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According to David Ricardo's Law of Rent, a tax on land cannot be passed on to renters, because landlords are locational monopolists who are already charging as

by nwah1 12y ago

According to David Ricardo's Law of Rent, a tax on land cannot be passed on to renters, because landlords are locational monopolists who are already charging as much as the market will bear. "A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground." - Adam Smith, Wealth of Nations "A tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers. The landlord could not raise his rent, because he would leave unaltered the difference between the produce obtained from the least productive land in cultivation, and that obtained from land of every quality." - David Ricardo, On the Principles of Political Economy and Taxation

icebraining 12y ago
David Ricardo didn't live to see cars and two hour commutes.
- nwah1 12y ago
  Are these not factored into what the market will bear? Do areas with shorter commutes have different land values than areas with longer commutes?
  - dragonwriter 12y ago
    They are factored into what the market will bear the same way that they are in any market, whether it is monopolized or competitive. But if there were a monopolized market, changes in price differentials between different areas wouldn't result in changes in patterns of where people choose to rent, but empirically we do see price changes driving decisions as to where people live, including renters. There are constraints, and the market for housing isn't perfectly fluid, but its simply not the case that real property rental -- whether for residential or commercial/industrial uses -- shows the behavior of a market where land owners have monopoly/market/pricing power. This may well have been different in late 18th to early 19th Century Britain when Ricardo and Smith were writing; availability of better means of transport for people and goods (particularly perishables) means that while location is important to the value of land, there's a wider area over which land can be substituted for other land for the same use, so any particular owner is less able to exercise market power, because price changes can be (and are) met with substitution.
    - nwah1 12y ago
      But the places that you are substituting for, assuming the landlords there are self-interested, would also wish to charge the full rental value for their land. The rental value they can charge is determined by the general level of income that can be had at that location compared to the best available rent-free location. Since we don't really have much rent-free locations, land rents can go very very high. Even in the regions people are commuting from. Why do you think rents in Oakland are so high, despite the commuting required to get to San Francisco?
      - dragonwriter 12y ago
        > But the places that you are substituting for, assuming the landlords there are self-interested, would also wish to charge the full rental value for their land. Of course they do. But land doesn't have an inherent full rental value, it has a value for particular uses. If land in place A that is used for use X becomes more expensive because the landlord is trying to rent it for more than the minimum price to meet his economic costs with no economic profit, land in place B whose highest-value use was the less-valuable use Y (given that land A was already being used for X, driving the marginal value of additional X down below the marginal value of additional Y), might become viable for X at a price greater than it was already able to charge for use Y, but lower than A was trying to charge. This potential for substitution is what distinguishes a competitive market from a monopolistic one. Now, substitutability of land is sharply limited when transport costs are high relative to the value of the things provided by the uses of the land, which was true to a greater extent when Ricardo and Smith were writing than it is today (and, given geography, is -- even with similar technology -- often going to be true more on average in Britain than in the US.) In land rents as in most other markets, taxes on the supplier (the owner offering the land for rent) -- like other costs -- are in part passed on to the consumer, and in part born by the supplier, reducing the quantity supplied at any given price and increasing, all other things being equal, the market clearing price. Land rent is, in practice, not fully monopolized so that taxes on it only reduce monopoly rents (and even if it was fully monopolized, this would only be the case if the taxes were less than the premium taken as monopoly rents for the property where the least premium was able to be charged.)

by nwah1 12y ago

icebraining 12y ago

David Ricardo didn't live to see cars and two hour commutes.

nwah1 12y ago
Are these not factored into what the market will bear? Do areas with shorter commutes have different land values than areas with longer commutes?
- dragonwriter 12y ago
  They are factored into what the market will bear the same way that they are in any market, whether it is monopolized or competitive. But if there were a monopolized market, changes in price differentials between different areas wouldn't result in changes in patterns of where people choose to rent, but empirically we do see price changes driving decisions as to where people live, including renters. There are constraints, and the market for housing isn't perfectly fluid, but its simply not the case that real property rental -- whether for residential or commercial/industrial uses -- shows the behavior of a market where land owners have monopoly/market/pricing power. This may well have been different in late 18th to early 19th Century Britain when Ricardo and Smith were writing; availability of better means of transport for people and goods (particularly perishables) means that while location is important to the value of land, there's a wider area over which land can be substituted for other land for the same use, so any particular owner is less able to exercise market power, because price changes can be (and are) met with substitution.
  - nwah1 12y ago
    But the places that you are substituting for, assuming the landlords there are self-interested, would also wish to charge the full rental value for their land. The rental value they can charge is determined by the general level of income that can be had at that location compared to the best available rent-free location. Since we don't really have much rent-free locations, land rents can go very very high. Even in the regions people are commuting from. Why do you think rents in Oakland are so high, despite the commuting required to get to San Francisco?
    - dragonwriter 12y ago
      > But the places that you are substituting for, assuming the landlords there are self-interested, would also wish to charge the full rental value for their land. Of course they do. But land doesn't have an inherent full rental value, it has a value for particular uses. If land in place A that is used for use X becomes more expensive because the landlord is trying to rent it for more than the minimum price to meet his economic costs with no economic profit, land in place B whose highest-value use was the less-valuable use Y (given that land A was already being used for X, driving the marginal value of additional X down below the marginal value of additional Y), might become viable for X at a price greater than it was already able to charge for use Y, but lower than A was trying to charge. This potential for substitution is what distinguishes a competitive market from a monopolistic one. Now, substitutability of land is sharply limited when transport costs are high relative to the value of the things provided by the uses of the land, which was true to a greater extent when Ricardo and Smith were writing than it is today (and, given geography, is -- even with similar technology -- often going to be true more on average in Britain than in the US.) In land rents as in most other markets, taxes on the supplier (the owner offering the land for rent) -- like other costs -- are in part passed on to the consumer, and in part born by the supplier, reducing the quantity supplied at any given price and increasing, all other things being equal, the market clearing price. Land rent is, in practice, not fully monopolized so that taxes on it only reduce monopoly rents (and even if it was fully monopolized, this would only be the case if the taxes were less than the premium taken as monopoly rents for the property where the least premium was able to be charged.)