiss the obvious alternative to taxing labour and capital – the unearned income from land.

Mason Gaffney explains the importance of recognising land as a distinctive factor of production and the consequences of its uniqueness for economic policy, for example, that income from land is subject to market forces quite different from those that determine a return on capital.  Nic Tidman brings together the classical literature on land taxation to explain the argument that such taxation is an economically efficient and ethical revenue source.

The authors argue that reform of the structure of public finance would make it possible to restore full employment without causing inflation and to reduce the overall tax burden. Once again, Shepheard Walwyn presents a different approach to an old problem.

listen to the podcast here https://shepheardwalwyn.podbean.com/nic-tideman-land-and-taxation-2nd-edition

Leseprobe

Land and Taxation

Both ground-rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Though a part of this revenue should be taken from him in order to defray the expenses of the state, no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Groundrents, and the ordinary rent of land, are, therefore, perhaps, the species of revenue which can best bear to have a peculiar tax imposed upon them.

- Adam Smith* The Wealth of Nations (1776), Bk II, Ch.2, Art.1

© N. Tideman and authors, 1994

All rights reserved

First published in 1994 by Shepheard-Walwyn (Publishers) Ltd., 107 Parkway House Sheen Lane London SW14 8LS

in association with

Centre for Incentive Taxation Ltd., 107 Parkway House Sheen Lane London SW14 8LS. Tel: [phone] Fax: [phone]

British Library Cataloguing in Publication Data

A catalogue record of this book is available from the British Library.

Hdbk ISBN 0 85683 162 X Ppbk ISBN 0 85683 153 0

Ebook 978-0-85683-558-2

Contents

Introduction

Taxation as a Political Choice

Fred Harrison

Land as a Distinctive Factor of Production

Mason Gaffney

The Economics of Efficient Taxes on Land

Nicolaus Tideman

Poverty and the Theory of Wages: a “Geo-classical” analysis

Fred E. Foldvary

Flawed Land Acts 1947-1976

V H. Blundell

Postscript on Neo-classicism. Death rattle of a deadly paradigm

Fred Harrison

About the Authors

Index

Taxation as a Political ChoiceFred Harrison

Ssomething is fundamentally wrong with life in the democracies. Given the level of discontent, we may assume that people are generally dissatisfied with the policies of the governments they elect. Yet our communities of intellectuals continue to think from within the neoclassical paradigm to address the pathologies (like poverty and inequality) as if there was no structural remedy. When US President Joe Biden proclaimed a contest between democracy and autocracy, we could not be optimistic about the outcome; success of the democratic form of governance would mean a continuation of involuntary unemployment and the other pathologies that persisted throughout the age of universal suffrage.

            The authors of Land and Taxation explain that the major cause of society’s problems is located in the system for funding public services. The biases in tax policies favour the owners of rent-yielding assets. Most people, as homeowners, find themselves co-opted into that system: the plots of land beneath their homes appreciate to yield unearned capital gains. Others are net losers in the distribution of the nation’s income. This is an outcome of history, of four centuries of fineness fiscal policy to accommodate the appropriation of the commons by the medieval aristocracy. The facts are on the historical record; but those who advise governments on how to solve contemporary problems never discuss them.

            One outcome is the pontification of Treasury ministers who seek popularity by insisting that economic growth will be “shared equally”; distributed “fairly”; through tax policies that “reward growth”. At the same time, however, they acknowledge “something is not working”. Poor levels of productivity and inadequate capital formation compromise economic activity. [1] This bewildering state of affairs is incomprehensible to taxpayers who face increasing rates of taxation and inflation funded out of wages that, in real terms, are decreasing in value.

            Politicians also confuse themselves with the language they employ to convince electorates that they know what they are doing. Michael Gove, government minister charged with “levelling up” life chances across the UK, provided an example. Given the myriad problems located in the housing sector, he accused building companies of operating like a cartel. Housebuilders expressed their outrage in a letter of protest. They were “baffled” by the accusation, the implication being that some developers were “akin to a criminal organisation”.[2]

            At the heart of the confusion and misdiagnosis is one simple reality: a dynamic that operates in the land market called “zero elasticity”. What does that mean?

Compare the supply of labour (which is flexible, or “elastic”: it can be increased through migration, for example), to resources that are in fixed, or very short, supply (inelastic). Land situated in desirable locations commands premium prices because its supply is fixed. When bargaining in the marketplace, landowners hold the whip hand.

