One of the pleasant surprises of the past few months has been the re-emergence on the political agenda of discussion of a land value tax. That great radical Tom Paine was among the first who argued that land was originally un-owned and was therefore taxable, while the economist David Ricardo put meat on the bones by establishing the concept of economic “rent” – that land or property derives its value from scarcity rather than investment.
During the Labour leadership campaign, Andy Burnham proposed the introduction of a land value tax and the momentum has built from there. It will be part of Labour’s policy review. Bank of England Governor Mervyn King and Many eminent economists support its introduction. The questions are: what do we want such a tax to do, how much money should it raise and can it be used to replace other more regressive taxes?
First, LVT is an annual tax on the market rental value of land. It taxes the value of the land, including the property on it, whether or not the land has been sold. It has a number of advantages over other forms of taxation because of the incentives it offers, its egalitarian nature and its economic efficiency.
Since 1947, land value in Britain has depended on its planning status. If a plot is zoned for agriculture, it is worth a few thousand pounds per hectare. If it is zoned for business, it can be worth millions. LVT is efficient because it does not distort the incentives to develop land. It is fair because it returns some of the economic rent to the people who created it – namely, the local authority where the land is and the electors are.
Mervyn King explained one of the virtues of LVT in his textbook on the British tax system. “Suppose the award of planning permission increases the value of a plot of land from £5000 to £1 million. Then, even if the resulting gain were taxed at 90 per cent, the developer would still be better off by almost £100,000 using the land for housing than retaining it for agricultural purposes. Substantial incentives to bring projects forward would remain.”
As an annual charge on the rental value of the land, LVT would not be a tax on transactions and therefore development. Not only would this conflict less with government action to provide a much-needed increase in house-building, it could actively promote this by providing incentives for local authorities to encourage development.
For example, there are currently 700,000 vacant properties and business sites. At present, they are effectively economically worthless. However, introducing LVT would be a massive incentive for local councils to make these sites fit to live in or fit for business development, if levied regardless of the land use or development on it. That’s because a vacant site would still incur an annual charge. This is a simple way to raise potentially billions of new revenue and re-generate poor communities. In addition, it would promote more sustainable patterns of development by encouraging businesses to locate in less prosperous regions, as the market value of land would be much lower than in richer areas.
LVT also has the benefit of capturing the increases in private wealth that accrue through public investment. As an annual fixed rate, revenues would rise as the land’s market value (and so tax base) increases. In theory, therefore, it could provide an automatic revenue stream to help fund infrastructure projects, which are particularly needed in Britain’s poorer regions.
So that, in a nutshell, is LVT. How much money can it raise? Levied at a flat rate of between 0.5 per cent or 0.6 per cent it has the potential, based on the current value of land in the United Kingdom, which accounts for 38 per cent of our wealth, to raise between £30 billion and £35 billion. That’s enough to replace the council tax while also giving a tax cut to all those living in properties worth less than £350,000-£400,000.
The replacement of the council tax is long overdue. It is heavily weighted against the poor and the “squeezed middle”. Its eight bands lead to the absurdity of people living in properties worth half the national average (around £112,000) paying half the tax of someone owning property worth £1 million or more. Like VAT rises, the council tax hits the poorest hardest. According to the Office of National Statistics, the poorest fifth of households pay 5 per cent of their household income in council tax. The middle fifth pay 3 per cent and the richest fifth pay less than 2 per cent. The council tax also hurts those who rent or are living in part-owned social housing. They are paying tax according to the value of a property that they may not have been able to afford to buy or even rent at market rate.
LVT could also allow the abolition of another regressive tax – stamp duty. This tax raises a lot of cash when you have a booming property market. But housing booms, as we have seen in Britain and, devastatingly, in Ireland, are dangerous. Taxing transactions creates bubbles in the property market and price volatility (as the crisis has shown) – something we should look to tackle in order to avoid a future property-based recession. It is fairer and more efficient to tax the value of land and property rather than transactions on it.
Like the council tax, stamp duty also sets arbitrary bands. For example, if your prospective property goes £1 over the £124,999 threshold, you are immediately liable to pay £1,250. Hitting the £250,000 threshold costs you £5,000. With the property market stagnant, and likely to remain so following the death of the era of the 125 per cent mortgage, stamp duty is a huge hurdle for people without access to the “Bank of Mum and Dad” to get onto the property ladder.
Last year, stamp duty and the council tax raised a combined total of £28 billion. LVT has the potential to raise more, while being fairer and simplifying the tax system into the bargain. Granted, the wealthiest land and property owners will pay more, particularly the 130,000 people in estates worth £1 million and more. But they’ve had 20 years of benefits from low council tax rates. Labour’s future tax policies must follow a new formula: be fairer and simpler. That’s what LVT does and why Labour should adopt it.
