As I read Pat Gunning's post (no doubt he will correct me), it seems to me that it
condenses to the idea that the only rental value that attaches to, say, a prime site in
Oxford Street, London, is the difference between what, say, a shopkeeper selling clothes
can make from her purchase of the site (or payment of rent to the owner) compared with
what the next best use might have yielded (say selling records instead). It is based on a
competitive opportunity cost concept.
  
The annual rent that the highest bidder pays for 100 square metres of space (net of the
cost of the bricks and mortar and fittings) on Oxford Street could be, say, �200,000.
Its capital value could be �4m. The next highest bidder may have been offering
�190,000 a year. The surplus (possibly Pat's concept of "unearned increment"?) is a mere
�10,000. The other �190,000 is esteemed as "entrepreneurial earnings".
  
On prime sites such as Oxford Street the land (or space, or location) value may well be at
least 90 percent of the whole value of the property inclusive of the building. (The latter
is a specific man-made improvement on that site; in the above example it would have an
annual value of 10% x �200,000, or �20,000). But on Pat's reasoning the entrepreneur,
by selling enough clothes to cover the cost of the land, and more beside (to make a return
on the other elements of cost) has added (contributed) all of that value. It is her
contribution to GDP. But the rent is a cost (yes, an opportunity cost) to the individual
and, after deducting other explicit and opportunity costs, her net income (net
entrepreneurial profit) is, say, �50,000 a year.
  
Meanwhile, back in Glockamorra, a similar 100 square metre clothes shop rents for
�10,000 a year, attracting fewer customers. Nevertheless, the shopkeeper makes enough to
cover those costs and earn satisfactory net entrepreneurial profits of, say, ...
�50,000.
  
As I read him, Pat implies that the Oxford Street entrepreneur has contributed enormously
more to GDP than has the lady in Glockamorra. Or maybe it's only the landlord who did the
contributing, if the lady in Oxford Street is only a tenant?
  
Contrast the Ricardian view: Oxford Street commands enormously more than Glockamorra (for
the same amount of human effort, entrepreneurial skill, and man-made capital costs)
because it is very "intra-marginal", whereas Glockamorra is near the margin. The
difference is due to the fixity and pure scarcity value of land located closer to natural
advantages and man-made amenities (social infrastructure paid for by other people). It is
pure surplus.
  
The opportunity cost of the Oxford Street site is very great, so its neo-classical and
Knightian rent is relatively trivial. But the labour cost of that particular site (as
empty space) is zero. So the difference between its labour cost and its market price is
classical Ricardian (or Marxian or Georgist) surplus (just like monopoly profit). Yes, the
labour cost of the surrounding amenities was very great, but the owner of the site did not
put in that labour or entrepreneurship. The rent that is paid and received is a pure
transfer payment. Think parking charges, or (by analogy only) the price of the better
theatre seats.
  
  
If those rents were the prime source of public revenues instead of taxes on our productive
labour and man-made capital, inter alia we could expect the following:
1. As taxes fall, there would be much greater incentive to work, save and be
entrepreneurial;
2. There would be less incentive to hold land purely for its expected appreciation, so the
supply of available land would increase, along with its fuller use;
3. The demand for land would rise because of greater activity and greater after-tax
income;
4. Land rentals would rise accordingly. This would absorb much, but not all, of the
increase in after-tax income, but still provide an elastic source of state revenue;
5. With a "tax" on annual land rental values (actually a fee for benefits received for
exclusive ground occupancy rights) the "capital value" of land (based on the expected
stream of future net rentals) would fall drastically, probably eliminating much of the
boom-bust house price (i.e., land price) cycle, and making it easier to be a home owner.
  
Essentially this debate boils down to whether we follow (i) neo-classical marginal
productivity theory (what we get is what we contribute to GDP, and this includes land
rental income), or instead (ii) the classical view that what is true of the individual
(land is a cost; payments reflect contributions to the enterprise) is not also true of the
whole. In the social viewpoint land rents are transfer payments from producers to owners;
and what the owners of labour, capital and land get is a matter of the relative degrees of
competition and mobility. Labour and capital are mobile and elastic in supply, so their
rewards are relatively competitive; land is fixed in supply and immobile, so it gets what
its market will bear, a monopoly price.
  
  
Return these community values to the community, and get labour and capital taxes off our
backs.
  
   
  
(And don't distract from this message by suggesting that just because we don't deny top
footballers their due (so-called quasi-rents), so too must we leave landowners with
whatever they can get from us.)
  
Roger Sandilands