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By Philippe Legrain 2 COMMENTS

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.

Posted 10 Apr 2010 in Published articles
  1. The Liberal Democrats “Alter” (Action for land taxation and economic reform) has both the party leader and shadow Chancellor Vince Cable among its supporters. Although due the democratic nature of the party conference they have not yet been able to turn this into land tax policy. Longer term a broader support within the Libdems and across all political parties would be required for land taxation to make progress.

  2. What about the effects of LVT on poverty? or on bankrupcy? Philippe seems to have presented only a small part of the full LVT story. If and when LVT is gradually introduced it will give the speculators in land values a chance to take their money elsewhere, before there is a spate of mortgage failures and foreclosures. This means that although the land will then become less costly, it will not happen quickly and that investors in the banks would have a chance to take out their money from land before putting it back in for shares of new companys, whose needs will become apparent as the dynamics of greater prosperity begin to be felt.

    When land is taxed the withholding of it out of use will cease. It will no longer be worthwhile to speculate in its value and more sites will become available for use. Since its price for occupancy or for ownership depends on competitive forces, there will be lower prices associated with the greater numbers of sites becoming available. This will help to reduce the cost of produce and as a result the demand for consumer goods will grow. With a transfer of the burden of taxation off incomes and purchases, this demand will be even greater whilst the national income from LVT will cover what is not collected directly from production. This means less unemployment, less homelessness and a reduced number of families facing poverty.

    It might be justly claimed that the biggist limitation on greater national prosperity is due to the way that the land is being allowed to grow in value (due to taxation money being invested by government and local authorities in infrastructure) and withheld for speculation. Not only do the tax payers deserve something better than their investments being used to raise (for free) the usefulless of someone else’s land, but they are then having to spread out due to the high cost of access to it and the most productive land in the city centers being monopolized.

    LVT is cheap to collect compared to other product-based taxes. Today there are many ways by which a property owner or even a family supporter can claim relief from paying his taxes. To overcome this trend, a large army of tax inspectors are needed to supervise. With LVT instead, the ownership of a site is immediately known, as well as the approximate value of the site compared. The only work apart from the numerical finances is the valuation and publication of land-value maps for public use and individual knowledge as to who pays what. The smaller number of government employees would then join in the greater numbers of those employed in productive work and the wastage of non-productive workers in government would be reduced.

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