Property rights grant owners the near absolute freedom to withhold land from use. For long periods, building companies hold vast tracts in their “land banks” rather than erecting houses on those sites. They shrink the supply of land and push up the price, which is why homes are unaffordable for many working families.

Governments complement the zero elasticity of land by favouring the owners of rent-generating assets with their fiscal policies. They place the tax burden on wages and consumption, rather than on the imputed rent of locations. This generates upward twists to land prices, which drives many working people into poverty.

House builders take advantage of their opportunities – as do home owners – but if the outcome is cartel-like, the fault lies with those who enact the laws of the land. Tax policy is the domain of governments. If politicians frame revenue policies in ways that burden the people who work to add value to the wealth of the nation, who can blame investors for directing their money towards relatively risk-free/high return assets like land and natural resources?

            Equal outcomes are structurally impossible when governments administer this patently “unlevel playing field”. To achieve equality, the first and biggest step is for government to anchor its revenue policies in ways that fulfil the norms of responsibility and integrity. That means they ought to draw their revenue from the rents of locations and natural resources. By doing so, they would be able to abolish what are called the “dead-weight” taxes on earned incomes.

Privatised rent as transfer income

Disruptions caused by the tax regime are not a state secret. The Organisation for Economic Cooperation and Development defines taxes as “compulsory, unrequited payments to general government. They are unrequited in the sense that benefits provided by government to taxpayers are not normally in proportion to their payments”.[3] This offends the sense of fairness. Low-income people receive less in public services than they pay for in taxes; while high-income people receive more in public services than they pay for. This means that low-income people subsidise high-income property owners![4] This is not a surprising outcome. In the economic literature, rent in its privatised form is defined as a transfer income. Owners collect the rent of locations and of nature’s resources without exchanging anything of equivalent value in return.

            Compare this state of affairs with what would happen if government collected revenue directly from the nation’s rents. Payments into the public purse would be proportionate to the benefits received. We may call such rental payments a price, a fee, a royalty – anything but a tax, as defined by the OECD. Furthermore, such payments would not be compulsory. Citizens would exercise the power to determine how much they individually paid, because they decide where to locate their homes or situate their enterprises. Unrequited compulsion is absent when individuals negotiate the rents they pay for exclusive possession of a given location.

            It is wrong, therefore, to characterise rents pooled into the public purse as “taxes”. People do not like paying taxes, for good reasons – taxes discriminate between payers, they are arbitrary exactions, and they distort economic enterprise in a thousand and one ways (in jargon terms, the distortions result from the “excess burden” of taxes).

            Taxes divide populations. Rent, when pooled in the public purse, unites populations. If people want public services, they pay for them. There is no question of demanding that government intercede with solutions to problems while remaining silent on the funding of the associated costs. Beneficiaries must pay. This kind of society is one in which people meet their social responsibilities. Furthermore, eliminating tax-induced barriers to freedom removes the scope for “rent-seeking” (as understood by post-classical economists): the corporate accumulation of super profits through the manipulation of governments for private benefit (known as “state capture”).

            Is this alternative social paradigm a pipe dream? I do not think so. Three decades have elapsed since I wrote about the “death rattle” of the post-classical model of economics. Those 30 years saw the housing boom/bust that led to a decade of austerity, the onset of a deadly global pandemic and the appalling atrocities of Russia’s assault on Ukraine. These events serve to harden the view that we need a fundamentally different kind of governance. The authors of this book offer a deep interrogation of the alternative way of financing society. In an authentic democracy, the choice on whether to adopt this reform must rest with the people.

London

September 2022

[1] These words were uttered by UK Chancellor of the Exchequer Richi Sunak in his Spring Statement, March 23, 2022. https://www.gov.uk/government/speeches/spring-statement-2022-speech

[2] Ben Gartside (2022), “Housebuilders hammer Gove over ‘unfounded’ claims industry is a cartel”, Daily Telegraph, March 23.

[3] 4. https://www.oecd-ilibrary.org/taxation/tax-revenue/indicator/english_d98b8cf5-en

[4] I elucidate the economics of this tax scam in Ricardo’s Law: House Prices and the Great Tax Clawback Scam, London: Shepheard-Walwyn, 2006.

Prologue:Taxation as a Political Choice Fred Harrison

Table 115 midwest cities before and after Pittsburgh’s major land tax increase. Average annual value of building permits.

