Public finances

A big fiscal splash still a step too far for Europe

Does the flagging eurozone need a fiscal boost as well as a monetary one? The debate in policy circles is slowly shifting.

I’m quoted right at the start of this excellent analysis piece by Mark John for Reuters.

“There is a shift towards talking about stimulus but there is no dramatic leap forward,” said Philippe Legrain, adviser to the European Commission during the aftermath of Europe’s 2009 sovereign debt crisis and author of the book “European Spring”, a diagnosis of Europe’s economic failings.

“There is no sense of urgency so far … That might happen when the euro zone enters recession.”

Read the full piece.

There is an alternative to the VAT rise

This is not a very happy new year. Rail fares, energy prices and fuel duty are all being jacked up. And today VAT goes up from 17.5% to 20%.

Optimists claim that the economy is strong enough to shrug off the VAT rise. People barely noticed when VAT was cut from 17.5% to 15%, so why should a rise to 20% make much difference? In any case, the rise is necessary, George Osborne asserts, to help fill the gaping hole in the public finances.

It’s true that few people will balk at paying two or three pence more for a packet of chocolate digestives. But, over a year, it all adds up. During the election campaign the Liberal Democrats claimed that the “Tory VAT bombshell” would cost the average family £389 a year, a figure that Labour is now throwing back at the coalition government.

Worse, VAT hammers the poor hardest, because they spend almost all their meagre incomes, whereas the rich save a big chunk of theirs. The Institute for Fiscal Studies reckons that the VAT rise will lop 1% off the after-tax incomes of the richest 10% – and 2.25% off those of the neediest 10%. That is hardly progressive.

The VAT rise will not just hurt people’s pockets: it will adversely affect jobs and growth too. Lower consumer spending means fewer jobs for people making things and selling them. In April, national insurance will go up by 1%, equivalent to an extra penny on income tax – all this at a time when public-sector pay is frozen, private-sector wages are stagnant, benefits are being slashed and many people are struggling with huge debts, often secured against their depreciating homes. Add big public-spending cuts and the fiscal squeeze will take roughly 2% out of the economy this year.

Unless private investment takes off, the economy will stagnate, unemployment will rise and the deficit will fail to shrink much. The government would be cutting to stand still – lots of pain for hardly any gain.

Of course, the government’s gamble may pay off. As the public sector and consumers retrench, business investment and exports may boom. The government points to countries – such as Canada in the 1990s – that tightened their belts and continued to grow. But circumstances in Britain now are different. Whereas Canada and others offset their fiscal squeeze with monetary loosening, the UK cannot cut interest rates below 0%. Worse, banks deny credit to small businesses that want to invest. And whereas previous belt-tighteners benefited from booming exports, Britain’s main export markets – Europe and the US – are weak.

In the longer term, we need to tap into the boom in emerging economies such as China, India and Brazil, but that will take time. The government isn’t helping by turning away foreign students, damaging one of the UK’s most promising export sectors.

The government claims that the alternative to today’s VAT rise is bigger spending cuts. But that isn’t true. Yes, the coalition government needed to set out a credible framework for stabilising the national debt, but its decision to tighten the screws so far and so fast was a political choice. It wouldn’t surprise me if Osborne was planning pre-election tax cuts for 2014.

Instead of raising VAT and national insurance this year, the government could introduce taxes on carbon and financial transactions next year. And it should levy a tax on land values. Since all the land in Britain is worth some £5 trillion, an annual levy of 1% could raise £50bn a year – without depressing economic activity, because land is in fixed supply: central London can’t be spirited away to a tax haven.

As well as preventing property bubbles (and busts), a land tax would be fair. A mere 160,000 people (mostly hereditary landowners) own more than two-thirds of Britain – and the value of that land increases not through their own striving, but through that of others. Surely it would be better to tax this windfall gain than the hard work and enterprise of those who generate it? And since infrastructure improvements, such as a high-speed rail network, boost surrounding land values, a land tax could also help to finance investment in future growth. There is an alternative to austerity – if only the government would listen.

Unwise and unfair

George Osborne described it as “unavoidable” and “progressive”, Vince Cable as “necessary” and “fair”. Don’t blame us, Tweedledee and Tweedledum suggest, Labour left the public finances in a mess – and unless we tighten our belts drastically now, the markets will force our hand. But in fact, the timing, extent and manner of this brutal surgery were a matter of choice. The Liberal Conservative coalition did not have to cut so far, so fast; nor did it have to raise VAT, which will hit the poor hardest.

Britain’s economy is on life support. Banks aren’t lending enough, companies are wary of investing, our biggest export market – the euro zone – is in crisis, and consumption is subdued. Faced with a collapse of private demand, public spending has propped the economy up. But now the coalition is planning to take away that government support much faster than Labour proposed to. Is the economy strong enough to stand on its own two feet? It’s a huge gamble.

