‘Buy land, they’re not making any more.’
For centuries, there has existed a solution to much that is inefficient, unfair and regressive about modern taxation, yet such centuries have come and gone and we are no closer to realising this ‘holy grail’ of economic theory. Though there are global examples of the land value tax (LVT), fitfully realised in countries like Denmark, Russia and Taiwan, it still lacks widespread adoption, for the forces arrayed against this most sensible of solutions are great.
Specifically, an LVT is one paid solely by the owner and levied on the underlying value of land, independent of whatever is built on top. It is a progressive (if you own less land you pay less), totally nondistortionary (the supply of land is fixed, therefore it cannot be reduced and economic activity is not suppressed) tax that rewards public and private investment (local infrastructure development is accurately captured in land-value increases), that shifts taxation from earned income onto unearned wealth (LVT would make owning vast tracts of land prohibitively expensive, triggering such landowners to sell, which raises its productivity), and that is almost impossible to evade (you can’t hide land).
There are few, if any, practical problems to this that are without solutions. The challenge of constant land re-evaluation is daunting but far from impossible. It certainly need not be very expensive, since business properties in the UK are already valued regularly by the Valuation Office Agency to assess business rates (and for the Community Infrastructure Levy), and there is much online data from estate agents available on residential properties. Since LVT is calculated through locational value (where a property is situated, transport, schools, etc), this data is relatively easily applicable. Moreover, this re-evaluation is long overdue – consider that council tax bands are currently determined by 1991 house prices and you see how inefficient and out of date Britain’s tax system currently is. Protections would also need to be enshrined for national parks, conservation areas, and protected regions, among others, in order to prevent excessive land development. This also does not have to be difficult. Infrastructure to national parks and preservation projects is usually limited, and they are often from centres of economic activity, thus the potential charge would likely be similarly low, though it would also not be difficult to make these areas tax free (the same could be true for farms, which are heavily subsidised by the government, or urban gardens, which could also receive exemptions to moderate development). Areas of Outstanding Natural Beauty and the green belt would not lose any development protection under LVT: such conservation programmes could easily be extended under this new tax regime. Besides, LVT incentivises densification – on land close to valuable infrastructure in city centres – and would likely restrict urban sprawl, not aggravate it.
There are few, if any, practical problems to this that are without solutions.
You might by now be wondering why the UK does not have such a system. Or, if you have a mortgage, a family, some debt, and have voted the same way as voters have for the past forty years (or all of the history of civilisation, depending on how cynical you are), you are probably not. Higher taxes are usually not hugely popular. No matter how you present it, the prospect of further taxation so risks inflaming the ire of middle and upper Britain that as a policy the LVT has mostly banished itself to the fringes of obscure think tanks, despite high-profile proponents across the political spectrum (including Milton Friedman, Paul Krugman and Joseph Stiglitz). Even the relatively left-wing 2017 Labour Party manifesto dared only to ‘consider options such as a land value tax’.
A land value tax then would be easier for voters to stomach, indeed most effective, if it were presented as replacing a number of distortionary and inefficient taxes, such as business rates, CGT, council tax or stamp duty. You could spend hours unpicking the inefficiencies of these various forms of, mostly, property taxation, whether they are overly complex (business rates), not progressive and unfairly levied on the occupant (council tax), or crudely surcharging transactions (stamp duty). A fairer system would place the burden of taxation on the owner of land, rather than, as is increasingly the case in modern Britain, the tenant. Since land supply is fixed, rents would depend on what these tenants were prepared to pay, preventing landlords from passing tax onto them. LVT would also not restrict the ability of people to freely buy and sell on property markets (there is no market distortion because supply cannot be reduced: thus no deadweight loss – a measure of market inefficiency), would curb rampant speculation and spiralling prices, and would encapsulate this all in a single payment. It would hardly solve the UK’s current housing crisis in one fell swoop, though it would go an immeasurable distance to raise the efficiency of land, bring onto the market land held to drive prices up, spark new building developments (given the necessary protections), and thus help people to find affordable homes.
There are obstinate foes arrayed against far gentler propositions than the land value tax.
Yet, even if presented as such it would take a herculean effort to sell to a suspicious electorate, no matter how slowly it were rolled out. For better or worse, Western society has wedded itself to the inexorable rise of house prices, to property as our pension pot or our inheritance: as the critical investment we make in our lives, even when it has blinded us to disasters like the Great Recession. Though an LVT would hardly prevent such issues from ever arising again, I think that it is clear that forcing large amounts of inefficient land held by large buyers onto the market, while raising the efficiency of the existing stock, among the assortment of other benefits listed here, would at least ease current pressures on house prices. But this is beside the point. I don’t think we will ever separate ourselves from the idea of property as a natural right, onto which taxes can only infringe. There are obstinate foes arrayed against far gentler propositions than the land value tax. For this reason, it will always fail.
Land value taxation, some issues – https://fraserofallander.org/2017/10/17/land-value-taxation-some-issues/
Solving the housing crisis? The case for land value taxation – http://tlio.org.uk/solving-the-housing-crisis-the-case-for-land-value-taxation/
Labour Manifesto 2017: What is a land value tax? How would it work? –http://www.independent.co.uk/news/business/analysis-and-features/labour-manifesto-land-value-tax-what-is-it-how-work-election-2017-a7739186.html
The case against land value taxes – http://timothyblee.com/2014/03/03/the-case-against-land-value-taxes/
Why everybody is wrong about the land value tax (except me) –https://www.adamsmith.org/blog/why-everybody-is-wrong-about-the-land-value-tax-except-me
Land value taxation: from proposition to practical policy – https://fabians.org.uk/land-value-taxation-from-proposition-to-practical-policy/
The case for a Land Value Tax – https://iea.org.uk/blog/the-case-for-a-land-value-tax-0
A Land Value Tax for England – http://www.andywightman.com/docs/LVT_england_final.pdf
The distribution of household wealth in the UK – https://www.ifs.org.uk/publications/8239
What is LVT? – http://www.landvaluetax.org/what-is-lvt/
Mortgages: how many Britons have one, and how much do they owe? – https://www.theguardian.com/news/datablog/2013/may/13/mortgages-property-debt-uk-trends
Labour’s Land Value Tax: will you have to sell your garden? –https://fullfact.org/economy/labours-land-value-tax-will-you-have-sell-your-garden/