Constant 1982 dollars: millions

1960-791980-89% change PITTSBURGH 181.7 309.7 70.4 Akron 134.0 87.9 -34.4 Allentown 48.1 28.8 -40.4 Buffalo 93.7 82.9 -11.5 Canton 40.2 24.2 -39.7 Cincinnati 318.2 231.5 -27.2 Cleveland 329.5 224.5 -31.8 Columbus 456.5 527.0 15.4 Dayton 107.7 92.2 -14.4 Detroit 368.8 277.7 -24.7 Erie 48.3 22.7 -52.9 Rochester 118.7 82.4 -30.5 Syracuse 94.5 53.6 -43.2 Toledo 138.3 93.4 -32.4 Youngstown 33.6 11.1 -66.9 15-CITY AVERAGE 167.5 143.3 -14.4

SOURCE: Gates and Schwab (1992), Table 3.

It would be incorrect to limit the explanation to a conspiracy of landowners, however, for successive Labour governments in postwar Britain enj oyed the freedom to implement legislation designed to capture at least a part of the value that is created by the community. The failure of these laws had less to do with retribution from the landowning class, and - as Vic Blundell explains in his contribution to this volume - more to do with the clumsy drafting of the structure of the taxes themselves. That clumsiness, however, was not wilful. It was, as we shall see, the result of confusion injected into economics.

The theory of poverty

Few countries in the world can claim that their finances are not in a mess.

Governments cannot keep abreast of the demands made upon them for more money: social problems keep escalating beyond the capacity to finance the social obligations that are deemed to be necessary for their solution.

The impact of the present structure of taxation on the fabric of society has not yet been evaluated. That influence extends from the criminalisation of people who simply want to be free to earn a decent living, to the creation of a state of dependency as the hold of the bureaucracy and the taxavoidance professionals is deepened in people’s private affairs.

If there is one subject that unites practically everyone, today, it is hostility to taxation. This hostility is not based on irrationality; people know that society needs the resources to meet communal obligations. But there is something that rankles them about the tax system. Despite all the talk of fairness with which fiscal policy is hedged, citizens intuitively believe that there is something fundamentally wrong with the system of public finance. Their instincts are correct. Public finance is based on principles of arbitrariness and oppression. That is why citizens woJd just as soon avoid paying taxes if they can get away with it; and many of them do just that, with the “black” (i.e., criminal - because tax-evading) economy in Britain officially estimated to be around £40 billion.

There can be no doubt that society is in urgent need of reform of the system of public finance. The authors of this book are united by the vision of what could be achieved by an enlightened policy: fairness in the payments to the community; a heightened level of personal prosperity; and a liberation of the community of a kind that would constitute a social renaissance. Is this pie-in-the-sky? There is one approach to public finance that could deliver this result. There is no secret about the policy: it is the most ancient of approaches to paying for the services that are collectively required by the community. The policy focuses on the surplus income generated by the economy, the economic rent of land.

Rent can be measured very precisely. It is what is left over, after paying the labour and capital costs of production in a competitive market. If, on a particular site, the weekly costs of producing a product for sale was £4,500 - paying all wages, interest on bank loans, a “profit” for the owner of the building and equipment on which the article was manufactured; and if the price of the product in the marketplace yielded a weekly revenue of £5,000, then the economic rent of the site, in its bare condition, is £500. That is the sum that would be claimed by the owner of the land on which the enterprise was built. And if people decided, through the democratic process, to restructure the tax system in favour of revenue from the economic rent of land - and untaxing their wages and profits - they would be creating the optimum conditions for the welfare of both the private and public sectors.

During the late 18th and 19th centuries, the classical economists proved theoretically that our ancestors, from tribal peoples to the folk of the archaic and classical civilisations right through to the Anglo-Saxons and their Norman conquerors, were correct: the most efficient way to raise public revenue was from the surplus generated by activity on land.

In the 1880s the case was convincingly restated by Henry George, so why, over the past 100 years, have governments avoided this reform? Before reflecting on the role of economists in the distortion of economic policy, we first need to confront the question of whether we can, indeed, take for granted, that the Georgist approach to taxation would deliver the benefits we want. Let us reflect on the problem of poverty.

Henry George saw that, if people were not taxed on their wages and the returns to their capital, there would be no involuntary unemployment; and incomes would be good enough for everyone, such that poverty would be a historical curiosity. The legitimate financial needs of the community, he argued, would be adequately catered for out of the economic rent of land; a policy that was dubbed “the Single Tax”.

