I found this comment in The Australian by Adam Creighton:
It’s extraordinary how some of the finer distinctions of yesteryear have seeped almost entirely out of modern economic theory, which might explain some of the broader public’s frustration. In the 19th century, liberal economist John Stuart Mill defined “unearned income” as that arising “without exertion or sacrifice”, in effect what we would today call capital gains. He thought such income should be taxed more, not less.
Indeed. Quite extraordinary.
In England the land-tax has not varied since the early part of the last century. The last act of the legislature in relation to its amount, was to diminish it; and though the subsequent increase in the rental of the country has been immense, not only from agriculture, but from the growth of towns and the increase of buildings, the ascendancy of landholders in the legislature has prevented any tax from being imposed, as it so justly might, upon the very large portion of this increase which was unearned, and, as it were, accidental. For the expectations thus raised, it appears to me that an amply sufficient allowance is made, if the whole increase of income which has accrued during this long period from a mere natural law, without exertion or sacrifice, is held sacred from any peculiar taxation. From the present date, or any subsequent time at which the legislature may think fit to assert the principle, I see no objection to declaring that the future increment of rent should be liable to special taxation; in doing which all injustice to the landlords would be obviated, if the present market-price of their land were secured to them; since that includes the present value of all future expectations.
Here Mill is talking about so-called rent – the classical economic device to explain away anomalies that arose from employing the labour theory of value as a theory of value. This is also the logic that underpinned the ill-fated mining tax of 2010.
Now this is actually the case with rent. The ordinary progress of a society which increases in wealth, is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches? In what would they have been wronged if society had, from the beginning, reserved the right of taxing the spontaneous increase of rent, to the highest amount required by financial exigencies?
Unfortunately for JS Mill, he was quite wrong on this point. The fact is that simply growing richer – as it were in their sleep, without working, risking, or economizing – is simply not possible. In his magnificent A farewell to alms economic historian Gregory Clarke includes this graph showing that the national share of rent in the UK had been falling for 100 years before Mill published those words.
The notion of unearned income is also a classical economic fallacy derived from the labour theory of value.
The overall point is that Adam Creighton is undervaluing the importance of secondary markets – it is not the case that they add no value and are purely speculative.