Thinking about how to explain ground rents/land rents/land value taxation…
Economic rents differ from shelter rents, the checks many of us write on the first of the month. Economic rent is what landlords claim from the ownership of land, the proceeds of the work performed on that land. A residential tenant’s wages are the crop harvested each month, as they represent the labor that tenant sells in the market. It’s economic rent and the related term rentier — defined as “[a]n individual who receives an income, usually interest, rent, dividends, capital gains, or profits from his or her assets and investments” — that we are concerned with here.
Going back to the notion of economic rent, not shelter rent, what apartment or house tenants pay, here is the Ricardian definition.
“Portion of the produce of the earth which is paid to a landlord on account of the original and indestructible powers of the soil, Ricardo in his theory of rent has emphasized that rent is a reward for the services of land which is fixed in supply. Secondly, it arises due to original qualities of land which are indestructible”. (The original indestructible powers of the soil include natural soil, fertility, mineral deposits, climatic conditions etc., etc.).
To this we add Adam Smith’s description:
“The rent of land, therefore, considered as the price paid for the use of the land, is naturally a monopoly price. It is not at all proportioned to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take; but to what the farmer can afford to give.” — Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book I, Chapter XI “Of the Rent of Land”
We have to recall the times in which they lived and their focus on or simplification of land for agriculture. What Ricardo formulated was the idea that land’s value was based on what it could produce from its location and other properties (bottomland vs hillsides, sun exposures vs shade, rain or access to water). So the landlord can rent an acre of bottomland with access to the river for more than he will get for an acre on the hillside where water has to be carried uphill. Also included in his definition is that land is finite, fixed in supply, and that it is original (ie, not made by man) and indestructible.
Smith’s explanation is more direct: the landlord owns a monopoly on the land she owns and can charge what she likes for the use of it. If her tenant brings in a good crop, she can demand more rent from her tenant based on the higher income from the land.
What Henry George saw was that the price to acquire land to work in a given area, either as farmland or to site a factory, became more expensive as more people moved to that area. Supply and demand for a monopoly good can only benefit the owner.
So as the cost to acquire land rises, who pockets the increase? The landowner. But who created that value? Everyone else. All the investment by the taxpayers — roads, utilities, public safety — and those who work their land nearby accrues to the landowner’s benefit. As nearby or adjacent land is developed, the value of land increases, partly through scarcity and partly through the increased desirability of it for new or existing businesses. If I am in business, I will pay more for land near businesses or markets I need access to. And rather than the public whose taxes and consumer spending created that value, the landowner — the rentier — reaps the benefit.
When a fraction of an acre sells for millions of dollars, that’s all unearned income. That windfall should be subject to a ground/land rent or land value tax that returns that value to those who created it, derived as it was from “the original and indestructible powers of the soil.” In this case we don’t care so much about the power of the soil so much as the value of the location, its proximity to other commercial interests. Once a city develops a presence in some industry — banking in New York or London, for example — that location becomes more valuable and the land under it more expensive. The idea that someone can live off the proceeds of land their long-dead ancestors bought as farmland sounds a lot like feudalism. Land speculation is as corrosive to social mobility and a free market as dynastic wealth. They are not unrelated.
The ideal price to acquire land for commercial use is $0, with the value of the land payable as a ground rent to the municipality. This is the premise of ground rents, that the map is not the territory. The map coordinates are not the land itself, and we can allow someone to hold, buy, or sell the exclusive rights to a set of map coordinates but the value of the land belongs to no one or everyone:
So does this mean that home prices will rise even higher in overheated markets? That depends. If commercial property is assessed and taxed on its highest and best use, residential rates may well go down. There is no reason why a downtown office block pays the same tax rate as a family home. One of those two properties is using the land expressly to make money and it should pay a higher rate to use the land. If there is a monopoly in land, the value should be held in common with the proceeds being returned to those who created it.
There is really no reason to own land, other than to extract economic rents through scarcity. Imagine a home purchase that didn’t include land in a city like Seattle: it could cut the price in half, with the current property tax being assessed as a ground rent. A look into the King County property database makes clear that land prices have risen faster than home prices (yes, they are tracked separately, in preparation for a ground rent/land value tax).
The ideal tax model would be split-rate, with a higher tax on the land (higher than the current 1%) than on the improvements, to both discourage land speculation and encourage development. If the cost to hold land is increased to discourage speculation but can be defrayed by developing it, that’s what we will see. Accepting surface parking lots or single story buildings downtown in the face of homeless emergency and a housing affordability crisis should be unacceptable but Seattle and other cities can’t seem to find their way out of this mess. We already know that developers will pay close to $1,000,000/acre per year to rent land: putting an equivalent ground rent on surface parking lots and other disused or underused land might impoverish a few parking lot operators but cars have reached their peak anyway. The reality is anyone holding land downtown in many of our expensive cities will make out just fine. Let them cash in their winnings and go.