Obfuscating economic rent

Gavin R. Putland writes in the Australian Financial Review (Letters, Jan.25, 2011):

Confusing economic rent

Sinclair Davidson's “Myth of economic rent tax” (Opinion, January 24) offers his usual neoclassical distraction from the economic rent of natural resources: “But nature doesn't surrender its bounties free. Value is created through the application of capital, labour and entrepreneurial insight.”

The reader is not meant to notice that the party who gets the “value” is not necessarily the one adding the “capital, labour” etc. For example, if land is let to the highest bidder, who supplies everything else, the landlord gets everything in excess of the necessary return to the “capital, labour and entrepreneurial insight” of the second-highest bidder. If, on the contrary, the land is developed and used by the owner, the excess (i.e. the economic rent) accrues to the owner as the owner, not as the supplier of “capital, labour” etc.

The use of the word “created” instead of “added” is a sleight of hand which implicitly and wrongly conflates the economic rent with the necessary returns to human inputs including labour, capital and entrepreneurship. The observation that different natural assets yield different returns to the same human inputs is proof that there is a source of value over and above those inputs.

Consequently, a tax on economic rent is not, as Davidson says, a tax on “entrepreneurship and innovation”, but a tax on the surplus over the necessary returns to human inputs, including entrepreneurship and innovation.

As for the alleged difficulty of defining economic rent as a tax base, I defy any reader to give a succinct definition of “taxable income”.

Gavin R Putland
Land Values Research Group
Melbourne Vic

Cf. my earlier post, “Pure poison on land tax”.

The irony is that land-value capture is a form of public capture of economic rent. As my front-page article explains, land owners are stupid to oppose land-value capture, because without land-value capture they miss out on windfall gains due to infrastructure. Those gains, unlike gains due to worsening scarcity, reflect improving amenity and rising capacity to pay and are therefore compatible with housing affordability and general prosperity.

P.S.: Davidson, to his credit, has linked back to this post.