Size of Rent                                               by Ole Lefmann

Before discussing the Size of Rent let us make clear what we mean when speaking about Rent.

RENT

In everyday speaking people use the word Rent about payment for the right to use something that belongs to others, such as a flat, a house, a car, tools, machinery, furniture, or whatever.

Commercial Rent is the term used for rent paid as compensation for wear and tear of leased manmade things, premium for the risk of accidental loss of the thing during the lease, financing the lease arrangement, profit to the letter, etc.

Commercial Rent may include also payment for temporary enjoyment/use of the owner’s exclusive right to enjoy/use the Economic Rent.

Economic Rent is available on or from a valuable site or other advantages provided by Nature (such as electronic radio waves), by the Society (such as a town or city) and/or by the Government (such as order).

Some people call the Economic Rent for Rent of Land.

ECONOMIC RENT

Economic Rent/ Rent of Land (Land = Nature) is in the first place “Free Lunches” that fall to the user of valuable land and other natural advantages; either for his/her immediate enjoyment or as excessive result of production over what pays for the costs of production including the market value of the user’s exertions.

If the holder of the society’s supreme physical power has granted a person exclusive right to use a certain area of land or another part of nature including enjoyment of its Economic Rent he/she will generally be called the landowner.

The landowner may allow other people to use his/her land and enjoy its Economic Rent against payment to the landowner. In that way the landowner is able to use the Economic Rent as purchasing power though he/she has not made any personal exertion for it.

As the “Free Lunches” of Economic Rent are provided by Nature or by the surrounding Society or by the Government, ethically speaking Economic Rent does not belong to any individual or any specific group of individuals, but belongs on an equal footing to all citizens in common.

Originally all rent of land was paid to the Crown who used it to finance common tasks that first of all was protection of citizens against robbers, raiders and criminals, meaning Police, Military and Court of Justice, secondarily public administration, developed infrastructure, public service, etc.

Gradually the practice of paying the rent to the Crown/the Government became watered-down by nobles and others of wealth and influence who referred the ruler/ Government to finance his/her/its need for revenue by taxing productive people, who already paid (and always will be paying) the economic rent to the landowners for use of the advantages of nature and society.

Today common practice is that landowners withhold for their own satisfaction the economic rent paid them by producers, who also deliver manpower and investments and pay taxes to the community for development and maintenance of the advantages of Society:  infrastructure, public services, etc. The old system is in functions only in few places around the world and only to some degree.

When Economic Rent is paid to the community by the users/owners of land/nature and the community uses the revenue for betterment of all citizens on an equal footing, nobody takes advantage in preference of others of the values of nature and society, which makes no harm to private economies or to social economy.

Otherwise, when Economic Rent is withheld by owners of land/nature who use it for realisation of their own ideas it damages private people’s economies as well as the social economics, because it:

-  builds up fortunes to a small minority of citizens, who use the Economic Rent as purchasing power to take out from the market products and services without supplying to the market anything wanted by other citizens. That one-way system differs from the two-way distribution system by which the market normally functions. The one-way system leaves the market with reduced quantities for other citizens to demand at increased prices.

- deprives the Government of income it has created by using its sovereign power to protect the rights for the titleholders to collect the rent, which makes it necessary for the Government to collect from the producers the revenue it needs for administration of the society and provision of public services.

- causes a deadweight on production because the effect of taxes on producers and/or on the results of production is that demand and supply cannot meet at prices for optimal production; fewer consumers accept the higher prices including tax, and fewer producers accept the lower prices after tax, which means reduced production and reduced employment.

- wastes resources and possibilities.

- creates poverty among citizens who receive neither Economic Rent, nor huge salaries or profits for supplying specialised services or goods to the Government or to wealthy receivers of Economic Rent.

- expands the gap between rich and poor which makes the society unstable with a class of very satisfied wealthy and lavish citizens, a middle class of satisfied and reasonably satisfied citizens, and a growing class of very unsatisfied, insecure and alienated citizens.

