SLRG – Focussing on Equality, Shared Prosperity and a Fair Society

Rent is half of GDP, not 5%

By Roger Sandilands, Emeritus Professor of Economics, Strathclyde.

How can the claim be justified that Rent, the product of society and nature, is about half of GDP, when the text books put it at about 5%?

The national income accountants (who are accountants rather than what we would define as economists) look only at the surface phenomena. They look at income and basically allocate it between only two very broad categories: wages and ‘profits’ (or ‘operating surplus’).

I gave some figures for 2011 in my 2015 SLRG conference paper, The Hidden Potential of Rents. I reproduce the Appendix below showing basic figures for 2011.

Rent is camouflaged

There you see that there is no explicit mention of ‘rent’. It is bundled up in an aggregate of gross operating profits, as also defined in the Appendix. “Rental income” is any money paid for buildings, including land. No separate figures are given for land rent except where rent is paid for bare land and this is a very small fraction of all ‘rental income’.

We know that much of what is income from ownership of buildings is actually land rent

Accountancy approach problematic

But the more important problem with this accountancy approach to the distribution of income is that it takes no account of the way that the taxation of earned incomes (including income from man-made capital – buildings, machinery, equipment etc) ultimately falls on (squeezes) the rents that can be charged on land qua land. This again is the ATCOR principle: All Taxes Come Out of Rent.

Rent is half the national income

Once this is recognised and accepted then you can indeed justify the claim that rent is about half of national income. But otherwise people will scoff and refer you to the textbooks that state that rent in the modern urbanised economy is only about 5% or less of GDP, and hence totally insufficient to finance a modern state’s public spending (about 40% of GDP).

Remember that our aim is to replace taxes on earned incomes and trade. As those taxes fall, so the annual value of unearned land and natural resource rents increases. This large underlying annual ground rent (AGR/LVT) thus becomes transparent and available to finance the modern state. And in the process would breathe greater life, health and fairness into our sclerotic economy and society.

Appendix (extracted from The Hidden Potential of Rents)

Table 8.2 of the UK National Income Accounts gives GDP in 2011 at market prices (£1,537bn) by category of income and by its percentage composition, thus:

Total gross operating surplus: £436bn (28.4%)   

“Mixed” incomes (of the self-employed): £ 85bn (5.5%)

Employee compensation £820bn (53.4%)

Taxes less subsidies on products and imports: £190bn (12.5%)

Gross operating surplus is gross value added (GVA) minus labour costs paid by producers. It is the sum of (i) gross trading profits and (ii) “income earned through the ownership of buildings (rental income).” But separate figures are not easy to find for (i) and (ii); and nor is “rental income” calculated separately for land and buildings.

The opportunity for shared prosperity to be greatly boosted across Scotland is detailed in The Hidden Potential of Rents. Once the proportion of the national income composed of rent is understood, the question must be asked, who gets it?