Henry George (1830-1897)
High birth rates and an influx of millions of immigrants in nineteenth-century America triggered rapid growth. Frontier lands were homesteaded, and urban land values boomed. Henry George and his followers believed landowners unjustly reaped huge benefits from economic growth, which George viewed as rightfully due to society in general. In Progress and Poverty (1879), George proposed a single tax on land equal to the surplus landowners receive, and argued that these revenues could replace all other taxes and finance all government spending. His reasoning is illustrated in Figure 4.
Equilibrium rent per acre before the land tax is t0 (point a). A tax equal to half of annual rent would cut the net rent per acre to landowners to tT . They cannot change the supply of land to drive its rental rate up. Attempts to raise rents would fail because surpluses of vacant land would develop. Rent that can be charged land users is strictly demand determined, so landowners cannot avoid the full burden of a pure land tax.
The central thrust of George's notion is that land rent can be taxed heavily without distorting production incentives. If untaxed land were used optimally, the most profitable uses would remain so after imposing the tax. (If you are able to keep half of all rent, 50 percent of the highest possible economic rent is the best you can do.) Thus, land taxes seem allocatively neutral.
George felt that "nothing short of making land common property can permanently relieve poverty and check the tendency of wages to the starvation point." He proposed to do this not by directly
Figure 4 Effect of a Tax on Land: Landowners Bear the Burden
nationalizing land, but by the roundabout method of taking away the unearned income that proprietors enjoyed from land rents. Progress and Poverty became his era's best selling work on economics and the bible of the single-tax movement.
A single tax on land sounds appealing, but it suffers from several flaws: (a) potential revenue would probably not cover all current government spending; (b) administration would be complex, because distinguishing the values of land from its improvements—clearing, irrigation, buildings—is quite difficult; (c) land is not the only resource that generates economic rents, and (d) rent does provide resource owners with incentives to find users who most highly value the resources. A single tax on land rent would impose the full burden of paying for government on landowners. This seems unfair from the vantage point of current landowners.
George's single-tax movement reached its apex in his 1886 race for mayor of New York City. Running as the candidate of the United Labor Party, George finished second, but there was wide speculation that he might have won an honest ballot count. Henry George died during another run at the mayor's office in 1897, but left his imprint on economic reform movements at home and abroad.
Even in the short run, the drive to maximize economic rent creates incentives for resource owners to use their productive resources in the most valuable ways possible and to maintain them properly. Suppose that you own a city block that will potentially rent for $1 million annually. If rents were taxed 100 percent, would incentives exist to seek the highest bidder so that the land would be put to its most valuable use? Absolutely not!
Henry George argued that land would be used efficiently even if 50 percent taxes on rent were imposed because "half is better than nothing." When we consider transaction costs, however, his analysis falters. If the tax were 99.99 percent, for example, the $100 received if you found the $1 million bidder for use of your land would be unlikely to overcome your transaction costs. You might simply let your land lie idle. But what if the site tax were only 80 percent? Or 32 percent? Any tax rate, however low, reduces the incentive to incur transaction costs so that land is put to its most valuable use.
Some corporate CEOs, musicians, novelists, film stars, and athletes realize incomes that seem outrageous . Much of such income is economic rent, so why not impose 100 percent taxes on annual incomes over $1,000,000? This question is partially answered if you ponder how you would react were you in this position. High income tax rates explain why many English actors and rock stars have immigrated to Switzerland, the United States, and Ireland (where income tax rates are zero for royalties from books and records).
Another problem is that parts of even extraordinary incomes are not pure rents. If emigration seems unattractive, why bother to be worth more than $1,000,000 annually? Great actors might study their lines less diligently or do fewer films. Might opera singers begin to smoke or fail to avoid colds? Would successful authors write as much? Would sports superstars play as hard or often? Would they happily play in industrial towns, or might most gravitate to sunny resort areas?
Some might still strive to excel out of personal pride, but after a certain point, we suspect that cold cash motivates most people whose specialized skills earn large economic rents.
In summary, rents are important even in the short run, because they are incentives to maintain rent-generating resources, and because they are important in ensuring that those who most highly value scarce resources are able to use them.
Many resources that draw economic rents because they are semifixed in the short run are far from fixed for the economy as a whole over the long haul. Prospects of high income motivate people to invest in assets that subsequently command economic rent. Today's opportunity costs become tomorrow's fixed costs, as resources jell into fixed assets. For example, medical students undergo years of expensive training in hopes of high economic rents once their M.D. degrees are in hand. Investors in buildings or capital equipment draw economic rents over the useful lives of these assets.
Would tomorrow's pro athletes have as much incentive to hone their skills if the economic rents enjoyed by basketball’s Vince Carter, tennis’s Venus Williams, or football’s Warren Sapp were taxed away? No! Would the lawyers of the next generation be as skilled as Alan Dershowitz or Lawrence Tribe if the incomes of top attorneys were capped because they are economic rents? From whence would come future Andreas Bocellis, John Grishams, or Oprah Winfreys? The long-run effects of taxing all economic rent would be economic stagnation because there would be fewer incentives to invest in oneself or in capital equipment.
It should come as no surprise that the annual rental value of any resource is tied closely to its selling price, which is the wealth associated with owning a resource or other asset. Before we discuss capitalization, which is the process of translating rents or other income flows into wealth, you need an understanding of interest and profits, which also may be capitalized through the process described near the end of this chapter.