His book, Progress and Poverty, when it was published in 1879, explained the mechanisms by which this result would be achieved. People throughout the world, having turned the book into the most popular text on economics ever to be published, decided that they, too, accepted the blindingly obvious. 5 So Henry George had to be stopped. Before considering one way in which this was accomplished, let us ask the question: were the millions of people who accepted George’s analysis - throughout America, the British Isles, down to the Antipodes, they bought his book and packed his public meetings - wrong? Was he misleading them, in arguing that he had perceived the way to abolish poverty through a reform of the tax system?

Conventional economists believe him to be wrong, but can we respect their conclusion? Unlike Henry George, they do not provide an alternative theory of poverty. Furthermore, they decline to engage his propositions in debate. They dismiss his case on the basis of assertion rather than rigorous argument. That may explain, of course, why the world continues to suffer from an escalation in poverty, despite the break through the barriers that once obstructed us from a state of generalised material prosperity.

To provide the reader with an overview of the controversy we shall recall the work of Joseph Schumpeter (1883-1950), a finance minister in Austria after the first world war before becoming a professor of economics in Bonn, from whence he moved to Harvard in 1932.

In his History of Economic Analysis, Schumpeter stressed that, although self-taught, Henry George was an economist. Indeed, Schumpeter notes that the way in which George acquired his knowledge was to his advantage. He had held a variety of jobs before finally settling down as a journalist in San Francisco, acquiring his economic knowledge from real life rather than by academic training.

Schumpeter characterises the Single Tax as a “panacea”. Nonetheless, Henry George “was careful to frame his ’remedy’ in such a manner as to cause the minimum injury to the efficiency of the private-enterprise economy”. 6 On what basis was the proposal denigrated as a panacea? Well, wrote Schumpeter, the policy was “vitiated by association with the untenable theory that the phenomenon of poverty is entirely due to the absorption of all surpluses by the rent of land”. He then proceeds to concede that George’s fiscal proposal “is not economically unsound” (Schumpeter’s emphasis). The problem, in his view, related to one specific issue: the proposal “involves an unwarranted optimism concerning the yield of such a tax”.

Here we have one of the crunch tests. Schumpeter, like all the other major economists of the 20th century, transgressed the basic principles of science. He resorted to assertion - w 1 thout theoretical discourse, let alone reference to empirical evidence - to claim that the rent of land would not provide sufficient revenue to finance the needs of the modem nation.

In any case, it should not be put down as nonsense. If Ricardo’s vision of economic evolution had been correct, it would even have been obvious wisdom. And obvious wisdom is in fact what George said in Progress and Poverty (Ch. 1, Book IX) about the economic effects to be expected from a removal of fiscal burdens - if such a removal were feasible. 7

In his discussion, Schumpeter lists what he postulates as the two problems with the tax policy that is the only radical alternative available to society. First, the proposal is disgraced by its association with the claim about the origins of poverty. Second, that land-rent constitutes an insufficient tax base for modem needs.

The books in this series on the Georgist paradigm re-examine the proposition that the major social problems would be resolved by the reform of the tax system along the lines prescribed by, among others, Henry George. The authors have compared the alternatives and cannot find serious competitors for the hypotheses that flow from the Georgist paradigm. Here, we can only consider the tantalising issues that touch on Schumpeter’s two concerns.

On poverty: as Schumpeter noted, Henry George’s economic analysis was so transparently clear that millions of citizens accepted the truth of what he wrote. Were they wrong? It is possible, of course. But among those readers was a nuclear physicist, Albert Einstein. In a letter dated October 8, 1931, Einstein wrote:

I read the largest part of the book by Henry George with extraordinary interest, and I believe that in the main points the book takes a stand which cannot be fought, especially as far as the cause of poverty is concerned.8

Would it not be extraordinary for a mind such as Einstein’s to draw such an emphatic conclusion on poverty, if he was in any way dubious about the analysis? Einstein concluded that, ifwe wanted to deal with poverty, we had to pursue the line of reasoning displayed in Progress and Poverty.

This is a view shared by Dr. Fred Foldvary, who in his contribution to this volume re-examines the theory of wages. He finds that progress towards a solution on poverty is contingent on policy initiatives that must include a unique combination of reforms to the structure of both public finance and the markets, reforms that flow from the principles of the Georgist paradigm. Dr. Foldvary, while substantially agreeing with Schumpeter’s analysis of how other theorists treated wages, was disappointed to find that Schumpeter afforded Henry George’s theory of wages an incomplete treatment compared with the weight he gave to other economists.