The immediate danger is that a drop in demand will plunge the economy into a double-dip recession. That would cause a lot of pain without much budgetary gain: a smaller structural deficit would be offset by a larger cyclical one, leaving the country poorer but the government still borrowing almost as much. Far from shoring up confidence, as Cable suggests, the budget could shred it. Weighed down by huge debts, the economy might stagnate for years, as Japan did after its bubble burst twenty years ago.

Another big danger is that the economy will stagger back to its bad old ways instead of developing along new and healthier lines. Now, more than ever, Britain is relying on a prolonged period of near-zero interest rates to sustain the recovery. Fiscal austerity for monetary licence – that is the bargain that the Chancellor has struck with his chum Mervyn King, the not-so-independent governor of the Bank of England and newly promoted plenipotentiary for financial regulation (an assignment he does not merit, given his insouciance during the bubble years and his role in the Northern Rock fiasco). But with Britons still addicted to property speculation, big banks still unreformed and able to gamble with government guarantees, and the authorities depending on monetary policy to boost growth, we risk inflating a new financial bubble to rescue us from the bursting of the last one.

This emergency budget was a missed opportunity to tilt Britain towards more balanced and sustainable growth. Instead of increasing VAT next January – which will raise £13 billion a year – the government could have phased in a tax of £30 a tonne on carbon emissions. That would not only raise around £16 billion a year, it would curb carbon emissions while stimulating investment in clean-tech companies and the green jobs of the future.

An even better way to fill the budget gap and rebalance the economy would be to introduce a tax on land values. With all the land in Britain worth perhaps £5 trillion, a 0.5% levy could raise £25 billion a year. That could be used to cut the deficit, trim national insurance, and protect public spending on the most vulnerable.

Taxing wealthy landowners’ windfall gains would also limit property speculation and fund new social housing. And since growth-promoting infrastructure investment raises surrounding values, Crossrail and a high-speed rail network would pay for themselves and thus not fall victim to short-sighted budget cuts.

Over time, shifting the tax burden off labour and on to land would create jobs, reward hard work and promote more stable, sustainable and balanced growth. And since nearly all of us earn most of our lifetime income from work rather than from rent, taxing land instead of labour would make most people better off.

The Attlee government introduced a tax on land values in 1947, a measure the Conservatives unfortunately repealed in 1951. As Labour’s leadership candidates consider how best to respond to this unwise and unfair budget, they would do well to revive the idea.

Tax land: it can’t be hidden from the Revenue

Filling the gaping hole in the Government’s finances is, in George Osborne’s words, the “great national challenge of our generation”. Unwise spending cuts and tax rises could sap economic growth; unfair ones provoke political unrest; inaction a market panic.

Faced with a national crisis, who better to turn to for advice than Winston Churchill? A century ago, the great man — who, like the present coalition, was both Liberal and Conservative — advocated introducing a land tax as part of a bold package of fiscal reforms. In his emergency Budget on June 22, the Chancellor should set up a commission to consider how best to implement that recommendation.

Taxing land values would be a fair way to help to plug the budget gap while stabilising — and even boosting — the economy. Land is routinely valued each year as property changes hands. With all the land in Britain worth perhaps £5 trillion, a 0.5 per cent levy could raise £25 billion a year — as much as a five-point rise in income tax.

Neither tenants nor leaseholders would pay a penny; only freeholders and landlords would, with the owner of a large estate paying a higher rate than someone who owns a small suburban semi. The proceeds could be used to cut the deficit and national insurance, creating jobs, boosting take-home pay and stimulating growth. Over time, the aim would be to shift the tax burden off hard-working families and on to idle landlords — as in Hong Kong, where revenues from land taxes keep income tax low, there is no VAT or capital gains tax, and enterprise flourishes.

When the Government taxes successful effort, people strive less — some work less, others don’t bother setting up a business, a few relocate overseas — and since hiring is more expensive, fewer jobs are created. But taxing land wouldn’t crimp economic activity, as Adam Smith explained in The Wealth of Nations. It wouldn’t reduce the supply of land, which can’t be spirited away to a tax haven. And it wouldn’t push up rents, which depend on what tenants are prepared to pay rather than landlords’ expenses.

A land tax would actually encourage development. Since it would be payable irrespective of how land is used, it would stimulate the regeneration of derelict sites — such as Battersea power station, where David Cameron launched his election campaign and which has lain idle since 1982. Infrastructure investment that raises surrounding land values, such as Crossrail or a high-speed rail network, would pay for itself and thus escape short-sighted budget cuts. And unlike property taxes, people who do up their homes would not be penalised.

