An introduction to economics - Lesson 7: Collecting a Land Rent

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Collecting a Land-Rent Charge for Public Revenue

Let us now assume that for political reasons we chose to collect less than 100% of land-rent value, say 90%. Our first challenge is to discover what the land-rent value actually is. We may start with our marginal site – site B earlier. If for illustrative purposes we assume that firm B produces £100x of added value per year. As we have shown 40% of this is taken one way or another in tax. Say they also paid 10% in land-rent. From our earlier reasoning it may be seen that the true land-rent was actually £10x + £40x = £50x. This assumes that nowhere within the economy can land be available for use without payment but we have identified at the beginning of this paper the importance of ensuring ‘free land at the margin’.

We also reasoned earlier that the landowner of Firm B’s site set his rent by reference to ‘all those other sites where no viable production can take place at all or where only production of a less valued kind than that which is the business of firms ‘A’ and ‘B’.

We may see then that the maximum amount by which firm B’s site land-value exceeds that for which there is no demand for use must be £10x per year. The site may then be safely valued at this level and that this corresponds with its ‘best permitted use value’. We may see now how, if all the land in the economy was to be valued for its ‘best permitted use’, this would provide a basis for a land-rent charge that would provide a major source of public revenue. Land-owners would not be permitted to charge more in land-rent than the best permitted use valuation as agreed between the land-owner and the tenant. If all land-rent values were declared as public information this would make valuation very easy, cheap and robust. Comparisons would be easy and appeals by either landowner or tenant would be straightforward for determination by a professional surveyor.

Note now the likely effects of such a fiscal policy

  • Tax at the margin would be reduced of eliminated
  • Earnings at the margin would thus increase
  • Earnings everywhere would thus increase
  • Sites that are currently sub-marginal would, because they would bear no tax burden or land-rent become viable for new ‘start up’ businesses.
  • Sites that are currently marginal thus become supra-marginal and thus yield more land-rent (and more public revenue)
  • With a reduction in some and the abolition of other conventional taxes, the costs of collection and associated deadweight losses will be reduced
  • The need for public revenue to alleviate poverty reduces since the general level of earnings have risen.
  • The capital price of land for housing and business  reduces, reducing the need for loans and thus interest payments.<
  • The scope for illegal tax avoidance is reduced and so are the costs of professional financial services
  • Public utility projects become more viable as the value they add is reflected in the yield from higher land-rent payments.
  • Housing becomes more affordable to all who earn a living
  • The opportunity to earn a living is enlarged for all
  • Unearned income from land-rent is reduced encouraging those who live off it to invest in, or work on productive enterprises

Ultimately it may be shown that all production (including a house or anything produced by people) arises from the combination of two principle elements: land and human enterprise or activity.

The economic term used for productive human enterprise and activity is ‘labour’. The qualification ‘ultimately’, is used here since in building a house there is clearly an important part that is played by the employment of plant, machinery and tools – in economic terms - ‘capital’. However we may be see that just as a building, when used as an office or factory would be classified as ‘capital’ so these items of capital have their origins in land and labour. The raw materials that went into the making of a shovel or concrete mixer were drawn from land, and the labour that was applied to them in their manufacture, distribution and sale, took place somewhere on land. Capital is a sub set of wealth and like all wealth is ultimately the product of human ‘labour’ applied to a non-human, or natural resource. The economic term for this natural resource or gift of nature is ‘land’.

The first thing you might notice here is that travel and holidays take you somewhere away from your base – your home, and where you have to earn a living. Maybe however, we need first to notice that there is a need to ‘earn a living’. What does this phrase ‘to earn a living’ mean exactly, and is it true? Living for all of us involves, eating, drinking, and sleeping and being protected from the weather through clothing and a shelter of some sort. For most of us, it also means the opportunity to engage in social activities where we share the company of other people whilst we eat, drink and entertain ourselves and each other. All these activities, indeed living itself, requires that people exert themselves, in economic terms they work!

People need to grow, harvest, transport, buy and sell the food that other people transform into meals in homes and restaurants and yet another group of people may enjoy. Similarly, the clothes, houses, clubs, theatres and many of the items of entertainment and pleasure that we may think make life worth living are made, built, maintained and operated by people – people like us.

The economic term that is used to identify those goods and services that people are able to enjoy as a result of their endeavours to produce goods and services for themselves and for others is their ‘earnings’. In economic terms this is the reason why people are prepared to exert themselves – to earn a living. In short ‘there is no wealth without work’. This is not to say that an individual must work in order to enjoy the particular collection of goods and services that comes his way, but rather to point out that someone must work to produce them, before anyone can enjoy them. The individual may of course produce them him or herself but in a modern trading economy they are more likely to be received through gift or trade. We may think of these means of availing wealth as ‘economic’ in so far as they reflect the natural link that exists between the act of producing and the act of consuming, or enjoying that which has been produced.

An individual would be unlikely to exert himself in the interests of ‘earning a living’ if all his earnings were taken from him through theft, fraud or by other ‘uneconomic’ means, it would simply not be economic.

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