What of Schumpeter’s second concern - the revenue-yielding capacity of land? Was it really insufficient to meet the needs of the nation? Schumpeter’s view is taken as axiomatic by his colleagues, the academic economists who purport to study these matters. Typical of this school of economic analysis is the work by two prominent British economists, John Kay and Mervyn King. In referring to Henry George, they claim that it is “apparent” that “the total of economic rents, of all kinds, is not now a sufficiently large proportion of national income for this to be a practicable means of obtaining the resources needed to finance a modem State”. 9 This conclusion, while “apparent” to conventional economists, is not correct.

The measurable rental value of Britain’s land and natural resources has been calculated at well over 20% of the nation’s income, 10 including the rent that must be imputed to owner-occupiers who do not actually receive rent as a cash income (the taxation of imputed income is discussed below). This is a handsome proportion of government revenue, by any standard. Typically, however, as with most economists who write in their textbooks about the taxable capacity of land, Kay and King do not offer a shred of evidence for dismissing the size of the economic rent in the modem economy.

The one economist who has spent his lifetime reflecting on the question, however, draws a different conclusion. Mason Gaffney is a professor of economics at the University of California. In his view, the economic rent of a tax-free society is around 40%.' 1 This is sufficient to meet the needs of the most avaricious of modem States! There is evidently a scholarly dispute here that needs to be authoritatively resolved if public policy is to be reformed from an enlightened perspective. That debate will not be conducted until we retrieve the concept of land from the intellectual cupboard into which the neo-classical economists worked strenuously to lock it a century ago. Prof. Gaffney, in his contribution to this volume, takes this process of rehabilitation a step forward by prising open the door to that cupboard: he re-educates his colleagues on the distinctive qualities of land as a factor of production. Land cannot be sensibly analysed as if it were just a sub-category of “capital”; the relegation of land to the sidelines has done more than anything else to lead economists up the policy cul-de-sacs, wherein confusion was caused to the profession and bewildering pain to the citizens.

Empirical tests will prove that Henry George was correct. We confidently draw that conclusion because the reforms that he commended can be located in a theoretical tradition that has not yet been falsified, despite the best endeavours of the neo-classical economists. But why, then, has George’s primary reform, to the system of public finance, not yet been executed?

When it became clear that Henry George was serious; that he was intruding into the politics of his era - in Britain and Ireland and Australia; in China (via the nationalist leader Sun Yat-sen) and in Russia (via Leo Tolstoy); that he was determined to push for fiscal reform in an epoch making campaign, the historic logic of his arguments had to be neutralised. How this was accomplished by the neo-classical economists, at the turn into the 20th century, is the subject of an investigation into intellectual dishonesty by Professor Gaffney. 12 The neo-classicals set about obliterating the distinctive features of the concept of economic rent. This, in turn, succeeded in obscuring the unique characteristics of a policy that had enjoyed a tradition measured by the millennia.

Economists, by convoluting their concepts, were able to pretend that the rent of land was not, after all, something special. That was convenient for those who had not the slightest desire to publicise the virtues of the most efficient system of public finance. How was this accomplished? The neo-classicals set about proving that both labour and capital could also earn rent! So why, in that case, single out land as the unique source of public revenue?

Schumpeter did not approve of some of the treatments that had been accorded to the concept of economic rent. He noted “a tendency to harness the concept of rent into the service of entirely different purposes” which, inter alia, lead to “waverings, haziness and spurious issues”. 13 Distinguished economists participated in the extension of the definition of rent, “though, in my opinion, this only served to expose its emptiness”.

If, now, a nation wishes to rebase its affairs on a rational, efficient system framed by justice, it will have to treat the rent of land as something special. But that will not happen if economists are allowed to continue to cloud the issues that are at stake. If the prejudices and practises of 800 years are to be corrected - that is how long it took for the Norman aristocrats and their heirs to privatise the public revenue in Britain 14 - it will first be necessary to engage in a democratic debate. That process will be energetically resisted by the vested interests that continue to wield the ultimate power in society; but for the will of the maj ority to express itself effectively the issues will have to be clarified once again, through the process of demystification.

