Economic Rent and Building Rent

"Rent" as economists use the term (those whose education is moderately complete) and as landlords and tenants use the term are very different phenomena.

Real estate investors are just as happy to accept the "polite fiction" that land has little or no value, and that the value of their holdings is mostly in the buildings.

But the reality, particularly for buildings that aren't quite new, is that the value of the site on which the building sits is frequently more than 50% of the total property value. Buildings depreciate every year. Land appreciates, due to population increases, public investment in infrastructure and services, and technological progress.

Most cities' assessments don't acknowledge this. Assessments are done infrequently (Connecticut requires every 4 years; there are counties in Pennsylvania which haven't been assessed in decades; California's and Florida's assessments have little consistent relation to reality due to assessment caps.

Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894)

Note 13: Following is an interesting computation of the cost and loss to the city of Boston of the present mixed system of taxation as compared with the single tax; The computation was made by James R. Carret, Esq., the leading conveyancer of Boston:

Valuation of Boston, May 1, 1892
Land... ... . .. ... .. ... .. $399,170,175
Buildings ... ... ... ... ..$281,109,700
Total assessed value of real estate $680,279,875
Assessed value of personal estate $213,695,829
.... .... ... ... ... ... ... ... .... .... .... ... .... ... $893,975,704
Rate of taxation, $12.90 per $1000
Total tax levy, May 1, 1892 $11,805,036

Amount of taxes levied in respect of the different subjects of taxation and percentages of the same:
Land .... .... .... .... $5,149,295 43.62%
Buildings .... .... .. $3,626,295 30.72%
Personal estate .. $2,756,676 23.35%
Polls ... .... ... .... .... ...272,750   2.31%

But to ascertain the total cost to the people of Boston of the present system of taxation for the taxable year, beginning May 1, 1892, there should be added to the taxes assessed upon them what it cost them to pay the owners of the land of Boston for the use of the land, being the net ground rent, which I estimate at four per cent on the land value.

Total tax levy, May 1, 1892 ... ... ... ... .... .... .... .... .... ..... .... .... .... .... .... .... ..$11,805,036
Net ground rent, four percent, on the land value ($399,170,175)..... ... ... ...$15,966,807
Total cost of the present system to the people of Boston for that year ... $27,771,843

To contrast this with what the single tax system would have cost the people of Boston for that year, take the gross ground rent, found by adding to the net ground rent the taxation on land values for that year, being $12.90 per $1000, or 1.29 per cent added to 4 per cent = 5.29 per cent.

Total cost of present system as above .. .... .... .... .... .... .... .... .... ....$27,771,843
Single tax, or gross ground rent, 5.29 per cent on $399,170,175 ... ..$21,116,102
Excess cost of present system, which is the sum of
taxes in respect of buildings, personal property, and polls .... ...... .. $6,655,741

But the present system not only costs the people more than the single tax would, but produces less revenue:

Proceeds of single tax ... ... ... ... ..... .... .... ..... .... .... .... ..... ..... .... $21,116,102
Present tax levy ... ... ... ... ... .... .... .... ..... .... .... .... .... .... .... .... ....$11,805,036
Loss to public treasury by present system ... .... .... .... .... .. ..... ..$9,311,066

This, however, is not a complete contrast between the present system and the single tax, for large amounts of real estate are exempt from taxation, being held by the United States, the Commonwealth, by the city itself, by religious societies and corporations, and by charitable, literary, and scientific institutions. The total amount of the value of land so held as returned by the assessors for the year 1892 is $60,626,171.

Reasons can be given why all lands within the city should be assessed for taxation to secure a just distribution of the public burdens, which I cannot take the space to enter into here. There is good reason to believe also that lands in the city of Boston are assessed to quite an appreciable extent below their fair market value. As an indication of this see an editorial in the Boston Daily Advertiser for October 3, 1893, under the title, "Their Own Figures."

The vacant lands, marsh lands, and flats in Boston were valued by the assessors in 1892 (page 3 of their annual report) at $52,712,600. I believe that this represents not more than fifty per cent of their true market value.

Taking this and the undervaluation of improved property and the exemptions above mentioned into consideration, I think $500,000,000 to be a fair estimate of the land values of Boston. Making this the basis of contrast, we have:

Proceeds of single tax 5.29 per cent on $500,000,000 ... .... .... .... $26,450,000
Present tax levy ... .... ... .... .... .... .... .... ..... .... .... .... .... ..... .... .... ..$11,805,036
Loss to public treasury by present system ... ... ... ... .... .... .... ....$14,644,974

3. THE DISTRIBUTION OF WEALTH

The chart on the following page displays the fundamental principle of Production, which we considered at the beginning, and also the fundamental principle of Distribution, which is yet to be considered. In the development of the latter will be found the explanation of the divorce in the civilized state of Labor from Land: [chart]

This chart reminds us that Labor (human exertion), by application to Land (natural materials and forces external to man), produces Wealth (the generic term for all those things that tend to satisfy the material Wants of man), and so tends to abolish poverty. No man's poverty can be abolished in any other way, unless it be by gifts, or vulgar robbery, or legalized spoils.

