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.