As a start, it is necessary to examine what conventional economists mean when they say that labour and capital also earn rent; for then we might be better able to decide whether such a claim is a good reason for not singling out land as the unique base for the optimum system of public finance. We cannot leave the concept of optimum taxation to economists, for they are not willing to devote sufficient time or space to the idea, as some of them, at least, are willing to acknowledge. 15

The mystification of rent

We can take as an example the work of John Kay of the London Business School and Mervyn King, formerly a professor of economics at the London School of Economics; who is now Chief Economist at the Bank of England. Their treatment of the tax system, which has passed through five editions, is singled out for no special reason. It fairly represents the teaching manuals on public finance that are recommended to students. The British Tax System derives much of its popularity from the fact that it is a text used by the Open University. This means it exercises influence on the way that mature students, members of the public who sit in judgment on the record of politicians when the time comes to elect a new government, think about public finance.

In Chapter 12, we are told that economic rent has a specific technical meaning in economics. The point is illustrated in this way:

If a singer earns £100,000 a year, and his next best employment would be as a barber at £5,000 per year, then he is obtaining economic rent of £95,000. 16

Without his exceptional voice, the singer would be clipping locks for the lesser sum and using his voice for the tips his amused customers might be willing to add to his wages. Kay and King draw two conclusions from their illustration:

(i) “.. .rent is the result of the scarcity of particular factors of production. If all barbers would make equally good singers, then the earnings of singers would be bid down to the earnings of barbers, and no rent would be derived.”

(ii) “...the rent could be taxed, or otherwise reduced, without any economic distortion resulting. So long as our singer nets more than £5,000 per year, he will continue his present occupation and stay out of the barber’s shop.”

Why extend the concept of rent to someone’s wages? Schumpeter offered one explanation:

It constitutes in fact a typical instance of unnecessary confusion being created for no better reason than a preference for terms that, like rent, have acquired derogatory associations. If it were not for this, it would be readily recognized that ‘surplus’ does all that is needed and that the term ‘rent,’ in this connection, is redundant. 17

Whatever the motive for causing confusion, of one thing we can be sure: for those who opposed the policy of rent-as-public-revenue, muddying the theoretical waters was a godsend. For the new theoretical formulation could be - and was - used to deny the wisdom of changing back to the system in which people’s wages and profits were privatised (that is, untaxed) in line with a switch to rent-revenue.

But if we dissect the differences in the incomes going to land, on the one hand, and labour and capital, on the other, we accumulate such a list of differences that it becomes absurd to try and lock the incomes of all three factors of production into single categories; an absurdity that distorts democratic debate and public policy. I shall briefly review the differences under four headings:

The nature of rentSocial justiceEnforceabilityEfficiency

(1) The nature of rent

Is rent the result of scarcity? Scarcity can apply in any of the markets. Scientists with special skills might suddenly become scarce; those willing to provide their services would be able to claim a premium over the wages of their colleagues. Some would say: “Lucky for them!” Conventional economists would claim that the difference was economic rent. Similarly in the capital markets. For a time, an entrepreneur might have an advantage which he could translate into a rate of return above what his capital would earn in other uses: again, the conventional economist would claim that capital was receiving income that was composed of both interest and rent. So why make a fuss about the distinctive qualities of the income received by land?

One difference is to be uncovered by identifying the way in which the value accrued to the factor of production that is in scarce supply. The scientist had to acquire the skill which - luckily for him - turns out to be scarce. His earning capacity is therefore raised above the level of the wage that he would otherwise have earned as a run-of-the-mill scientist. Similarly with capital: the entrepreneur who discovered he could command a premium on top of the average rate of interest had to have undertaken (or be willing to undertake) the investment, in the first place, thereby placing his capital at an advantage. In both cases, the income is actively earned by those who command the labour and capital.

Now, turning to land, ask the question: if a piece of land can command rent, who created that value? It is not sufficient to say, as Kay and King contentedly do, that scarcity, per se, results in rent.

We do not make land; therefore, its supply is fixed, and by definition it is scarce. But what are people paying for, when they seek to occupy a site? It is not scarcity, by itself, that fixes the price: they can go and live on the outer rims of Siberia and pay no rent whatsoever.

Rent is the price people are willing to pay for the benefits they know they would receive from the occupation of particular sites. The rent of land is the one figure that sums up the value of these kinds of services:

availability of public transport and refuse collection;access to hospitals and schools;intangible qualities that are accorded to a neighbourhood as a result of levels of crime and sociability;proximity to shops and recreation amenities, and so on.

