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
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