Taxing land values could also limit property bubbles — and the inevitable busts — without discouraging mobility (unlike stamp duty) or business investment (unlike interest rate rises). Relaxing planning restrictions, as Policy Exchange, the Prime Minister’s favourite think-tank, has suggested, would help too. The notion that we can all get rich by swapping more or less the same stock of houses at ever more inflated prices is a dangerous delusion. Property speculation diverts funds from productive investment in promising companies — and when the bubble bursts, the economy plunges into recession, home-owners are stranded with huge debts and banks laid low by bad loans seek bailouts from taxpayers. Isn’t it time we learnt from our mistakes?

Above all, a land tax would be fair. Land in Britain is parcelled out more unequally than in Brazil: 0.3 per cent of the population owns 69 per cent of the land. The country’s biggest private landowner, the Duke of Buccleuch, owns 277,000 acres, not because of his talent or industry, but because his ancestors seized vast swaths of Scotland.

These “land monopolists” — as Churchill dubbed them — get richer not through their own efforts, but that of others. The Duke of Westminster owns 300 acres of what was once fields and is now London’s priciest real estate — Mayfair and Belgravia. And because so many people have established thriving businesses in the capital, that inheritance is now worth billions of pounds. Surely it would be better to tax that windfall gain, rather than the employees and entrepreneurs who generate it?

For sure, farmers and big landowners would kick up a mighty fuss. But since the typical family of four shells out £750 a year to farmers in higher taxes and food prices because of the Common Agricultural Policy, which also inflates land prices, it’s only fair to claw some of that back. And while landowners would point to the impact on a poor granny in a big house — a bogus argument that Churchill called the “poor widow bogey” — she wouldn’t be forced out of her home; her tax bill could be deferred, or she could even be exempted.

Since nearly all of us earn most of our lifetime income from work rather than from rent, taxing land instead of labour would make most people better off. So the question for the coalition Government boils down to this: do you want to help a big society of enterprising people working hard to get ahead — or a tiny hereditary elite creaming off the rewards of others’ efforts?

Tax land: it can’t be hidden from the Revenue

This article appeared in The Times on 16 June 2010.

Filling the gaping hole in the Government’s finances is, in George Osborne’s words, the “great national challenge of our generation”. Unwise spending cuts and tax rises could sap economic growth; unfair ones provoke political unrest; inaction a market panic.

Faced with a national crisis, who better to turn to for advice than Winston Churchill? A century ago, the great man — who, like the present coalition, was both Liberal and Conservative — advocated introducing a land tax as part of a bold package of fiscal reforms. In his emergency Budget on June 22, the Chancellor should set up a commission to consider how best to implement that recommendation.

Taxing land values would be a fair way to help to plug the budget gap while stabilising — and even boosting — the economy. Land is routinely valued each year as property changes hands. With all the land in Britain worth perhaps £5 trillion, a 0.5 per cent levy could raise £25 billion a year — as much as a five-point rise in income tax.

Neither tenants nor leaseholders would pay a penny; only freeholders and landlords would, with the owner of a large estate paying a higher rate than someone who owns a small suburban semi. The proceeds could be used to cut the deficit and national insurance, creating jobs, boosting take-home pay and stimulating growth. Over time, the aim would be to shift the tax burden off hard-working families and on to idle landlords — as in Hong Kong, where revenues from land taxes keep income tax low, there is no VAT or capital gains tax, and enterprise flourishes.

When the Government taxes successful effort, people strive less — some work less, others don’t bother setting up a business, a few relocate overseas — and since hiring is more expensive, fewer jobs are created. But taxing land wouldn’t crimp economic activity, as Adam Smith explained in The Wealth of Nations. It wouldn’t reduce the supply of land, which can’t be spirited away to a tax haven. And it wouldn’t push up rents, which depend on what tenants are prepared to pay rather than landlords’ expenses.

A land tax would actually encourage development. Since it would be payable irrespective of how land is used, it would stimulate the regeneration of derelict sites — such as Battersea power station, where David Cameron launched his election campaign and which has lain idle since 1982. Infrastructure investment that raises surrounding land values, such as Crossrail or a high-speed rail network, would pay for itself and thus escape short-sighted budget cuts. And unlike property taxes, people who do up their homes would not be penalised.

Taxing land values could also limit property bubbles — and the inevitable busts — without discouraging mobility (unlike stamp duty) or business investment (unlike interest rate rises). Relaxing planning restrictions, as Policy Exchange, the Prime Minister’s favourite think-tank, has suggested, would help too. The notion that we can all get rich by swapping more or less the same stock of houses at ever more inflated prices is a dangerous delusion. Property speculation diverts funds from productive investment in promising companies — and when the bubble bursts, the economy plunges into recession, home-owners are stranded with huge debts and banks laid low by bad loans seek bailouts from taxpayers. Isn’t it time we learnt from our mistakes?

