Present Value

I once heard a visiting professor tell an audience of economics and finance undergraduates that the concept of Present Value was probably the most important one they could master, both for their business lives and their personal finances.

Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent

Another objection to taxing land value, which some find compelling, is that when the owner bought the land, he already paid the present value of all future rents, so taxing the land would be a double payment. But many who bought their lands in the past have enjoyed gains, often large, in the real estate value. Moreover, this is only a transition problem; once the tax is in place, a new buyer’s tax is offset by a lower price for land and lower mortgage interest payments. Such an argument would prevent the liberation of slaves, since slave owners also pay the value of future labor when they buy a slave. ... read the whole document

Charles T. Root — Not a Single Tax! (1925)

let us lay down and briefly defend the proposition that —

Taxation as a means of meeting the proper expenses of government is oppressive, unjust, inexpedient and unnecessary.

This proposition will strike a good many readers as absurd, but all must at least recognize the timeliness of the topic and the importance of any contribution to the discussion of a subject which is agitating the whole civilized world, for the methods, subjects and amounts of taxation are among the pressing problems of every country.

The most obvious question which arises in the mind of anyone who reads for the first time the proposition above laid down is this:

"If taxation is unnecessary, what is to take its place? Government and its functions are increasingly expensive. They require a lot of money. Where is it to come from?" The answer may be placed in the form of a second proposition:

Every community, whatever its political name and extent — village, city, state or province or nation — has its own normal, unfailing income, growing with the growth of the community and always adequate to meet necessary governmental expenditure.

To explain: Every community has an indefeasible original right to the land on which it exists, and to all the natural, unmodified properties and advantages of that particular area of the earth's surface. To this land in its natural state, undrained, unfenced, unfertilized, unplanted and unoccupied, including its waters, its contents and its location, every individual in the community (which may consist of any political unit selected) has an equal right, while all the individuals together have a joint right to the value for use which society has conferred upon these natural advantages.

This value for use is known as "Land Value," or by the not particularly descriptive but generally adopted name of "Economic Rent."

Briefly defined the land value or economic rent of any piece of ground is the largest annual amount voluntarily offered for the exclusive use of that ground, or of an equivalent parcel, independent of improvements thereon. Every holder or user of land pays economic rent, but he now pays most of it to the wrong party. The aggregate economic rent of the territory occupied by any political unit is, as has been stated above, always sufficient, usually more than sufficient, for the legitimate expenses of the government of that unit. As also stated above, the economic rent belongs to the community, and not to individual landowners.

On the other hand, the result of every utilization or enhancement of the natural advantages of land (such as farm profits, the rent and selling value of buildings and other improvements), when accomplished by an individual, belongs wholly to that individual, and should never, and need never, be taken from him by taxation.

One must be careful not to confuse land-value with the price of land. The price of land is the sum demanded for the transference from one individual to another of the privilege to collect and retain land-value and thus to divert public earnings to private pockets. ... read the whole article

Bill Batt: Comment on Parts of the NYS Legislative Tax Study Commission's 1985 study “Who Pays New York Taxes?”

The problem as I see it is the mixing of two separate dimensions of economic value – what are frequently referred to as stock and flow. Stock value is a variable that has no time dimension, e.g., the stock of capital, or what in real estate is typically understood as the market price of a parcel.19 Flow, by contrast, is the quantity of an economic variable measured over a period of time. So the flow of an investment may be measured as the amount of investment expenditure or the amount of income return in a given time, such as in a yearly period.20 We can easily understand stock when looking at the value of a house or an office building just as we can for a car or a computer, as it represents the investment of labor and capital, and can be priced based on market supply and demand, depreciation, and replacement value much as with any other manufactured good.

The other component of a real property parcel is the land value, which reflects a market price based on very different criteria. Despite the apparent reality that land is visible and tangible, land prices reflect the value of location more than they do the material content they contain. This is easy to understand when one reflects that if some earth is removed from a site and brought to another place, the prices of each site is largely unaffected.21 Location value has duration, and the value of this flow of rights for exclusive use of a site requires a flow price rather than a stock price. This flow is really what classical economists refer to as ground rent or economic rent.22 Also known as “land rent,” it is defined as “a payment to a factor beyond what is needed to put that factor into use; [it is a price for use] beyond what is needed to maintain a market for land.”23 Land has a selling price because we have come to regard land sites as objects, as commodities to be traded,24 and they are understood to have a static price, as a stock rather than as a flow. That stock price really needs to be understood instead as the “present value” of the flow of ground rent minus taxes. “Present value” is an economic term that refers to “the worth of a future stream of returns or costs in terms of their value now.”25 Consideration in this way brings to the fore other concerns and factors.

The market price of a location depends not only on ground rent and taxes, effectively its present value, but also upon the “discount rate,” or interest rate, that prevails in the market used to calculate its returns and costs. When interest rates go up, the market prices of sites fall, just as for any other economic encumbrances placed on locational sites. ... read the whole commentary