The chart shows also that Wealth distributes ultimately in Wages 82 (a fund made up of the aggregate of the earnings of individual laborers), which corresponds to Labor; and Rent 83 (a fund made up of the aggregate premiums for specially desirable locations), which corresponds to Land.84

82. "What is paid for labor of any kind is called wages. We are apt to speak of the payment given to the common day laborer only as wages; and we give finer names to the payments which are made for some other kinds of services. Thus we speak of the doctor's or the lawyer's fee; of the judge's salary; of the teacher's income; of the merchant's profit; of the banker's interest, and of the professor's emoluments. They are all in reality only payments for labor of different kinds, or for different results of labor, — that is, they are all wages." — Dick's Outlines, p. 23

"Wages is what goes to pay for all the trouble of labor." — Jevons's Primer, sec. 39

"His [the manager's] share is called the wages of superintendence, and although usually much larger than the share of a common laborer, it is really wages of the same nature." — Id., sec. 41.

"The common meaning of the word wages is the compensation paid to a hired person for manual labor. But in political economy the word wages has a much wider meaning, and includes all returns for exertion. For, as political economists explain, the three agents or factors in production are land, labor, and capital, and that part of the produce which goes to the second of these factors is styled by them wages. . . It is important to keep this in mind. For in the standard economic works this sense of the term wages is recognized with greater or less clearness only to be subsequently ignored." — Progress and Poverty, book i, ck. ii.

83. Rent "is what is paid for the use of a natural agent, whether land, or beds of minerals, or rivers, or lakes. The rent of a house or factory is, therefore, not all rent in our meaning of the word." — Jevons's Primer, sec. 40.

"The term rent in its economic sense . . . differs in meaning from the word rent as commonly used. In some respects this economic meaning is narrower than the common meaning; in other respects it is wider.

"It is narrower in this: In common speech, we apply the word rent to payments for the use of buildings, machinery, fixtures, etc., as well as to payments for the use of land or other natural capabilities; and in speaking of the rent of a house or the rent of a farm, we do not separate the price for the use of the improvements from the price for the use of the bare land. But in the economic meaning of rent, payments for the use of any of the products of human exertion are excluded, and of the lumped payments for the use of houses, farms, etc., only that part is rent which constitutes the consideration for the use of the land — that part paid for the use of buildings or other improvements being properly interest, as it is a consideration for the use of capital.

"It is wider in this: In common speech we only speak of rent when owner and user are distinct persons. But in the economic sense there is also rent where the same person is both owner and user. Where owner and user are thus the same person, whatever part of his income he might obtain by letting the land to another is rent, while the return for his labor and capital are that part of his income which they would yield him did he hire instead of owning the land. Rent is also expressed in a selling price. When land is purchased, the payment which is made for the ownership, or right to perpetual use, is rent commuted or capitalized. If I buy land for a small price and hold it until I can sell it for a large price, I have become rich, not by wages for my labor or by interest upon my capital, but by the increase of rent.

"Rent, in short, is the share in the wealth produced which the exclusive right to the use of natural capabilities gives to the owner. Wherever land has an exchange value there is rent in the economic meaning of the term. Wherever land having a value is used, either by owner or hirer, there is rent actual; wherever it is not used, but still has a value, there is rent potential. It is this capacity of yielding rent which gives value to land. Until its ownership will confer some advantage, land has no value." — Progress and Poverty, book iii, chap ii

84. "The primary division of wealth in distribution is dual, not tripartite. Capital is but a form of labor, and its distinction from labor is in reality but a subdivision, just as the division of labor into skilled and unskilled would be. In our examination we have reached the same point as would have been attained had we simply treated capital as a form of labor, and sought the law which divides the produce between rent and wages; that is to say, between the possessors of the two factors, natural substances and powers, and human exertion — which two factors by their union produce all wealth." — Progress and Poverty, book iii, ch. v.

Care must be taken not to confuse the hire of a house, commonly and legally termed "rent," with economic Rent. House rent is really Wages; it is compensation for the labor of house building. But economic Rent is not compensation for anything; it is simply the premiums for advantages of location. ... read the book

Charles B. Fillebrown: A Catechism of Natural Taxation, from Principles of Natural Taxation (1917)

Q3. What is meant by economic rent?
A. Gross ground rent -- the annual site value of land -- what land, including any quality or content of the land itself, is worth annually for use -- what the land does or would command for use per annum if offered in open market -- the annual value of the exclusive use in control of a given area of land, involving the enjoyment of those "rights and privileges thereto pertaining" which are stipulated in every title deed, and which, enumerated specifically, are as follows: right and ease of access to

* water, and
* health inspection,
* sewerage,
* fire protection,
* police,
* schools,
* libraries,
* museums,
* parks,
* playgrounds,
* steam and electric railway service,
* gas and electric lighting,
* telegraph and telephone service,
* subways,
* ferries,
* churches,
* public schools,
* private schools,
* colleges,
* universities,
* public buildings --

utilities which depend for their efficiency and economy on the character of the government; which collectively constitute the economic and social advantages of the land which are due to the presence and activity of population, and are inseparable therefrom, including the benefit of proximity to, and command of, facilities for commerce and communication with the world -- an artificial value created primarily through public expenditure of taxes. For the sake of brevity, the substance of this definition may be conveniently expressed as the value of "proximity." It is ordinarily measured by interest on investment plus taxes.

Q9. Does not the single tax mean the nationalization of land?
A. No; as Henry George has said, "the primary error of the advocates of land nationalization is in their confusion of equal rights with joint rights. ... In truth, the right to the use of land is not a joint or common right, but an equal right; a joint or common right is to rent."* It means rather the socialization of economic rent. It simply proposes gradually to divert an increasing share of ground rent into the public treasury.
*A Perplexed Philosopher, Part III, Chapter XI: Compensation ... read the whole article