Land Value Tax purists argue that it should be the only tax charged. One difficulty with this is it means some people are not paying any tax, and this does not create responsibility for public spending. However, in combination with some consumption taxes (VAT and specific duties) the system could operate equitably and replace many current taxes including property taxes and potentially Income Tax.
What is Land Value Tax?
Land Value Tax is a method of raising public revenue through an annual charge on the rental value of land. It is charged to owners of land, not tenants. It is not strictly a tax but a payment for the benefits the plot of land receives. It would replace not add to existing taxes. How many taxes it replaces depends on the rate set, but it clearly has the potential to replace many taxes.
Every parcel of land in Britain would be regularly valued. Land Value Tax is calculated as a percentage of that value. It is different from Council Tax on many counts, not least is that it considers the land, not the property that may stand on the land. It uses values not bands of values.
Since public investment in the facilities surrounding the land affects the land price, the tax correctly reflects public investments. Those investments otherwise create an unearned profit for the landowners. The value of any given land reflects its closeness to various amenities (both public and private). As an example, when a new Tram stop or underground station or school is built, land near the new facility becomes more valuable. Even if the rate of tax does not change, the tax revenue produced from benefiting properties rises because of the higher land values and increased development.
Why is it such a good tax?
When considering any tax, economists focus on how it affects decision-making such as Income Tax reduces the incentive to work; Corporation Tax reduces the incentive to invest; Stamp Duty deters some house sales. Land Value Tax is so beloved of economists because, it does not distort decision making. There can be no supply response to the tax. There will still be as much land as there is today. Neither do consumers’ preferences change, as land is no more useful, either. So if the market for land is competitive, no transactions are deterred or encouraged. All that changes is the price, which falls until it exactly offsets the discounted cost of paying the tax forever. Most other taxes depress economic activity and run the threat that it is avoided through offshore financial centres.
Land Value Tax, on the other hand, lacks these perverse features. It cannot change the supply of land (to quote Mark Twain “Buy land, they’re not making it anymore”). It does not distort decision making, but it can stimulate economic activity, by penalising those who hoard land and keep it idle. This is an important feature in regenerating post-industrial cities where much land is vacant. It is also protected from tax avoidance since the land cannot be moved.
The Land Value Tax is fair because land (unlike goods and services), has no cost of production. If enough supply of land of equal desirability were available everywhere, there would be nothing to pay for its use. In reality land gains a scarcity value owing to the competing needs of the community for living, working and leisure space. Thus, land value owes nothing to individual effort and everything to public investments. It belongs justly and uniquely to the community. Conversely, the reward for individual effort can belong only to the one who earns it, to spend, save or give away as he or she may see fit.
Importantly the tax stimulates a change to the endless modern-day arguments about planning, land and housing supply.
The Land Value Tax has a wide variety of advantages that make it compelling as the central point of tax:
- avoiding Land Value Tax is difficult. Since land is immovable tax avoidance is impossible. Land cannot be hidden, removed to a tax haven or hidden in electronic data. Offshore trusts and wealthy nonresidents, the final owners of much of the most valuable land in England, would make a fair contribution to public income
- increased land values, unearned by the landowner but created by community investment, create public revenue. This rewards and encourages public investment rather than creating greater wealth inequality at the expense of other people’s tax
- the land supply cannot change. It is therefore a natural source of public revenue. With the tax all land makes its relative contribution to the public finances. This allows reducing and replacing less efficient taxes
- Land Value Tax stimulates the economy rather than taxes on labour and companies that discourage activity. The tax is payable regardless of whether or how well the land is used. To return the payment there is an incentive to create income. It is a payment, based on current market value, for the exclusive occupation of a piece of land. Long-term, this fundamentally different approach to revenue raising will stimulate new business and new employment, reducing the need for government welfare
- the economy would grow more evenly by ending speculation on land value. This is often called “property” or “asset” speculation. It causes unsustainable booms which then result periodically in downturns
- Land Value Tax deters speculative landholding so run-down inner-city areas are returned to good use. This reduces the pressure for building on greenfield sites and restores use of currently unoccupied buildings. The need to pay the tax encourages landowners to develop vacant and underused land properly or to make way for others who will. Empty sites are brought into use as owners seek an income with which to pay the tax. Eyesores, such as vacant lots and empty 1960s office blocks, are replaced by modern buildings. Current investments in property speculation is diverted into real capital improvements
- conventional taxes such as VAT and those on transport fuels cause particular damage to the remoter areas of the country. Land Value Tax, by definition, is low or even nonexistent if land has little or no value. The tax stimulates economic activity away from the centre. It creates tax havens exactly where they are most needed. Urban sprawl into greener areas becomes contained, enabling more compact towns and cities to run more efficiently. Brownfield sites would not need a subsidy and, as they are brought into use, the green belt and open spaces are better protected from development pressures
- Land Value Tax is a progressive tax. The tax load falls on the owners of valuable land who largely have higher incomes. It cannot be passed on as higher costs to tenants or consumers or lower wages to workers
- when sites become disadvantaged, such as from noise from a new road or rail line, the owners are automatically compensated at the next valuation. Their tax is reduced by a lower valuation. There is no formal or complicated compensation scheme
- the price of land would fall in direct proportion to the impact of the Land Value Tax. A low-level tax, say 5%, would have little impact. A high-level tax, say 40% (the same as the higher rate Income Tax), would have a much greater effect on reducing land prices. This further determines the ability of the Government to replace other taxes with the Land Value Tax
- it reduces bureaucracy, once underway, landholders will not face complicated forms and demands for information. The costs to businesses fall if it replaces Corporation Tax and is cheap to collect. The tax is efficient
- competition makes it impossible for a business producing goods on a valuable site to charge more for each item than one producing similar goods on less valuable land. This is the same as producers and traders at different locations that are paying different rents to landlords already. Similar goods sell for much the same price and employers pay their workers comparable wages. The tax cannot be passed on to a tenant who is already paying the full market rent
- the buyer assumes the load of paying the tax, so is no better or worse off. Landlords cannot pass the tax on to tenants, because the supply and demand of rented land is unchanged
- if Land Value Tax replaces property taxes (Council Tax, Business Rates and Land Stamp Duty), incentives against improving homes and developing land are removed
A theory or practice?
