Fred Foldvary wrote:
>
> Henry George advocated taxing only the economic rent
> of land.
>
> By definition, economic rent is the income beyond that
> which puts the factor to its most productive use.
> Therefore, if entrepreneurs anticipate a tax on the
> economic rent of oil, it will not diminish the
> incentive to search, as their economic profit will
> still be above normal opportunities.


Fred, his is an old discussion between us. So let me try again. Your 
statements are true by definition. They are also meaningful so long as 
the term "productive" has an objective meaning. But, of course, it does 
not. What is and what is not productive in a market economy is 
determined by entrepreneurs.

The link between natural events and the satisfaction of human wants ? 
productivity as reflected in the marginal revenue product -- is not 
magically established or calculable by a tax authority. In a market 
economy it is discovered by and made known by entrepreneurs to others. 
The others, in discovering the announcements of the first entrepreneurs, 
are also entrepreneurs.

Your examples can be used to illustrate this. You assume that the sports 
star has natural talent, like the natural oil in the desert (presumably 
sitting on top of the sand). Okay, I?ll accept this assumption, although 
it seems to defy realism.

Given that these things are just there, the prices of them are not ?just 
there.? Someone must have linked those natural events to the 
satisfaction of wants and then to have made bids for the things. In 
other words, someone must have set the prices. Otherwise, the things 
would not have market value and would not be taxable under the Georgian 
scheme. If you tax the price (i.e., the income), you reduce the 
incentive for entrepreneurs to discover the market value and to attach 
prices.

Both the owner of natural talent and the owner of desert land that has 
oil would have no rent if no one linked these discovered things to the 
satisfaction of wants and arranged for a bid to be made for them. The 
two owners are lucky if their previously unappraised naturally-owned 
things are recognized by others as worth bidding for. A tax can be 
imposed on wealth acquired luckily without affecting incentive to 
produce, although it is not clear that this is what George had in mind. 
But if a tax affects the entrepreneur?s anticipated profit from 
discovering, announcing, and bidding a price, it reduces the incentives 
to discover the market value of the things and to bid for them. To the 
extent that the tax is a percentage of the price, it reduces the 
incentive to discover and bid for them by a percent, although there is 
no reason to assume that the percent is proportional.

What is true for the original prices also applies to price increases. An 
increase in the price of real estate is a bid that is made today that is 
higher than a bid that was made yesterday. Let us take the case of a 
real estate agent who matches buyers and sellers. The agent?s profit 
depends on the spread between the buying and selling prices in the sense 
that if a low spread means that the costs of finding profitable deals 
between buyer and seller will more often exceed his commission. If the 
anticipated spread was too low, there would be no real estate agents. A 
pre-announced tax on a home seller?s capital gain amounts to a reduction 
of the spread. This, in turn, reduces the amount of intermediation in 
the market and, therefore, the amount of exchange. It causes homes to be 
less efficiently allocated than otherwise. It also has an effect on the 
production of homes.

It is true that a capital gains tax on sites, to use David's term with 
approval, does not have an effect on the production of sites, although 
it is likely to have an effect on the number of sites that are regarded 
as worth using. But it still has an effect on their distribution as 
among alternative uses. Even the market value of a site depends on the 
entrepreneur discovery of its most profitable use -- its "productivity." 
If the capital gain is taxed, it reduces the incentive to discover and, 
therefore, the efficiency of site allocation.

Pat Gunning