Above all, a land tax would be fair. Land in Britain is parcelled out more unequally than in Brazil: 0.3 per cent of the population owns 69 per cent of the land. The country’s biggest private landowner, the Duke of Buccleuch, owns 277,000 acres, not because of his talent or industry, but because his ancestors seized vast swaths of Scotland.

These “land monopolists” — as Churchill dubbed them — get richer not through their own efforts, but that of others. The Duke of Westminster owns 300 acres of what was once fields and is now London’s priciest real estate — Mayfair and Belgravia. And because so many people have established thriving businesses in the capital, that inheritance is now worth billions of pounds. Surely it would be better to tax that windfall gain, rather than the employees and entrepreneurs who generate it?

For sure, farmers and big landowners would kick up a mighty fuss. But since the typical family of four shells out £750 a year to farmers in higher taxes and food prices because of the Common Agricultural Policy, which also inflates land prices, it’s only fair to claw some of that back. And while landowners would point to the impact on a poor granny in a big house — a bogus argument that Churchill called the “poor widow bogey” — she wouldn’t be forced out of her home; her tax bill could be deferred, or she could even be exempted.

Since nearly all of us earn most of our lifetime income from work rather than from rent, taxing land instead of labour would make most people better off. So the question for the coalition Government boils down to this: do you want to help a big society of enterprising people working hard to get ahead — or a tiny hereditary elite creaming off the rewards of others’ efforts?

Another dangerous property boom

House prices rose by 10.5% in the 12 months to April. A typical home now costs £167,800, according to Nationwide – more than in August 2008, the month before Lehman Brothers collapsed, credit seized up and the economy fell off a cliff. It’s as if the financial crisis and the worst recession since the 1930s had never happened.

While home owners – especially those who had fallen into negative equity – will cheer the housing market’s bounce, it is high time Britons were weaned off their addiction to property speculation. It is a dangerous delusion that we can all prosper by swapping more or less the same stock of houses with each other at ever more inflated prices. Unfortunately, few politicians – with the notable exception of Vince Cable– propose to do anything about this nationwide pyramid scheme. After all, another fix of house-price inflation that got consumers spending again would appear to be a pain-free way to stimulate the recovery. In truth, though, it would be recklessly unsustainable.

Fortunately, the housing market is not yet as bubbly as the headline figures suggest. Volumes remain depressed: half as many properties are changing hands as two years ago. And while London prices are being pushed up by bulging City bonuses and foreign investors capitalising on the weak pound to snap up prime property in the capital, the rest of the country is looking less perky. Even so, it is astonishing that prices are notching up double-digit growth with the economy stagnant and houses still extremely expensive. Priced at more than five times average earnings, the typical house is more exorbitant than at the height of the 1989 property boom.

In part, this is because the supply of new houses – which is constrained by planning restrictions and the failure of successive governments to build enough social housing – has failed to keep pace with rising demand. This is notably due to more single people wanting to live alone; blaming immigration is a red herring – while house prices at their peak in 2007 were two-and-a-half times as high as in 2000, they would have been only 7% lower had net immigration to Britain been zero over that period, according to Stephen Nickell, of Oxford University, whose testimony is quoted in an infamous House of Lords select committee report that was hardly pro-immigration. Mostly, though, property prices are buoyed by financial factors: the availability of cheap credit and the willingness of prospective buyers to borrow huge sums in anticipation of future gains.

The belief that the “property ladder” is the road to riches does all manner of damage. It saps long-term growth by diverting funds – and talent – away from productive investment. Three-quarters of bank loans go to the property sector; many would-be entrepreneurs become property developers instead. It also promotes an unhealthy reliance on the financial sector and debt-fuelled consumption. And it destabilises the economy, as euphoric booms are inevitably followed by nasty busts.

Rising house prices force many families to squeeze into smaller homes, prevent many people from buying a place altogether, and inflict long commutes on people who cannot afford to live near their workplaces in city centres. They transfer wealth from poorer young people to richer older ones. And they fracture society between property haves and have-nots. The biggest beneficiaries are Britain’s big landowners – the 0.3% of the population who own 69% of the land – who get richer each year without lifting a finger. The Duke of Westminster, who inherited 300 acres of what were once fields and are now Mayfair and Belgravia – the priciest parts of central London – is laughing all the way to the bank.

