The Conservative Case for a Land Value Tax

land

Hidden away in the depths of the UK Labour party’s 2017 election manifesto was a short but fascinating sentence:

‘We will initiate a review into reforming council tax and business rates and consider new options such as a land value tax, to ensure local government has sustainable funding for the long term.’ (p86)

It was hidden intentionally.

A so-called Land Value Tax (LVT) is never going to be a popular policy due to its very nature. Indeed, upon the inclusion of such a suggestion in the Labour manifesto, it was quickly branded a ‘garden tax’ and the Daily Express ran an article claiming the policy would lead to people being forced to sell off their gardens.

There exists some merit to the worries of simply introducing the tax on top of the current taxation system. Rather, conservatives should support LVT’s introduction as part of wholesale reform to the said system.

To understand why, it must first be understood what exactly a Land Value Tax is. Put simply, it refers to an annual levy, charged as a low percentage of the value of a piece of unimproved land. That is to say, a landowner would be charged the same levy for a plot of empty land as one with a house on it, assuming all other aspects, such as location, of the plots were identical.

What this means is that there is no incentive to sit on an unimproved plot of land, nor is there an incentive to simply own real estate without renting it out or otherwise making use of it. This change in incentives has the capacity to hugely reduce unused land in the UK, and tackle the current land banking issue.

Conservatives should always be sceptical of introducing new taxes, or raising the rates of existing ones. To justify a new tax, we must look into the moral basis for it.

Land Value Tax is in fact perhaps the most morally justified of all taxes. To understand why, we must consider where the value of land comes from. The answer to this is that it comes mostly from infrastructure and other publicly funded developments. Land located near to a public park and with good roads for access, for example, is going to be valuable land. Given that these improvements come almost exclusively from public money, it is right that those who benefit from them – the landowners – pay a levy on the value created by them.

Those with education in macroeconomics may worry about the efficiencies of a Land Value Tax, and its effect on the economy. However, LVT is favoured by even the most free market of economists, with Milton Friedman describing it as the ‘least bad tax’, and this is for good reason.

In theory, there is no inefficiency at all which comes from the implementation of LVT, making it unique as taxes go. To understand why, we must consider the market for land. Usually, the implementation of a tax in a market results in a reduction in the supply for the marketed item. Land, though, cannot have its supply altered – supply is fixed. This means that any tax on land cannot be passed onto the buyer through a reduction in supply, so land prices remain constant.

There is a stark contrast here with Britain’s current stamp duty tax on housing – the supply of housing can easily be restricted, meaning plenty of the tax is paid by buyers.

By implementing a Land Value Tax, and imposing a tax on landowners which they cannot easily pass onto buyers, we would be seeing a truly fair and progressive tax in action. LVT is almost impossible to avoid as land, unlike income or wealth, cannot be transferred abroad to a tax haven. Further, landowners are primarily the most well off in our society, and benefit the most from infrastructure and other public investment spending projects. It is only fair that the funding for these projects comes from a tax on the value that they create.

Conservatives must support taxation on the value of land to modernise the UK economy. If they do not, it will become even more difficult to tackle issues like land banking and the housing shortage, while its implementation could allow for scrapping outdated taxes such as corporation tax and help to bring about a surge in productivity and growth. The economic case is clear – but putting it to the electorate will be significantly less so.

5 COMMENTS

  1. Clear, succinct and to the point. Well done. The other point that might be mentioned is that land value is NOTHING BUT the market’s estimate of the future tax-funded net subsidy to the landowner. It is simply how much more the landowner can expect to take from society by owning the land than he will be asked to pay in taxes on it. So by definition, as long as any land value remains, the landowner is undertaxed.

  2. Simplicity, efficiency, progressivity, unavoidability, equality (of opportunity, not outcome) – what isn’t to like here? For those who worked their lives under previous (inefficient) rules, I believe any such increase in their own tax burden should be able to be deferred until death/sale/transfer of property.

  3. In and of itself

    1 It allows the market to best allocate each individual land title to the individual or firm that can put it to its most productive use.

    2 It incentivises the state to maximise aggregated land rents. As these are a measure of resource allocation in an economy, so the state has to get the right balance of investments, laws and planning regulations in order to maximise its revenues.

    3 The state is currently a passive collector of taxes. Instead, as collector of rents and manager of our shared environment, it would, like any landlord or property developer, become a direct competitor in the market for our spending ie that part of our income we chose to spend on benefits we get from living/doing business in one location vs another.

    Thus its whole mindset regarding the choices the state makes in regard to policy would change for the better, aligning its incentives with those of its citizens(customers).

    4 Currently people are not (directly/fully)compensated for the opportunity loss they suffer from being excluded from valuable locations. This means excessive inequality and resource misallocation are baked into our society and its economy. Taxes on output only address this inequality partially and also come with adding a burden of deadweight costs onto the economy.

    A LVT compensates people fully and directly, eliminating excessive inequalities(individual, inter-generational, regional) and the costs associated with it.

    5 Only in a society were we are all paid what we are owed and the incomes people get are from work, effort and enterprise, can there be a true meritocracy.

    6 A society where we all get an equal share of land rent is one where we all have an equal stake in its well being. Humans are not equal until this happens, leading to divisive attitudes as currently reflected in politics.

    7 Those who currently enjoy an income from land, directly or indirectly are not contributing towards the economic good for that income. By reducing their land incomes to an equal share, they would then have to produce goods and services that do contribute to the economic good if they wanted to maintain their current lifestyle.

