Land Rent and Selling Price

In a free market, products exchange for a value equal to their cost of reproduction. Assets which cannot be reproduced, but yield an income (like a license to sell alcoholic beverages) are valued through a process called capitalization. Capital, which is a product, and has a value equal to its cost of reproduction, yields income called interest.

Parcels of land with the potential to yield an income fit this category. So, the selling price of a parcel of land is based on a comparison between the potential income from that land and the amount of capital that would be needed to yield a similar income. This process, called "capitalization," is standard in real estate circles.

However, in many cases the income from a parcel of land increases faster than the profits from the ownership of capital. In that case, if the owner of a parcel of land agreed to sell it for a price based on its current income, she would forego the increased profits which would have been retained by not selling.

There is some confusion - to say the least - about the role of land in our economy. If the house came to be sold for $150,000 four or five years from now, would the land still be free?

Although land is usually offered for sale at an advertised price, it is generally sold for less to the highest bidder. And it is rarely sold for a price based on its potential to yield an income in the present. The highest bidder is the person or entity with the assets, and the greatest expectation in regard to the potential profits of the site in the future.

There is no way to predict with certainty what the potential profits of a site will be in the future, and therefore no way to calculate from any existing facts, the most anyone will pay for a parcel of land in the present.

When the selling price of land in general is bid up so high that the owners of unused land cannot resist the temptation not to sell, then businesses find it more profitable to down-size, rather than expand their productions. As the unemployed workers buy fewer products, the reduced demand reverberates throughout the economy and a recession/depression is under way.

Land Value Taxation and Land Prices

If the entire rent of land were taken in taxation, there would be no rental income, hence nothing to capitalize, and no selling price. Land that yielded no income would not be worth owning - not for its own sake, anyway. It would still be worth owning for the opportunity it provides to producers, who would still be willing to pay for its use. Therefore, a 100% tax on land rent would destroy the selling price of land; it would also destroy any profit that could be had from land speculation. But land would still have a rental value, as long as people were willing to pay for its use.

Henry George advocated collecting something less than 100% of the rent of land. He recommended that a small percentage, say 5%, should be left to the landowner, which would in turn be capitalized into a selling price (albeit a much smaller one). The advantage of this would be to ensure that free-market forces set the value of land, and to keep government out of the business of making land-distribution decisions.