What, then, should the government do? For a start, ease planning restrictions and build more social housing. That does not imply concreting over the countryside: 3 million new homes at the government’s target density would take up a mere 0.3% of the UK’s land area – even less if they were built on brownfield sites. Second, the authorities should restrict mortgage lending when the housing market is getting bubbly through targeted measures – such as requiring banks to hold more capital against property lending – that do not crimp desirable business investment.

Last but not least, the government should introduce a tax on land values. Taxing wealthy landowners’ windfall gains would help curb property speculation, fund new social housing and reduce the budget deficit. Over time, shifting the tax burden off labour and on to land would create jobs, reward hard work and promote more stable, sustainable and balanced growth. Fixing the housing market should be a priority for whichever parties form the new government.

Why Krugman is mistaken on migration

Paul Krugman claims that liberals are divided on migration because:

Democrats are torn individually (a state I share). On one side, they favor helping those in need, which inclines them to look sympathetically on immigrants; plus they’re relatively open to a multicultural, multiracial society. I know that when I look at today’s Mexicans and Central Americans, they seem to me fundamentally the same as my grandparents seeking a better life in America.

On the other side, however, open immigration can’t coexist with a strong social safety net; if you’re going to assure health care and a decent income to everyone, you can’t make that offer global.

I don’t dispute his analysis of the politics. But I do disagree with his belief that free migration threatens the welfare state, let alone America’s threadbare social safety net, as I argued here.

As I set out at length in a paper for the Government of Sweden’s Globalisation Council, “Is Free Migration Compatible with a European-Style Welfare State?“, there is no evidence that even Sweden’s generous welfare system acts as a welfare magnet.

Consider that when Poles joined the European Union, only 3 countries allowed them to come and work freely: Sweden, with the most generous welfare state on earth; Britain, which denied Poles access to welfare benefits for the first year; and Ireland (likewise).

Guess how many Polish migrants went to Sweden? Fewer than 1% of them, and most of those to work, not claim welfare.

What’s more, migrants’ contribution to public finances is generally positive, not just because they pay more in taxes than they take in benefits and public services, but more importantly because their diversity and dynamism boosts economic growth.

In short, far from threatening the welfare state, free migration could help to pay for it.

Tax land or carbon emissions, but not hard work

With Britain’s £167bn ($257bn) budget deficit looming, tax is becoming a key election battleground. Businesspeople are rallying to the Conservativesafter they pledged to cancel most of the government’s planned rise in national insurance contributions (NICs). Labour blasts that the Tories’ unfunded “tax cut” will have to be paid for through an “unfair” rise in VAT. Liberal Democrats concede that raising NICs would be damaging, but argue that a “credible” prospective government could not afford to reverse it. Are any of them right – or might there be better ways of raising revenue?

None of the parties have spelled out how they would cut the deficit. Since their various proposals will scarcely dent it, whoever wins the election will have to implement further tax rises and spending cuts.

Is raising NICs a good first step, though? Hardly. With unemployment high and incomes squeezed, it is staggering that Labour wants to raise taxes on labour. Hitting ordinary voters’ main source of income is hardly progressive. Worse, it will harm the recovery by raising the cost of labour and penalising effort. That will crimp pay, cost jobs and discourage working – limiting the tax take and raising benefit spending.

NICs and income tax inflate the cost of employing the average worker by half, according to the OECD, while a single person on two-thirds of average wages faces a marginal tax rate of more than 40 per cent. Hiking taxes on hard work is perverse.

While the Conservatives are right to oppose a “tax on jobs”, Labour and the Lib Dems are right to question George Osborne’s scarcely credible claim that nebulous “efficiency savings” will cover the revenue shortfall. But that does not make rescinding the NIC rise “unaffordable”. It just means the parties need to find better ways to raise extra revenue. Here are three.

First, tax harmful things, such as carbon emissions. A levy of little more than £10 a tonne could fill the £5.6bn gap left by the Tories’ rescinding of Labour’s 1 per cent NIC rise. Raising the rate as emissions fell would ensure a steady stream of revenue. It would also stimulate clean-tech industries and the green jobs of the future, without picking winners.

Second, bring forward reforms to encourage people to retire later. As the first baby boomers reach 65 this year, they should bear some of the burden of adjustment, while working longer would also replenish savings crushed by the crisis. Raising the retirement age by three months a year for the next 20 years and removing incentives for early retirement and obstacles to working longer would reduce pension outlays, raise tax revenues and boost growth.

Third, introduce a tax on land values. Whereas taxing work is wasteful – less is produced and no tax is raised on the lost output – land is in fixed supply so a tax on it is less harmful (and impossible to avoid). Shifting the tax burden from labour to land would therefore boost economic growth, according to an OECD study.

