Jim Frederiksen's Reply to Milton Friedman's "Good Wealth, Bad Wealth"

James W. Frederiksen
_________ Avenue
Park Ridge, IL 60068
November 17, 1981

Dr. Milton Friedman
Hoover Institute
Stanford University
Stanford, CA 94305

Dear Dr. Friedman:

Thank you very much for your excellent article "Good Wealth, Bad Wealth," Newsweek, August 10, 1981, p.58, a copy of which is enclosed. If Henry George could have read it, he might have been inspired to compose the following variation on your example of the factory owner and the taxi cab medallion owner:

Mr. Smith uses savings of $60,000 to build a factory producing widgets much desired by consumers. Mr. Jones uses savings of $60,000 to buy the title to a commercially zoned urban site, whose location is much desired by consumers.

Both Smith and Jones have created private wealth, embodied in a factory in the one case, in the site title in the other. Both use their private wealth to serve the public, as long as Jones puts his site to productive use. From a private point of view, their cases are indistinguishable and equally deserving of commendation.

From the public point of view the two cases are radically different. Smith's wealth adds to the total supply of physical capital available to serve the public; it adds to the productive capacity of the community. Jones' does not. It simply transfers wealth from Jones to whoever owned the title before. Moreover, the existence of such a category of wealth a - share, as it were, in the governmentally sanctioned privilege of private individuals to profit from community created site values - harms the community as a whole.

The title has market value only because Jones either can (1) charge a fee to persons rendering services on the site or (2) hold the site out of use for speculative gain. If Jones allows services to be rendered, the fee he can charge is the difference between the value of the services rendered on his site and the value of the same services rendered on the least productive site available.

Now suppose the government were to raise commercial site taxes high enough so that site owners could not acquire appreciable income from collecting rental fees or from holding their sites out of use. Suppose also that simultaneously the government were to lower or eliminate taxes on improvements and on services rendered on those sites. Under these tax laws, owners of vacant or under-utilized sites would be forced to utilize the sites more productively or to sell them to persons who would. The community as a whole would benefit (1) from the increased production of wealth on heretofore underutilized sites, and (2) from the revenue generated by the site tax. A site title would have market value only to persons wanting to produce - and capable of producing - goods and services whose value exceeded the value of the site tax.

Since the title would have no market value to persons seeking only to collect rent or to speculate, the effect on Jones of these tax laws would be identical to the effect on Smith of government expropriation of his factory without compensation something specifically prohibited by the Fifth Amendment to the Constitution. ("Nor shall private property be taken for public use without just compensation"). It is entirely understandable that Jones would oppose the one measure with the same righteous wrath with which Smith would oppose the other.

Though privately identical, the two actions would have wholly different effects on the public interest: the site value tax would eliminate "artificial" wealth that currently is sanctioned by the government and that harms the public; the expropriation would confiscate physical wealth that benefits the public....

Henry George might have gone on to point out that the government can create a "shortage" of land by allowing commercial site owners to speculate, just as it can create a "shortage" of taxi cab services by limiting the number of medallions issued.

For many years you have rightly attacked government policies which infringe on economic freedom. Allowing site owners to profit from community created site values not only infringes on economic freedom, but also may be the most salient example of how government "...can create artificial riches - and can harm the community as a whole." I would like to ask, therefore, whether you think site value taxation would help reduce or eliminate such "artificial riches," while stimulating improvement investment and generating tax revenue at the same time? Do you think more professional economists and legislators around the country should be conducting studies on the effects of site value taxation? Should graduate students be delving into this problem?

That site value taxation can, indeed, spur improvement investment is strongly suggested by the data presented by Michael J. McManus in his article "High Land Tax Gives Pittsburgh Big Boost." A copy of his article is enclosed. As Mr. McManus points out, the value of issued construction permits increased threefold the year after Pittsburgh increased the site value tax rate to five tines the building tax rate. Increases in the number and value of construction permits also have occured in Australian municipalities which have adopted site value taxation. However, the question of how much revenue site value taxation could generate from sites currently being utilized seems not to have been addressed seriously by most professional economists, the news media, or the government. For example, to my knowledge, there has not been published, for any major American city, a study detailing how much money the owners of commercial sites pocket annually for granting permission for these sites to be used. Were this data available, a city government could determine how much "artificial wealth" it could tax away from site owners, without altering what persons producing on those sites already are paying for permission to use them.

Thank you very much for your consideration of these questions. I look forward to hearing from you.

Sincerely,
James W. Frederiksen

Jim Frederiksen adds:

Unfortunately I do not have the comments Dr. Friedman penned in red ink in the letter's margins when he returned my letter.  Among those comments were his assertions that (1) market renting of land encourages its best use, (2) most Georgists do not understand that human talent - e. g. Frank Sinatra's vocal talent and Muhammed Ali's boxing skills - is as rare as prime sites, and (3) the analogy between Jones the taxicab medallion owner and Jones the site owner is weak because "there are no negative externalities" in the case of Jones the site owner. None of those comments addresses whether a site-only real property tax would be better than the current real property tax.  However, during an interview conducted in ~2004, Dr. Friedman asserted that the least bad tax was the tax on the unimproved value of sites advocated by Henry George many years ago.  When asked why, he responded that sites are not producible.