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