| Subject: | RE: [socialcredit] Questions for Ed Dodson | | Date: | Monday, August 15, 2005 13:57:27 (-0400) | | From: | Ed Dodson <ejdodson @.......net>
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Ed Dodson responding...
Bill Ryan wrote:
[Dodson] ...location rent is a "first cost" incurred.
[Ryan} Ed, we're trying to pin down first principles. You've
strayed from the stipulations to my questions in a
rambling response that fails to address the questions.
Ed here: OK. I'll do my best. What I tried to offer was an explanation that
used your specific example.
[Ryan] In this case there is no "first cost." The landowner
doesn't have to pay rent to acquire the two parcels;
he already owns the parcels. He didn't pay rent when
he acquired the parcels because he inherited them from
a remote ancestor who acquired them by merely filing a
deed at the land grant office, after meeting certain
qualifications. The further stipulation is that no
rent has been collected from the parcels since the
beginning of time prior to the erection of the
McDonald's. They had always been vacant land.
Ed here:
This instance uses the frontier as the "margin of production" (defined as
locations on which production incurs no cost for access to land -- i.e.,
yields no rent under market conditions). The first occupant arrived when
land in that area of similar potential productivity was freely available to
all. As more people arrive, land of equal potential productivity eventually
is fully controlled (although not all land controlled is likely to be
brought into production to its highest and best use, and some will be
withheld from production with the intent on leasing it out to others or
selling it outright. IF the owner is able to lease land to others who then
cultivate the land or otherwise engage in production of goods or offer
services, the lease payment is the location rental value as determined by
market forces. To the extent this location rent is untaxed, the net location
rent will be capitalized into a selling price for land. If, for example,
investors are expecting a rate of return on investments of 10% annually, and
the location rental value of a parcel is $1,000, the approximate selling
price will be $10,000 (subject to a long list of externalities that might
come into play, but, particularly, the seller's sense of future rates of
increase in location rent).
The fact that your first owner did not pay for the land indicates that at
the time the land had no location rental value. At some point in time, as a
community grew to include this parcel, its location would begin to yield
rent because the location was no longer at the margin of production. Others
would be willing to pay for access to the location. Thus, the owner (who has
inherited the deed to the land) is experiencing imputed rent, meaning that
the location, if offered for lease, would yield rent. This location rental
value arises because of aggregate community investment, both public and
private, and not because of what any individual deed holder does with the
land held.
Henry George defines rent as follows: "... that part of the produce which
accrues to the owners of land or other natural capabilities by virtue of
their ownership."
In short, rent is a claim on total production that occurs as locations are
recognized to have advantages over other locations. These advantages may be
natural (e.g., fertility, topography, weather, access to water) or arise as
people create communities. Location near the center of a city's business
district will (all other things being equal) come to have a greater exchange
value than locations farther away from where the highest level of commerce
occurs.
Getting back to your hypothetical situation, the parcel of land in the city
that has been vacant for decades may or may not have a location rental
value. Most likely it has had an increasing value, but because the owner had
no interest in making an investment in developing the site and was subject
to very low carrying costs in the form of an annual tax obligation, the
owner was under to pressure to act -- to develop the site or sell it to
someone who would. When McDonalds came along, they may have offered the
owner a price that reflected the owner's expectations of future increases in
land values in the neighborhood; or, McDonalds entered into a leasehold
arrangement that allowed the owner to capture the current location rental
value with the prospect of charging more each year as values continued to
climb. At some point, McDonalds would have to make a decision to absorb the
higher land lease costs or try to find another location.
[Ryan] Is it not correct in Georgist terms that the
McDonald's a thousand miles from anywhere will collect
no rent in the foreseeable future inasmuch as it will
presumably have no sales; whereas, the McDonald's
surrounded by hundreds of homes will collect rent
because it will in fact have sales?
Ed here:
If McDonalds establishes a restaurant at the margin of production, but the
margin of production has extended out where no one is willing to pay
anything for access, then McDonalds will have access to that land rent free.
They would not receive location rent (either imputed or actual) becuase the
location yields no rent in the market.
If McDonalds acquires a location in a bustling city, the location will
likely have a high location rental value. The owner from whom McDonalds
purchases the deed to the site will be the big winner (provided the
community, as most communities have done to date, failed to collect the
rental value via taxation. Under typical conditions today, McDonalds pays a
huge price for control over the land but from that point on may be a net
beneficiary or victim of all the combined taxes levied on the land, on the
building, on its gross revenue, on its equipment and on its fixtures.
McDonalds in the bustling city will likely experience an imputed net
location rent, but still may not be profitable if its gross revenue
forecasts fall short, or its other costs of doing business rise.
Let me add one other possible scenario. McDonalds acquires from the
long-time landowner a city block, constructs a 50-story office building on
the site and puts in a large McDonalds restaurant on the street level, and
leases out space to other businesses. In this case, McDonalds will collect
location rent from the other businesses who lease space in the building.
Some portion of the tenants' total leasing fee is a return on capital goods
(i.e., on the building), and some portion is a return to the location.
I hope this provides the clarification you were asking for.
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