-  destroys self-confidence and self-respect of people who are deprived of their equal share of the values of nature and society, are denied free access to nature and advantages of society without compensation, and are referred to accept unfair, often unhealthy working conditions including low wages.

-  in the longer term it causes our civilisation’s decline and falling back to barbarism as happened to the civilisation of Rome and to any other known ancient/archaic civilisations. The decline of civilisations and their falling back to barbarism was every time the result of concentrated power and wealth with few citizens leaving crowds of poor citizens unable to fend for themselves and dependent of charities and/or social security benefit.

THE SIZE OF RENT

There is a difference between the Economic Rent described by the classical economists (18th and 19th centuries) and the economic rent described by neo-classical economists (20th and beginning of 21st centuries).

The Classical Economists in the 18th and 19th Centuries

The classical economists living in 18th-19th centuries did not try to estimate the size of the Rent of Land; but they described clearly that they were convinced that it could easily replace all other taxes levied on producers or on results of production.

They emphasized that the Government would discourage productivity by taxing producers or the results of production; whereas the Government would encourage productivity by collecting from the landowners the rents that would fall to them if their land was used in the best possible of ways allowed by the government.

By collection of the rental value of land (nature) as if it was used in the best possible way within governmental regulation, it would be extremely seldom to find un-used or under-used land; natural possibilities would be utilized best possible, and the revenue to the Government would be optimized.

In 1879 Henry George wrote:

"In every civilized country, even the newest, the value of land taken as a whole is sufficient to bear the entire expenses of government. In the better developed countries it is much more than sufficient."

[Quoted from page 406 in Robert Schalkenbach Foundation’s in 1990 reprinted issue of Progress and Poverty (1879).]

This understanding - that the Economic Rent has the capacity to replace all other taxes - was still commonly agreed in the beginning of the 20th century; but in the second half of the century it became gradually replaced by the now prevailing attitude among politicians and economists, who look to the figures presented by statisticians.

Statisticians in the 20th Century

Statistics Denmark - The Danish Statistical Office - www.statbank.dk - is quite reliable and correct about taxes and market land-values. In 1999 the tables of Statistics Denmark showed figures that made it possible to calculate the rent of land for a row of years 1950 to 1997.

For 1997 the figures showed that the rent of land (calculated to Mio.Dkr.35,904 by adding the total of collected Landtax to the total called Land Values de-capitalised by 6%) made only 6 percent of the public budgets (Public budgets = All Taxes Mio.Dkr.557,820), or 3 percent of the Danish Gross Domestic Product Mio.Dkr.1,114,332; the public budgets being 50 percent of the Danish GDP.

So the figures seem to confirm that what today we call "rent of land" cannot pay all taxes needed for governing today's society.

Therefore, in spite of the fact that most of today’s economists confirm that public collection of rent of land instead of other taxes would bring about considerable advantages to the society and its citizens, most of them don’t recommend this but recommend the politicians to collect from production taxes that they perfectly well know have bad effects on private economies and on the society’s economy.

If we cannot prove that what today is called “rent of land” calculable from the available statistics is only part of the Rent of Land described by the classical economists, we may submit to the assertion that Henry George was too optimistic when in 1879 he wrote as quoted in the box above.

Now let us now make an effort to find out where the missing part of the rent is to be found:

If we look at the rent we calculate from the figures of today’s statistics (Landtax + de-capitalised Market Prices of land) and call it the “Visible Rent of Land”, the question is where we may find today’s invisible rent of land?

Invisible Rent of Land

We expect that “the invisible rent of land” we search for is the difference between the classical economists’ estimate of:

- much more than sufficient to bear the entire expenses of government including the public service citizens in general really want;

and today’s statisticians’ total of:

- publicly collected Land taxes plus de-capitalised total of Market Prices of Land.