Taxing land values could also limit property bubbles, which divert funds from productive investment in booms and then cause terrible busts – without discouraging development (unlike property taxes), mobility (unlike stamp duty) or investment (unlike interest rate rises).

It would also be fair. Whatever the merits of capitalism, there is nothing intrinsically desirable about the initial distribution of property rights. Britain’s history is such that land is distributed more unequally than in Brazil. There, 1 per cent of the population owns 49 per cent of the land; here, 0.3 per cent owns 69 per cent.

Land appreciates not through landowners’ striving, but that of others. As talented and industrious people have flocked to London, the value of the 300 acres of fields – now Mayfair and Belgravia – passed down to successive Dukes of Westminster over three centuries, has sky-rocketed to an estimated £6.5bn. Better, surely, to tax that windfall rather than the work of those who generated it? A land tax would also pay for much-needed infrastructure investments that raise surrounding land values.

Replenishing Britain’s public finances will involve painful choices. But it is also a chance to make tax fairer and less harmful to growth. Wise politicians should seize it.

Tax the ground they walk on

Consider these three facts. One: Britain is struggling to recover from a crisis caused in large part by a huge property bubble. Two: unemployment is painfully high. Three: the government has a huge gap in its finances. So, what would you raise taxes on?

Astonishingly, Labour is proposing to raise already high taxes on labour, through an increase in national insurance contributions. Finance fails, so workers pay—this is not only unfair, it will also damage future growth by making labour more expensive. Existing income tax and national insurance already increase labour costs by half, causing unemployment. Raising taxes on something the government wants to encourage—hard work—is perverse.

Another option is taxing harmful things, like carbon emissions. A charge of £30 a tonne could raise around £16bn and reduce emissions. Even better, if the tax per tonne rose as emissions fell, it would ensure a steady source of revenue. But still bigger gains could come from taxing an unproductive asset at the heart of our most recent bubble: land.

Britons have long seemed addicted to property speculation. Yet swapping more or less the same stock of houses with each other cannot logically create riches for society as a whole. Indeed, it has huge costs because it diverts funds from productive investment—while the resulting boom and bust, as we know, can cause havoc. Taxing land could curb property bubbles, and encourage productive investment elsewhere.

It would work by valuing land holdings every year (based on recent market transactions in the same area) and imposing a charge. If this was raised when land values were rising fastest, it would take the steam out of any bubbles without affecting the rest of the economy, as interest rates do. And whereas taxing income from work is wasteful—less is produced and no tax is raised on the lost output—land supply is fixed. No matter how heavily you tax it, land cannot be spirited away to a tax haven.

Land already accounts for the bulk of property values, especially in expensive places like central London. But taxing its value, rather than property or any improvements to it, would not penalise people who do up their home. It would also encourage the development of vacant and derelict land. Unlike stamp duty, a land-value tax would not be a tax on property purchases, so it would not discourage people moving. And it needn’t force a granny in a big house of out of her home; payment could be deferred until her death if necessary.

Critics say the tax is problematic because land is hard to value. Nonsense. Property changes hands all the time; estate agents and surveyors routinely value property as part of their work. Land-value taxes could be easily and cheaply collected. Hong Kong and Singapore both derive a large share of their revenue from variants of this system and have very low income taxes as a result. Denmark also has a long tradition of land-value taxation.

Most importantly, land taxes are also fair. In most countries history means the distribution of land is highly unequal. Land in Britain is more unequally distributed than in Brazil: there 1 per cent of the population owns 49 per cent of the land; here 0.3 per cent owns 69 per cent. Britain’s biggest private landowner, the Duke of Buccleuch and Queensberry, owns 277,000 acres because he descends from a man who seized vast swathes of Scotland. Far from being taxed, he is rewarded with huge handouts from the common agricultural policy.

What’s more, the value of land increases each year not through landowners’ striving, but that of others. Mayfair and Belgravia—originally 300 acres of fields passed down to successive Dukes of Westminster—are now worth an estimated £6.5bn. Better, therefore, to tax that windfall gain rather than the work of those who really generated it. And since the distribution of land is unequal, taxing it would be progressive too.

Likewise, when a government builds a new railway line and the value of the surrounding property soars, surely it is right that this unearned wealth be taxed. When the Jubilee line extension to Canary Wharf was built, property values adjacent to its stations rose hugely—by £2.8bn at Southwark and Canary Wharf alone. Land-value taxes would pay for—and thus encourage—public investment in valuable infrastructure. It could fund, for instance, the high-speed rail network that Britain so desperately needs. Conversely, landowners would be partly compensated for new developments that reduced the value of their land.

