Pat Gunning writes of an entrepreneur who succeeds in buying a plot of  
ground for $101, marginally more than it is worth to its current owner  
($100), because he expects to use it for something that will yield him  
$200. If a year later he sells it to another person (another  
entrepreneur, in his example, with superior knowledge of the land's  
worth) for $201, he says he has made an entrepreneurial profit of $99  
(due to his superior appraisal) and a mere $1 due to his land ownership.  
  
There are two possibilities here:  
(i) The first 'entrepreneur' bought the land for $101 only because he  
expected an appreciation in its value, with no intention of doing  
anything with it. It is held idle purely as a speculative venture. If a  
year later he succeeds in selling it on at a profit this is almost  
entirely ($99) a reward for "superior appraisal". Question for Pat: Has  
GDP risen by $99 this year?  
  
(ii) This person instead bought it in order to put it to a superior use.  
He spends $99 in clearing and building on the land. A year later someone  
offers him $201 for this property with $99 of improvements on it.  
Question: Has GDP risen by $99 this year?  
  
Pat then asks me for a concrete proposal as to how to tax windfall  
gains.  
  
First, I would make a sharp distinction between (i) and (ii). As I said  
in a previous post, valuation officers and estate agents distinguish  
location value and building values all the time; and so "quien puede mas  
puede menos". In case (i) a windfall gains tax would be imposed on the  
appreciation of the land value; in case (ii) there is no windfall.  
  
But my preference would not be for a windfall tax at point of sale (this  
would discourage sales in hope the tax would later be repealed). Rather,  
I would impose an annual ground rent charge. (It would be wrong, though  
conventional, to call it a 'tax' since a 'tax' is unrelated to benefits;  
rather it would be a 'fee' or 'charge', like a parking charge, for the  
specific benefits associated with exclusive holding of a specific site.)  
  
There is a fallacy of composition in assuming that the 'entrepreneur' in  
Pat's example is making a contribution to the nation's annual product  
when he succeeds in making money for himself from a speculative holding  
of land in hopes of its appreciation. What is true for the individual  
(he gets an income for the 'marginal product' of his land) is not true  
for society. If, collectively, we speculate on a rise in the price of  
land and hold it idle, there may be, _for a while_, a self-fulfilling  
prophesy as the supply of land for actual development falls, as in Japan  
in the late 1980s.  
  
Where there is genuine entrepreneurial activity (development) Henry  
George argued that the income should be left in the hands of the  
entrepreneur and not be taxed (taxation as theft).  
  
In case (ii) above, a Georgist government would "tax" the _annual rental  
value_ of the site (not the capital value; this would fall as the rental  
value is "taxed"), say $10, and would simultaneously un-tax the genuine  
entrepreneurial profits by a similar sum. The land "tax" (on unearned  
income) has no adverse incentive effects; the un-taxing of earned income  
would release the energies of labour and genuine entrepreneurship.   
  
Roger Sandilands