Today’s economists indirectly answer the question: Where do we find the invisible rent of land? by confirming that:

·        The supply of land is fixed and the prices for taking over exclusive rights to use sites of land are determined by the offers people can afford.

·        Taxes levied on citizens’ income or on their spending income prevent them from paying the same rent of land they would have been able to pay without these taxes.

These facts make it clear that:

Taxes (except tax on exclusive rights to use of  land) reduce the visible rent of land and other parts of nature;

and by contrast:

Reduction of such taxes increases the visible rent of land.

So now the question is, if the rent of land is reduced by the full amount of taxes, or only by part of it.

The general feeling is that taxes on income reduce wages and profits of production, and taxes on rewards to productive investors reduce interests, which is obvious every time new taxes are implemented or old taxes are increased. But in periods of progression wages to manpower and rewards to productive investors (after tax) will soon return to the level labourers and investors accept as sufficient, whereas Economic Rent will increase only with the amount users of land are able to pay extra, which is less than it would have grown to without taxes.

Nevertheless, on sites where the results of production cannot pay any rent (on the so-called margin for production), claim for more taxes will close production that will only come back if the claim for more taxes is withdrawn or a new technique makes it possible to produce increased results that will pay the new tax.

That means, if taxes close more productivity than new technical inventions open the result may be partially standstill of production and unemployment, which causes pressure on wages to manpower and reduction of interests to investors, spreading to the entire society.

Therefore:

As long as new techniques open more possibilities for production than increased taxes closes, taxes will reduce the visible rent of land while wages to manpower and rewards to productive investors regain the level they had.

If new techniques open fewer possibilities for production than taxes close, wages to manpower and rewards to productive investors will hardly regain to the same level they previously had.

Conclusion:

When we want to find out to which size Rent of Land - as described by economists in the 18th and 19th centuries - has grown in today’s world we have to take what today is called rent of land (= total of landtax + total of de-capitalised market prices of land) and add to that the total of all taxes (= the public budgets of the nation).

That view justifies that reduction of taxes will increase the visible rent of land with almost the same amount, that all taxes can be replaced by public collection of Rent of land, and that

Henry George was right when he wrote as quoted in the first of above boxes.

_

Still more people are becoming aware that taxes on production really cause a heavy Deadweight on production.

Authors like Mason Gaffney, Fred Harrison, Charles Bazlinton, and others publish books in which they describe that the reasons for economic recessions and for the increase of involuntary poverty, is  the governments’ unwillingness to collect the rent of nature and use it to the betterment of all citizens on an equal footing, which will free the citizens and the societies from the bad effects described above under the headline ECONOMIC RENT.

Such books give us hope for a better future, and hope that the fate of our society will be better than the fate that made the civilisation of Rome decline.

However, our problem is not just Taxes:

There are other Capturers

Like taxes reduce citizens’ possibility to pay the amount they would have paid for use of land hadn’t they been forced to pay taxes, there are other capturers who also distort the economy of society and of the citizens.

Capturers are people, companies, institutions, etc. who by use of power or under protection of power take from the market what they want without returning to the market anything wanted by other people.

This one-way distribution system contrasts the way the market normally works. Normally the market is the place where people exchange their products, goods and/or services, with other people’s goods and services, which is a two-way system of distribution of the results of production that satisfies both parties. Without both parties being satisfied no exchange will take place in the normal market’s two-way system.

Capturers do not care about other people’s satisfaction; they rely on their power or on the power that protects their interests and they just take from the market what they want without supplying wanted products or services in return.

While taxes will be used to provide to the citizens services not distributed via the market other Capturers - Criminals offending properties, Monopolists and Holders of valuable privileges to use advantages of nature and society - take without supplying anything in return

More about Monopolists and Holders of valuable ePrivileges (Click here)e

The reader's comments to the above article are very welcome. Please send a letter to:

International Union for Land Value Taxation and Free Trade,

212 Piccadilly, London W1J 9HG, United Kingdom,

or e-mail to [email-masked]

Some people in Hong Kong read this Webpage “Size of Rent” and mailed me a question to which I replied the following:

Dear friends,

You raise an important question:

“Why has Land Value Taxation never become a major source of government revenue in modern economics?”