    8 Housing issues are merely symptomatic of excessive inequalities. The LVT thus ends those issues instantly and permanently. It would reduce private rental incomes from land, and therefore their capitalised selling price to zero. So in the UK, average house prices would fall by 2/3rds.

    By increasing the incomes of typical working households, it also acts to rebate back to tenants in full that part of rent that currently makes housing unaffordable.

    All else being equal, this results in housing that becomes as affordable as it is possible for it to be for typical working households, be they owner occupiers or tenants.

    The LVT can therefore be seen to level the playing field for all participants in the market and society.

    9 Housing(land) bubbles are the precursor of most boom/bust cycles. The LVT therefore ends or damps down these cycles

    10 LVT provides a mechanism of bottom up power sharing/unification of regions and countries rather than top down, often violent processes we’ve historically suffered from.

    In principle, natural resource rents are a “commonwealth” to be shared equally as of right to all humans in the world.

    If a country like the UK, became the first to operate such a commonwealth, it is likely that others would want to emulate and join it.

    As a tax shift the LVT would

    1 Reduce/eliminate taxes on wealth creation, optimisimg the economy for growth.

    2 Radically simplify our tax/benefits system, given the fact a UBI would also arise due to the imposition of the LVT.

    3 Reduce the number of people engaged in work/activities that do not add to our stock of wealth and welfare ie bankers, landlords, estate agents/managers, accountants, tax lawyers, civil servants, economists, bureaucrats, idle rich etc, etc

  4. Good article. Please encourage Conservative Parliamentarians to engage with this issue. It is important. The recently formed APPG on land value capture now provides a forum where this can happen. To move forward this policy requires a cross-party consensus and as you explain it is in the the interests of all whole believe in honest endeavour rather than living what others have produced

  5. How may LVT be made politically acceptable?–An alternative (but equivalent) to LVT which has less opposition from the landlords.

    Much as I applaud the Single Tax idea of Henry George for having great ethical principles at heart, I find after more than 50 years in our Movement that its introduction is simply not practical. Apart from use of the word “Tax”, which in any case no politician wants to propose, we must eliminate the offense that our proposals for LVT causes to landlords. Obviously they will strongly oppose the proposal for having to pay a new tax (or anything else we might like to call it). The problem then is not to have to fight them, nor try to convince them on moral grounds, but how to make them want to pay for land access rights or revenues.

    To achieve this there should be introduced a gradual change in the way that land is being owned, which should be introduced by new laws. Whenever a site or prospect of land is being offered for sale (possibly with its buildings, etc.,) and whenever ownership of such a site is being transferred between family members (and on which an inheritance-tax would normally be paid), the change is that government automatically buys the land at its current normal nominal price. This is done simultaneously when the buildings are sold in the usual way or their ownership is being transferred. (The courts shall be empowered to settle the land-value, if/when doubt is expressed–land-value maps being publicly accessible.)

    The previous landlords or their heirs will no longer have any political objection, since the money from the land sale will greatly exceed the subsequent annual lease-fee (see below) for access rights to this land. This change will also eliminate the (hated) inheritance-tax. It is imagined that this process of land sales and governmental purchases will be spread over at least 40 years.

    Immediately when the site belongs to the government, this land must be offered for lease to the new or bequeathed owner of any buildings thereon. The lease-fee should be set according to normal amounts of rent for other similar sites, (and again the courts should decide when there is disagreement.) The above “first refusal” for this leasing offer is most necessary, because any buildings of practical use and value on the site, will still be sold or bequeathed as items of durable capital goods, as before.

    However, access to the site and its buildings should be denied by the government until the site is leased by someone who can then (and normally would) have purchased (or been given) the building in the usual way. All taxes that are applied to subsequent building developments should be abolished at this time.

    A new owner would acquire the building property more cheaply than before, because it is now without the price of the land under and around it. Such a buyer can then give for hire (rent-out) any building for access and use, as if it were any other item of durable capital goods. In the unlikely event of the leaser not owning the buildings, his/her incoming land rent (from the building owner), shall not exceed the out-going lease-fees by more than 2% (say). Should nobody initially lease the site and its buildings (if any), because of there being no demand for their use, the buildings may be pulled down by the next (eventual) leaser, who will be free to re-develop the site (and would naturally want to do so).

    The government should borrow the money for site purchase, or can even offer national redeemable bonds to raise money for it. As the lease money begins to flow to the government, it uses this to:
    a) repay part of its loan for site purchase, which may be extended,
    b) purchase more sites as and when they become available,
    c) cover the interest on the loan and on the new bonds and their eventual redemption, and eventually
    d) reduce other kinds of taxation.

    It will be appreciated that over the long term the lease fees are equivalent to LVT, but due to the greed of landlords (who behave as if they were capitalists), their income from land sales will satisfy them better than their being taxed. Eventually nearly all the land would then be leased from the government.

    Nationally leased land, in countries like Hong Kong, is close to 100%. This approach is known to be most successful, for the rate of growth of prosperity. Also when the previous landlords have more money to spend, most of it will be invested in durable capital goods, making production costs lower as obsolescent durable items are more easily replaced and so the national prosperity will grow also from the government’s investment in land values.

    This proposal is not land nationalization (at least no more than what currently applies), since no additional regulations are placed on how the land is to be used.

    Because the selling of land is a natural process which is (if anything) encouraged by the land returning to public benefit, the resulting lower priced buildings will become more easy to sell and this will not place such a limitation on their owners who wish to better develop the sites.

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