The concept has a fine pedigree. David Ricardo, the founder of modern economics, was a fan. So is Martin Wolf, the FT’s chief economics commentator, while Liberal Democrat shadow chancellor Vince Cable has proposed a “mansions tax”, which would target the richest homeowners. Perhaps the most eloquent case was made by Winston Churchill in 1909. “Roads are made, streets are made, services are improved… To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced… he contributes nothing to the process from which his own enrichment is derived.” A century on, the rest of us would benefit from finally facing down the ultimate vested interest: the big landowners who still own most of Britain.

Have Labour lost it?

Why is Labour staking its election campaign on defending a rise in national insurance?

It will hurt the pocket of the average voter.
It will cost some their job.
It isn’t even a “stealth tax” any more.

As for Gordon Brown’s Wayne Rooney reference to the need to support an injured economy, how on earth will raising taxes on labour aid the recovery? It’s like the 10p-tax-band abolition fiasco all over again.

Have Labour lost it?

National insurance rise won’t fix deficit

George Osborne does not look like a convincing chancellor-to-be. Polly Toynbee’s charge that the Conservatives’ economic policy keeps zigzagging is correct. It is also true that the Tories’ tax plans do not add up. But it is nonsense to claim that deciding not to implement Labour’s planned rise in national insurance contributions would be a “tax cut” that the country cannot afford. It simply means that a different – and with luck, better – way would have to be found to fill Britain’s gaping budget hole – £167bn this year, according to the Treasury’s latest forecasts.

At a time when unemployment is painfully high and workers’ incomes are being squeezed, it is astonishing that the government – a Labour government – thinks that the best way to raise extra revenue is to increase already high taxes on labour. What is progressive about hitting hard-working people with the bill for the financial crisis?

The national insurance hike is not only unfair; it will also damage future growth by making labour more expensive and penalising effort. It will drive a bigger wedge between the cost of employing people and how much they actually take home, cutting pay and costing jobs. And it will discourage many people from working harder – and some from working at all. That, in turn, will reduce the tax take and raise spending on unemployment and other social benefits.

Existing income tax and national insurance already increase labour costs by half, according to the OECD, while a single person on two-thirds of average wages faces an effective tax rate of over 40% on every additional pound they earn. Raising taxes still further on something the government wants to encourage – hard work– is perverse. Governments of all stripes should be cutting them as far as possible instead.

There are better ways to fill the budget gap, as I argue in my new book, Aftershock: Reshaping the World Economy, which is out on 6 May.

Tax harmful things, such as carbon emissions. A charge of £30 a tonne could raise around £16bn a year and reduce emissions. That would raise as much as a 3-percentage-point rise in the basic and higher rates of tax, a similar rise in employee and self-employment national insurance rates, or a 3.5-percentage-point rise in the standard rate of VAT, according to the green budget produced by the independent and highly respected Institute for Fiscal Studies. If the tax per tonne rose as emissions fell, a carbon tax would ensure a steady source of revenue.

The government could also accelerate desirable reforms, such as raising the official retirement age. It is normal for people to work longer now that they can be productive well past the age of 65 – and unaffordable for governments to burden young workers with paying to keep sprightly 66-year-olds on the golf course. The government could raise the retirement age by three months a year for the foreseeable future, while removing the incentives for early retirement and the obstacles to working longer. It would give a triple boost to government finances, reducing pension spending, increasing the tax take and boosting economic growth. Since many people have had their retirement savings devastated by the crisis, they should be open to working longer to replenish them.

A third option is to introduce a tax on land values, as I argue at greater length in an article in this month’s Prospect. That would help curb property speculation, which diverts funds from productive investment in booms and then causes terrible busts. Shifting the tax burden from labour to land would also boost growth, according to an OECD study. Why? Because whereas taxing income from work is wasteful – less is produced, and no tax is raised on the lost output – land supply is fixed. No matter how heavily you tax it, land cannot move, or be spirited away to a tax haven.

A tax on land values would also be progressive, since land in Britain is more unequally distributed than in Brazil – there, 1% of the population owns 49% of the land; here 0.3% owns 69%. Moreover, the value of land increases each year not through landowners’ striving, but that of others. As economic activity in London has soared through the ingenuity and toil of the masses of people who have flocked there, the value of the 300 acres of fields – now known as Mayfair and Belgravia – passed down to successive Dukes of Westminster over three centuries has sky-rocketed to an estimated £6.5bn. Wouldn’t it be better to tax that windfall gain rather than the work of those who really generated it?

Britain’s public finances are in a terrible mess. Putting them right will be painful. But it is also an opportunity to have a big debate about reforming the tax system to make it fairer and less damaging to growth. The three parties could start by looking seriously at the three options mentioned above.

Tax land, not labour

Consider these three facts.

