Land Value Taxation
by Ken Gibb
I was speaking at the Scottish rural housing conference in Birnam, north of Perth, on Friday. While I would never claim to have any expertise in rural matters, I am interested in taxation and housing. So, when invited to talk about land value taxation, something that hitherto I only have had cursory exposure to, I was happy to give it a go. We had a very lively session from which I thought I would make a few reflections.
In a 2005 IPPR paper (1), Ian McLean charted the history of the land value tax idea. Going back to Tom Payne’s use of John Locke’s property rights arguments to justify taxing land, through Ricardo’s attack on unproductive economic rent from monopoly land owners and on to Henry George and the ‘crank’ idea to have a single tax through taxing land. McLean, like Andy Wightman elsewhere (2), also stressed that Lloyd George, supported by Churchill, twice proposed an LVT for the UK prior to the First World War. The debate after the Second World War was shaped by the Atlee Government’s planning legislation which was supposed to combine the granting of planning permission with some form of land development or betterment tax – and four successive attempts subsequently to introduce and make work such taxation abjectly failed.
More recently, the debate around the LVT has turned on three wider questions – using taxation to moderate the housing market’s volatility (e.g. John Muellbauer and the Joseph Rowntree Foundation), whether it should be a replacement for council tax and business rates within a reformed local government finance settlement (McLean and Wightman), or if taxation of economic rents in general should be at the centre of systemic tax reform (Mirlees Review)?
The core idea is taxing unproductive economic rent derived from land ownership. Taxing the economic rent in land values but leaving the structures untaxed should allow ‘society’ to capture a proportion of the gains landowners receive in uplift in values as a result of planning permission and the benefits of public infrastructure support. Agricultural land would be untaxed. Thus, landowners with planning permission have an incentive to build and there is no tax disincentive to make the land productive. Of course, in reality, the taxes will take many different forms but research by the Lincoln Land Institute suggests that there are modest positive effects of increased production on land as a consequence of such taxes (3).
The Mirlees review identifies, rightly, that housing is inefficiently and unfairly taxed. They want to reduce the use of transactions taxes in general including stamp duty and would not return to betterment taxes captured at sale. In addition they argue for a tax on the returns made to housing assets in excess of risk free returns. This would replace council tax, which is of course in many respects a dysfunctional tax. In principle they could extend the economic rent argument to a land value tax but they worry about the practicalities of establishing and running it.
Should LVT be a local or a national tax? The case for a local model is hampered by three issues. First, the breaking up of council tax benefit creates an uncertain future of help for low income households to pay local taxes. Second, there are the long term corroding effects of the council tax freeze on democracy and accountability. Third, there is the wider Rubik’s Cube trilemma of working out comprehensive reform through the best mix of local-central services, the right geography for local government and how to pay for it.
Local property taxes of one kind or another may be encouraged, perhaps more so if they were combined with a local income tax associated with paying for national need and redistribution services locally delivered. However, the key point made by those who propose a national (UK or Scotland) tax is that it could be used to moderate price volatility and that very variation in prices locally makes for an unstable local tax base.
Cutting to the chase – is this a debate about taxing land for better fairness and housing/property market arguments or is it about more efficient and durable local government finance revenue raising? I think it would be simpler to keep the tax centralised and to recognise that local government reform has to operate consistently on the three levels mentioned above. However, just getting to first base on making a case that will be listened to about reforming council tax is pretty difficult at the current time. Reforming local government finances on a durable and defensible basis will require significant political consensus and support for change across the political system. That simply does not exist. But that is also not to say we should not continue to make the argument for change.
Taking that rather depressing reality to heart, what about the barriers and the politics of land value taxes? The tax would have to be valued and in particular the value of land would need to be separated from structures for each land use. Once such a tax base existed, it would need to be maintained and updated. This is certainly not beyond us – Lloyd George managed. But it will be initially expensive to establish, we can expect valuation with appeals and more widely there is the sense that property taxes are increasingly viewed as challengeable and illegitimate. Automatic valuation systems can help once the tax base is established along with transactions and planning permission data but it is this wider issue of acceptability that must be overcome.
A second concern for property taxes, ignoring rebate systems, concerns the asset-rich, cash-poor pensioner problem. Perhaps, as has been suggested by writers like McLean, that we need to support the development of deferred fees till property sales take place? It might also make sense to operate a proper phased transitional shift towards such a tax, damping the impacts on those most affected.
A final thought: it would be good to get a discussion going about how to make progress on rational tax reform for areas like this which have both high salience and visible articulate losers (the opposite of benefit reform).
1. McLean, I (2005) The Politics of Land Tax – Then and Now. IPPR: London.
2. Wightman, A (2007) A Land Value Tax for Scotland. Scottish Green Party: Edinburgh.
3. Dye, R and England, R (2010 Assessing the Theory and Practice of Land Value Taxation. Lincoln Land Institute: Washington DC.