Land Value Tax is proven to work. Denmark, Estonia, Lithuania, Russia, Hong Kong, Singapore, and Taiwan all use it. It has also been used in subregions of Australia (New South Wales), Mexico (Mexicali), and the United States (Pennsylvania).
Land Value Tax is anything but new. It can trace its origins to Henry George in 1879 in his work, Progress and Poverty. He suggested that because the value of land depends on natural qualities combined with the economic activity of communities, including public investments, the economic rent of land was the best source of tax revenue. George argued that land-value levies should replace all other tax, leaving labour and capital to flourish freely, and thus ending unemployment, poverty, inflation and inequality. Economists and politicians have supported the tax since then including some major names in their field such as:
- Alfred Marshall: a tax to be charged to urban landowners and “levied on that value of urban land that is caused by the concentration of population”
- Paul Samuelson: “Our ideal society finds it essential to put a rent on land as a way of maximizing the total consumption available to the society. …Pure land rent is in the nature of a ‘surplus’ which can be taxed heavily without distorting production incentives or efficiency. A land value tax can be called ‘the useful tax on measured land surplus’
- Milton Friedman: “In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago”
- Paul Krugman: “Believe it or not, urban economics models actually do suggest that Georgist tax would be the right approach at least to finance city growth. But I would just say: I don’t think you can raise nearly enough money to run a modern welfare state by taxing land [only]”
- Winston Churchill: “Land monopoly is not the only monopoly, but it is by far the greatest of monopolies — it is a perpetual monopoly, and it is the mother of all other forms of monopoly. Unearned increments in land are not the only form of unearned or undeserved profit, but they are the principal form of unearned increment, and they are derived from processes which are not merely not beneficial, but positively detrimental to the general public”
- Adam Smith: “nothing could be more reasonable”
How could it operate in the UK?
The Land Value Tax works by valuing each piece of land and applying a tax rate to it. The best statistics available are old (2011) and while the values will have changed, the proportional changes between categories are still useful (though implementing a Land Value Tax would require up-to-date data):
Analysis of England to Calculate Land Value Tax (Hectares, £ per Hectare Land Value, Total Land Value in £s and % of Total)
Source: Various ONS data
From the calculation on a land value in England of £1.842 trillion residential properties would pay 79.5% of the tax and businesses 15.5% while agriculture would only contribute 4.8%. Current Council Tax is unfairly distributed because it uses property bands. Rather than alarming existing householders, it is therefore useful to examine the distribution of residential property values. Again the data is dated, but remains useful to show the huge variation (and the complete inadequacy of the rates banding) in property wealth:
Upper Bounds of Household Net Property Wealth, 2012 (£s upper bound)
On this basis, the top 1% of property wealth owners would be liable for 54% of the residential part of the tax assuming the tax is introduced at a flat rate for all. Land Value Tax, unlike Council Tax, is not a residency tax it is an ownership tax, so people in rented accommodation do not pay the tax. The reason the tax is so fair is that it is based on land values. Land gains value because of its location. The value to that location is gained from the bordering facilities, such as transport links, schools, or other amenities. In other words the infrastructures that taxpayers have funded through the state. To the owner this is unearned income, to the taxpayer it is a huge investment.
For all the overtaxed ‘nearly haves’ who think this will result in them paying more tax – they are wrong. It taxes the ‘really haves’ much more equitably:
Comparison of Property Wealth in 2012 and Income Tax in 2014, by Decile Group (% of Total)
The fact is the ‘middle classes’ have become so used to being unfairly over-taxed that views of tax are distorted. The Land Value Tax will even benefit most of the top 10%:
Comparison of Property Wealth in 2012 and Income Tax in 2016, For Top 10% (% of Total)
The usual objection to the Land Value Tax is that it can force the asset-rich low income householders to move because of the tax implication. The most frequent approach to this issue is to allow pensioners to defer tax payment, the amount due becoming a land charge. Other choices include a rebate scheme. It is possible to devise a system to prevent this.
Eventually part of the solution is to increase pensions. Pensioners who are tenants are already badly affected because their incomes have not been linked to average wages. The problem is mainly one that affects the present generation of pensioners. Those born after around 1955 have been badly affected anyway because of the banking collapse and the Government’s response to it. Had today’s pensioners lived their working lives under a Land Value Tax scheme then they would have enjoyed the full fruits of their labour instead of paying huge sums in Income Tax. They would therefore have ample savings. There will clearly need to be long-term transitional measures to protect pensioners to offset the over-taxation they have suffered under Income Tax. The tax element, if it replaced income tax, would need to be phased in over a prolonged period so as not to double tax individuals.
To summarise, Winston Churchill stated the following in a speech back in 1909:
“Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist…contribute, and yet by every one of them the value of his land is enhanced.”
Forward Thinking would set Land Value Tax at a level that replaces Council Tax, Business Rates, Stamp Duty on Land and Property, Inheritance Tax. It could be furthered to replace Income Tax over time. There are other taxes that could also be replaced and it could contribute to a reduction in VAT. This is a fundamental change in tax policy giving opportunity for major simplification of the tax system and therefore reduces both collection and evasion costs.