  1. Britain is struggling to recover from a crisis caused in large part by a huge property bubble.
  2. Unemployment is painfully high and people are feeling the pinch.
  3. The government has a huge gap in its finances that cannot be filled by public-spending cuts alone.

What would you raise taxes on?

Astonishingly, Labour is proposing to raise already-high taxes on labour, through an increase in national-insurance contributions. Finance fails, so workers pay—this is not only unfair, it will also damage future growth by making labour more expensive and penalising effort.

Existing income tax and national insurance already increase labour costs by half, while a single person on two-thirds of average wages faces an effective tax rate of over 40 per cent on every additional pound they earn. Raising taxes on something the government wants to encourage—hard work—is perverse.

Another option is taxing harmful things, like carbon emissions. A charge of £30 a tonne could raise around £16bn and reduce emissions. Even better, if the tax per tonne rose as emissions fell, it would ensure a steady source of revenue. But still bigger gains could come from taxing an unproductive asset at the heart of our most recent bubble: land.

Britons have long seemed addicted to property speculation. Yet swapping more or less the same stock of houses with each other cannot logically create riches for society as a whole. Indeed, it has huge costs because it diverts funds from productive investment—while the resulting boom and bust, as we know, can cause havoc. Taxing land could curb property bubbles, and encourage productive investment elsewhere.

It would work by valuing land holdings every year (based on recent market transactions in the same area) and imposing a charge. If this was raised when land values were rising fastest, it would take the steam out of any bubbles—without affecting the rest of the economy, as interest rates do.

A land tax would be efficient as well as stabilising. Whereas taxing income from work is wasteful—less is produced, and no tax is raised on the lost output—land supply is fixed. So shifting the tax burden from labour to land would boost growth, according to an OECD study. No matter how heavily you tax it, land cannot move, or be spirited away to a tax haven.

And since land values in Britain are huge, even a low tax rate could raise big sums of money. The rate could be tapered so that small landholders pay very little while large ones pay much more.

Land already accounts for the bulk of property values, especially in expensive places like central London. But taxing its value, rather than that of property or any improvements to it, would not penalise people who do up their home.

It would also encourage the development of vacant and derelict land where planning permissions it.

Unlike stamp duty, a land-value tax would not be a tax on property purchases, so it would not discourage people moving. And it needn’t force a granny in a big house out of her home; payment could be deferred until her death if necessary.

Critics say the tax is problematic because land is hard to value. Nonsense. Property changes hands all the time; estate agents and surveyors routinely value property as part of their work.

Land-value taxes could be easily and cheaply collected. Hong Kong and Singapore both derive a large share of their revenue from variants of this system and have very low income taxes as a result. Denmark also has a long tradition of land-value taxation.

Perhaps most importantly, land taxes are also fair. Whatever you think of the merits of capitalism, there is nothing intrinsically desirable about the initial distribution of property rights in an economy. In most countries history means the distribution of land is highly unequal.

Land in Britain is more unequally distributed than in Brazil: there 1% of the population owns 49% of the land; here 0.3% per cent owns 69%.

Britain’s biggest landowner, the Duke of Buccleuch and Queensberry, owns 277,000 acres because he descends from a man who seized vast swathes of Scotland. Far from being taxed, he is rewarded with huge handouts from the Common Agricultural Policy.

What’s more, the value of land increases each year not through landowners’ striving, but that of others. As economic activity in London has soared through the ingenuity and toil of the masses of people who have flocked there, the value of the 300 acres of fields—now known as Mayfair and Belgravia—passed down to successive Dukes of Westminster over three centuries has sky-rocketed to an estimated £6.5 billion.

Wouldn’t it be better to tax that windfall gain rather than the work of those who really generated it? And since the distribution of land is so unequal, taxing it would be progressive too.

Likewise, when a government builds a new railway line and the value of the surrounding property soars, surely it is right that this unearned wealth be taxed. When the Jubilee line extension to Canary Wharf was built, property values adjacent to its stations rose hugely—by £2.8bn at Southwark and Canary Wharf alone.

Land-value taxes would pay for—and thus encourage—public investment in valuable infrastructure. It could fund, for instance, the high-speed rail network that Britain so desperately needs.

Conversely, landowners would be partly compensated for new developments that reduced the value of their land.

The concept has a fine pedigree. David Ricardo, the founder of modern economics, was a fan. So is Martin Wolf, the FT’s chief economics commentator, while Liberal Democrat shadow chancellor Vince Cable has proposed a “mansions tax”.

Perhaps the most eloquent case for land-value taxes was made by Winston Churchill 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, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.

A century on, the rest of us would benefit from finally facing down the ultimate vested interest: the big landowners who still own most of Britain.

This is an extended version of an article that appears in the new Prospect, which is on sale now.