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preference would not be for a windfall tax at point of sale (this would discourage sales in hope the tax would later be repealed).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