Just a few facts before the answer:

Land Values are capitalised Rent of Land;

Rent of land is what people want to pay annually for use of land = Nature and advantages of Society.

Appropriation of Rent of land does not obstruct production and it has always been appropriated by people of might and influence.

People of might and influence are people such as Rulers, War lords, Law lords, Landlords in large scale, Money lenders, Tycoons of Industry and trade. They agree in democracy as long as it stabilizes the existing order, but disagree in changes that will deprive them of their possibility to appropriate and control of the Rent of land that forms the base of their strong position.

In the same way as Popes and the ecclesiastical society for centuries not only denied astronomers’ and physicists’ proofs that the ancient idea about the Universe was wrong but also persecuted them in terrible ways, we should not be surprised that other theories are denied when they are believed to undermine the position of power brokers. That is the reason why the idea of public collection of the Rent of land and use of it for the benefit of all citizens on an equal footing is opposed mercilessly by today’s mighty powers everywhere it gets a foothold.

Modern economic theories - called Neo-classical Economics - deny classical economists’ thesis and make them obscure by new but untrue theories preferred and paid for by wealthy patrons; and information media in countries, like Denmark, for decades refused to publish correct info about economic coherences again and again with the excuse that “it does not interest people in general”.

Nevertheless, since appropriation of the Rent of land does not obstruct production, why not accept the way the tycoons want it?

Because appropriated Rent of land concentrated with few people has devastating effects on other people’s private economies and on social economics:

It leaves the market with reduced quantities of goods and services for other citizens to demand at increased prices.

It deprives the Government of income it creates by use of its sovereign power to protect rights for titleholders to collect the rent, which makes it necessary for the Government to collect from producers the revenue it needs for administration of the society and provision of public services.

It causes a deadweight on production because the effect of taxes on producers and/or on the results of production is that demand and supply cannot meet at prices for optimal production; fewer consumers accept the higher prices including tax, and fewer producers accept the lower prices after tax, which means reduced production and reduced employment.

It wastes resources and possibilities.

It creates poverty among citizens who do not receive Economic Rent nor huge salaries or profits for supplying specialised services or goods to the Government or to wealthy receivers of Economic Rent.

It expands the gap between rich and poor which makes the society unstable with a class of very satisfied wealthy and lavish citizens, a middle class of satisfied and reasonably satisfied citizens, and a growing class of very unsatisfied, insecure and alienated citizens.

It  destroys self-confidence and self-respect of people who are deprived of their equal share of the values of nature and society, are denied free access to nature and advantages of society without compensation, and are referred to accept unfair, often unhealthy working conditions, including low wages.

In the longer term it causes our civilisation’s decline and falling back to barbarism as happened to the civilisation of Rome and to any other known ancient/archaic civilisations. The decline of civilisations and their falling back to barbarism was every time the result of concentrated power and wealth with few citizens leaving crowds of poor citizens unable to fend for themselves and dependent of charities and/or social security benefit.

Hong Kong is one of few places around the world that practises and benefits from public collection of rent of land - in the form of lease of land.

I find it very promising that China has learned from Hong Kong´s example and from Dr. Sun Yat Sen´s recommendations, and has recently proclaimed that it is for privatisation of trade and industry except regarding land and natural resources.

When the Rent of land is publicly collected and used for the benefit of all people nobody will take preference of it in advance of others and there will be no bad effects of Rent of land.

That policy will bring progress and prosperity to China - and subsequently to mankind all over the world.

However, be aware that privileges and monopolies collect excess profits that reduce the Rent of land, and be aware also that by collection of these excess profits privileges and monopolies perform the same problems that landowners do when they collect the rent of land and use it only for satisfaction of their own private demands.

With my best regards

Ole