The value of these services to people varies according to a variety of considerations: age (old folk place a premium on the ready access to doctors); aesthetics (some people are willing to pay over-the-odds for a “green” view from their sitting room window); marital status (young families need convenient access to schools); income levels (public transport is more important to those who cannot afford to own a car, or who do not wish to commute long distances on overcrowded roads); and so on. Some of these considerations are subjective, but they pass through a process of “objectification” through the medium of the marketplace. By this, I mean that subjective preferences are evened out by the pricing mechanism - the amount of money one person is willing to offer, as rent, relative to the amount that others are willing to offer for the access to particular sites that give them access to the amenities that they require.

Now we see the unique nature of rent. It is the sum of the value placed by people on the availability of public services and the overall quality of “the community”. The finite supply of land becomes a way of rationing access to services in particular places. This is why people are obliged to compete for the right of access to sites: the occupation of the sites gives them access to the services that are available in the community of their choice. The amount of rent they are willing to pay is their public declaration of the value they place on the services to which they want access. But unlike the worker or the capitalist, who finds himself in the fortunate position of being able to claim extraordinary wages or super-profits in return for services rendered, the services of land are not provided by the owner of the land.

The distinctions in the payments made to land, labour and capital, then, can be summarised in terms of the benefits principle. If you pay the scientist for his special skill, you pay the person who provides the service. Similarly, if you pay over-the-odds to a capitalist for the use of his unique equipment, you pay the person who provides the service, scarce or otherwise. But under our system of property rights, when you pay rent for the use of land you pay someone who does not provide the services that are accessible to the site. This is a qualitative difference that must not be obliterated by the economist’s bland assertion that economic rent is the result of scarcity.

(2) Social justice

Conventional economists, while priding themselves in the oft-repeated claim that they are “positive” scientists - that they forgo the normative approach to economics based on subjective values - nonetheless spend a great deal of their time balancing the “trade-offs” between efficiency and equity considerations. But their concepts of equity are largely brought to bear in a subj ective manner. They presume to know positively what people regard as fair, so they devote enormous time and space to drawing economic conclusions based on their perception of social justice. 18

People do have a powerful sense of justice. They do wish their society to be governed by the rules that they would collectively agree were fair. And I believe that there is little ambiguity about the principle that would shape their concept of a fair system of public finance. My assertion, which I would be happy to put to the democratic test - as it was, successfully, in Britain, in the “People’s Budget” controversy of 1909, relates to the rules that would govern fairness in public finance. These are twofold. First, people ought to pay for what they receive. Second, people ought not to be paid for services that are rendered or financed by others.

In terms of public finance, this means that public services ought to be financed by the value that it creates - the economic rent of land. Rent is the payment for services that are largely provided by the public; and that value ought not (in all fairness) to be pocketed by people who do not pay for, or provide, those services. In the non-jargon language of Alfred Marshall (1842-1924), who straddled the classical with the post-classical period of economics:

Looking forward rather than backwards, and not concerning ourselves with the equity and the proper limits of the present private property in land, we see that that part of the national dividend which goes as earnings of land is a surplus in a sense in which the earnings from other agents are not a surplus. 19

And, to drum home the uniqueness of the income attributed to land, Marshall added:

. . .there is this difference between land and other agents of production, that from a social point of view land yields a permanent surplus, while perishable things made by man do not. 19

If the rent of land and natural resources is a “surplus”, in the way that the earnings of labour and capital are not, then the layman, in all conscience, is not inclined to approve of any one person, or class of persons, appropriating that income. Are they not likely to say that this value therefore ought to be devoted to the collective needs of the community, to finance the services that create the value in the first place?

(3) Enforceability

We now turn to the question of enforcing the collection of economic rent. Here, again, we see that there is a world of difference between the income of land and the income received by labour and capital.

Let us return to the case of the singer whose income is, in large measure, rent, according to Kay and King. What if the government were to tell the singer: “We intend to take 5% of your rental income as tax”? We can reasonably expect the singer to pay up, without fuss. But what if the government were to say: “Y ou have not earned that £95,000, for you would willingly work as a singer for £5,000 - the sum you would otherwise earn as a barber. We shall therefore impose an income tax at the rate of 95% on your income”? In that case, the singer has two options:

(i) He could pay, and his fans would hope that he would not so grind his teeth in anger as to affect his singing; or

(ii) He could refuse to sing; in which case, he would work as a barber for £5,000, and his fans would be deprived of their entertainment.