GroundSwell, September-October 2005]
To consume most goods and services is to eat them up, burn them,
wear them out, see them break or rust out or crack or tumble down.
But how about land, does anyone think of that? Land as space is not
used up. To consume it is to preempt its service flow without
impairing its substance. To consume land is to occupy it for a
time-slot, which may be as brief as beating a red light or (rarely)
as long as the pyramids last. After us life goes on, on the land
once left to us, which we then leave to others. "Time-sharing"
was not invented by the vacation condo industry but is inherent in
the nature of land and life. How do macroeconomists and national
income accountants handle that? They dont. It is a great
gaping void in conventional theory and public accounting. To handle
it explicitly would destroy the theoretical postulate that
consumption, defined as spending on consumer goods,
One need not actually enjoy or occupy land to consume it. The
essence of consuming land is preempting the time-slot from others.
Thus, holding land without using it, or using it below capacity, is
a form of wasteful consumption. If you hired a brain surgeon at his
usual hourly rate to weed your garden and dust your sills,
economists would recognize it as wasteful consumption; but if you
hold onto a $5 million Malibu beachfront to visit twice a year, thats
Land is reusable. As there is never any new supply, the old has to
be and is recycled periodically, and will be in perpetuity, without
changing form or location. Melded briefly with fixed buildings, land
always survives them to go one more round of use. Even while melded
with capital land always is fit for another use, unlike the capital
on it. Land value in cities has been defined as "what is left
after a good fire," and arsonists have taken that quite
literally. The opportunity cost of capital is fleeting. Capital
loses most of it the moment it is committed to a specific form,
whose physical alternative use is often only as scrap. Land's "opportunity
cost" is real and viable at all times. The scrap value of
capital is often zero or negative (radioactive waste supplying an
Capital, once formed, soon withers away unless there is capital
recovery enough to return the original amount over economic life,
and the capital recovery is reinvested. Capital recovery is cash
flow less interest on the unrecovered balance, with the latter
always a prior charge.
Capital is kept in existence from age to age not by preservation
or permanence but by constant replacement; while land is the place
on which generations of capital come and go.
When we speak of land turnover it refers only to ownership
turnover, i.e. the percentage of the fixed supply that changes hands
each period. There is no real turnover in the sense of wearing-out
and replacement. And even the ownership turnover is very slow
compared with capital. Capital turns over constantly, in the normal
course of production and consumption.
Something like 3-4% of land parcels turn over annually. Larger,
high-valued holdings turn over more slowly, so perhaps one or two
percent of the land, measured by value, changes hands yearly. On the
other hand, the entire inventory of consumable goods changes hands,
normally several times a year, in the natural flow of production. A
large share of "durable" capital returns half its value
within four or five years. Ownership turnover is inherent in
As noted, to consume land economically is merely to preempt a
time-slot from others, regardless of what one does with it. The
unreaped harvests of idle land flow down the river and out the gates
of time like water wasting through a desert. Lost water may
sometimes be useful downstream; lost time never returns. To keep
others from using a time-slot is to consume it.
The value of preemption is the highest and best use that might
have been made of the land preempted. That is the economic cost. The
land is not responsible if the manager fails to realize its value at
optimal capacity. Neither are the persons who are excluded. Only the
preemptor is responsible, as a manager. This person deserves credit
for performing above par and blame for falling below.
A great deal of land in fact is not allocated to its highest and
best use. The shortfall of realized ground rent below potential
ground rent is properly a debit to the manager's account, not the
land's; and the party responsible for the manager is the holder of
Most economic theorizing has failed to bring out this point. The
tendency is to treat ground rent as a residual, a waste basket for
all the errors and dereliction of responsible economic actors. This
has resulted in greatly understating the value of land relative to
other factors of production. Institutional and social factors, too,
often obscure the opportunity cost of land.
Theorizing lags behind practice. In dividing value between land
and a building affixed to it the standard practice of appraisers,
and speculative buyers too, is the "building-residual method."
The land is appraised as though vacant; the building gets the
remaining value, if any. The building, once attached to a specific
site, loses the mobility of place and form that fluid capital
possesses and has no opportunity cost but scrap value, often
negative. Land, always lacking mobility of place, retains mobility
of reuse because of its versatility, permanence, and irreproduceable
What can it mean to "consume" land, when it does not get
used up? It can only mean to occupy or preempt a time-slot of space.
That has the most profound implications for the meaning of "consumption"
in economic thinking, and "consumer taxation" in fiscal
policy. Economists have neglected and papered over these matters
almost completely. Let us pursue the point.
How shall we measure land-consumption by owners, where no rent is
paid? Is it purely subjective? Does it vary with the owner's mood
and health? It is simpler than that, and fully practicable. The
measure is the market opportunity cost of land, e.g. the price times
the interest rate.
Holding an urban site has been likened to holding a reserved seat
at a play, ballgame, or concert. The seatholder properly helps pay
for the event, whether or not there to enjoy it. As a result, very
few paid customers fail to show up. Likewise, people who pay cash
rent for land seldom leave it vacant. Doubtless if people paid
regular cash taxes to hold land, they, too, would consume (preempt)
Proponents of "consumer taxation" almost universally
overlook this point. I am not aware of one who has proposed
including land-consumption in the tax base. Aaron and Galper,
propounding a "cash-flow tax," explicitly allow for
letting each succeeding owner expense land purchase, effectively
exempting land rents from taxation 100%. So do Hall and Rabushka in
their Bible on the flat tax, and so do most current
agitators for a national sales tax or VAT. So-called consumer taxes
actually imposed now and in the past bear heavily on the necessities
of median and poor families. We deride the salt tax of the French
ancien regime, and of pre-Ghandian India. We recognize them as
instruments of tyranny and class warfare, even as we tolerate modern
legislators who now impose comparable burdens on ourselves, and
economists who rationalize such taxes by belittling the necessities
Doing so, they compound the deception in the label "consumer
taxation." Much of what is taxed in the name of taxing
consumers is actually used for another kind of capital formation.
This is what the puritans of early Plymouth called Inward
Wealth, and what modern economists call human capital.
The same economists who say human beings are or contain capital, and
we need more of it, turn around and tell us to tax the formation and
maintenance of such capital, by calling it "consumption."
Coupling this with their proposed exemption of land-consumption we
have the ultimate victory and application of semantic cleansing.
Inconsistency, thy name is neo-classical economist.
Leading modern philosophers of fostering human capital,
like Gary Becker and Theodore Schultz, think of it as post-graduate
education, which happens to be their profession. Logically, though,
it should include undergraduate education, and secondary education
before that, primary before that, and why stop there? Parenting is
part of education. Before that comes conception; before that
(usually), marriage; before that, courtship; and so on. There is no
logical stopping point, back to Adam and Eve. That leads us to
realize that much, perhaps most of what sales-taxers stigmatize and
down-value as consumption is actually human capital
Bottom line? To tax consumption properly we should tax all land
held for housing above some reasonable minimum needed for health and
children; all land held for recreation; and all land held without
using it at all. And we should NOT tax much of what economists today
carelessly call consumption.