The what and why of land value taxation

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I must learn to curb my enthusiasm about the Conservative Party. Contrary to my post earlier today, it would appear that the Bow Group’s proposals today (which can be found in full here) are not in fact a land value tax at all, merely a property tax and that going by the comments on ConservativeHome, the Tories are not likely to embrace the system any time soon (hat tip: Jock Coats).

I think we should still welcome the fact that these proposals have been published and added to the public debate on the issue however. There is indeed a very real difference between a tax on property values and a tax on land values, but the fact remains that regardless of the flaws, we would have significantly less of a problem with housing in this country if we had higher property taxes.

Taken as a straight proportion of property value however, taxes of this kind can have a pernicious effect. While it encourages people to want to maximise the use of their property, discouraging empty properties by forcing the landlord to pay an annual rate, it discourages actual investment. Double glazing, insulation, even (at least in theory) a lick of paint would increase the property value and thus the tax. This has a pernicious effect when surely there is a social good in encouraging such investment.

Land value taxation is different in that it is not levied at all on the capital value of a property, just its land.

What’s the difference? Well, without getting drowned in the economics, the simplest way of drawing the distinction is to imagine two houses, exactly the same, one of which is built in Newcastle and the other is in London. Let’s, for argument’s sake, say that the Newcastle house has a market value of £100,000 and the London house has a market value of £300,000. What’s the difference? Relative land values (or, as Kirsty and smug bloke put it “location, location, location“).

London bricks are not made of gold and Newcastle doors are not made of balsa. The reason the values vary so widely are because of a number of external factors such as:

  • the wealth of the surrounding area, including employment prospects
  • public services such as transport links, schools and hospitals
  • speculation

Speculation is a problem all markets face, but it is particularly problematic in the property game because demand is pretty much constant and supply is finite. What’s more, buyers stand to gain by getting in on the game as well. As a result, prices can escalate to quite absurd levels before a correction comes crashing down around people’s ears, and anyone playing the long game can afford to wait a few years knowing that the speculator bubble is bound to begin again soon.

Look again at the graph on housepricecrash: there may well be peaks and troughs, but the overall trend is up. Small time operators may have to be wary, but the large operators can only win in the long term. Why else do you think so much of London is still owned by just a few families? And why else do you think so much of London is now being bought up by Hong Kong conglomerates?

As well as simple speculation however, landowners also cash in because the taxpayer hands it to them on a plate. Property investor Don Riley has calculated that the Jubilee Line Extension earned landowners a grand total of £13bn – the cost of the JLE was £3.5bn, every penny of which was paid for by the taxpayer.

Not all land values are tied to government investment in this way to be sure, but they certainly are generated by wider society.  By definition, anything that the landowner does do to generate value is capital investment.

So, in essence, the case for land value tax is quite simple: it encourages use, discourages speculation and simply recaptures our own common wealth.  It doesn’t have the same problems associated with taxes on labour (including income taxes) and capital.

The downside is, if you tried introducing full land value taxation overnight, you would almost certainly cause huge problems as the housing market plunged and individuals found themselves trapped in negative equity through no fault of their own.  Ultimately, we have to recognise that people have been making the most of the existing system, however flawed, and that imposing any economically “perfect” system is bound to cause problems.

But there are ways around this.  Firstly, and obviously, don’t introduce full LVT overnight.  If instead you simply used it to replace existing property taxes (stamp duty, council tax, business rates and, arguably, IHT), the impact would be minimal.  Secondly, protect the smallholder by introducing a homestead allowance up to a certain value: this means the people at the bottom end of the scale are protected.  Thirdly, allow people under certain circumstances (e.g. the elderly) to defer payment until after the value of the property is realised.  That way, no-one will be forced out of their homes (although there would still be an advantage in moving).

Even land value taxation at modest rates would lead to a more rational property market however. This leads to the most obvious question – if it’s so wonderful, how come we don’t have it already?  The answer is, the people with the most to lose are the people with the most power.  This was certainly true in 1908 when Lloyd George attempted to introduce a modest land tax.  Back then, his enemy was the landed political class, squatting in the House of Lords.  And there’s no getting away from the fact that the people who stand to lose from this proposal now – specifically wealthy landowners – will mount a spirited defence.  But it cannot be emphasised enough that they will ultimately be defending a system that rewards speculation and discourages hard work.  That is not a sound basis for a strong economy.

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