The case for a land-value tax

 

Buy land, they're not making it anymore.’ - Mark Twain

The UK economy is beset by three compounding problems: no growth, a high deficit and a constricting straightjacket of regulations. I posit that a reform to land-use planning, partnered with a land-value tax (LVT) substituted for business rates and council tax, offers a potential solution to all of these.

The unique merits of a land-value tax have pressed on the minds of economists for over 200 years. Economics has taught us how to analyse taxes against the criteria of efficiency, equity and revenue raising potential. The taxes most heavily applied in the UK today succumb to the theory of the second best: for example, income tax damages efficiency by perverting labour supply decisions; business rates distort firms’ input decisions, such that scarce resources are misallocated and final goods are not produced in the least-cost way. The key driver of inefficiency in both cases is the responsiveness of the payer, or the elasticity. High elasticities imply a greater distortion and greater efficiency loss.

In accordance with the sacrifice principle of Mill and others, an equitable tax system is one in which the utility burden is equalised across payers. By this criterion progressivity is desirable. Revenue raising potential is a function of the size of the tax base and the ability to avoid or evade.

The LVT is an annual levy on the underlying value of land. What is on top, whether it’s residential housing, a factory or wheat is of no importance, so that an empty plot of land next to a plot with a mansion on are valued the same ceteris paribus. This value is derived from the amenities and infrastructure which surround it, or Ricardian economic rent monies accruing not by virtue of work or returns to capital but by virtue of exclusive rights over the land’s use, or ownership. As described by Henry George in 1879, and more recently by the Institute for Fiscal Studies in the Mirrlees Review, this value is borne out of community effort, rather than individual effort, and therefore its returns should properly be redistributed back to that community.

Since the supply of land is finite and fixed, it is perfectly inelastic. This means that economic decisions are unaffected by the tax and that the incidence coincides with the legal payer (landowner). When a landowner builds a swimming pool on his plot its value increases but his LVT payment remains unchanged; when a public swimming pool is built a short walk away and the value of his plot increases, so does his tax liability. There is no efficiency cost.

One ‘wrinkle’ as the IFS puts it, is that land-use planning laws mean a plot designated agricultural is worth considerably less than a plot designated business (over £2.4m less according to IFS estimates). But this presents a big opportunity. A recent IEA report showed how planning restrictions have led to a chronic shortage of affordable housing and a pernicious degree of intergenerational inequality. The Centre for Economic and Business Research has shown that if house building could be increased by 300,000 units a year between now and 2015, GDP would increase by five percentage points and rents would fall by 11%.

Relaxing planning restrictions would lead to a rebalancing of land designations towards their most profitable use, namely residential housing and business. This would lead to a fall in house and business property prices as supply increased, and windfall gains to land owners. A concurrent LVT would capture some of those gains. As the tax base is observable and fixed, neither avoidance nor evasion is possible, making collection cheaper. Substituted for other distortionary and inequitable taxes such as council tax and business rates, LVT could also increase efficiency. Paired with an overhaul of the antiquated system of land-use planning, it would boost growth and ease budgetary woes. 

@ Richard Wellings on Thu, 06/09/2012 - 15:51. " I should point out that articles on the IEA blog are published for discussion purposes and that the publication of this article does not mean that the IEA supports LVT. The IEA has no corporate view on this matter." Perhaps it should? Seem like a fundamentally important issue, wouldn't you agree?
@ Paul Perrin: Your objections to LVT are unfounded, if not fanciful or dishonest, as already explained -- and as all objections to LVT have always been, and always will be. If planning permission raises the value of your land, your LVT is not going up "through no fault of your own," but because you have consciously and deliberately decided to deprive others of their liberty to use the land nature put there, and the associated access to the opportunities, amenities, services and infrastructure government and the community have made available there. It is crucial to understand exactly what a land title is: not rightful ownership of the fruits of one's labor, but merely a legal privilege of depriving others of their liberty to use the land that was already there, ready to use, with no help from the owner or anyone else. Where a change in planning permission results in a permitted use that no longer matches existing improvements, the assessed land value would be reduced by the cost of buying and demolishing the existing improvements, as any prospective user wanting to engage in the new use would have to shoulder that cost before he could use the land. All land would be taxed NOT as if it were already improved to the maximum extent possible, but the SAME as if it were to be used in its most profitable permitted use. That is what taxing its "unimproved" value means: taxing the value someone is WILLING TO PAY to use (and normally improve) the land for that purpose.
Use the dividend from the SVT to finance a basic tax fee income of 10k per annnum for each UK citizen.
While there should certainly be a universal individal LVT exemption analogous to the universal individual income tax exemption (or, second best, a modest universal citizens' dividend) sufficient to enable everyone to have free, secure, exclusive tenure on enough good land to live on, devoting the entire LVT revenue to a dividend would leave the existing unfair and harmful tax system in place. That is not the idea. Liberty and justice require removal of not only the landowners' unjust privilege, but of the unjust burdens the existing tax system imposes on producers and consumers.
Roy, don't worry, the current tax system has personal allowances and funds a welfare system and state pensions, if you roll them all together (a tax reducer is the same as a cash benefit) it is easily simplified into a Citizen's Income, which we can fund out of LVT the same as the welfare and pensions systems are funded out of VAT, NIC, Income tax. So the nice thing is that the median size household in a median value home would pay net very little in LVT minus CI. Keep up the good work!
While I realize many LVT advocates have jumped on the CI bandwagon, the universal individual exemption (UIE) is a better alternative in a number of ways, probably the most important of which is politically: it will be easier to pass LVT with a UIE than a CI for the same reason income tax has a UIE but not a CI. People don't mind everyone else having a tax exemption if they get the same exemption, but they don't like the idea of paying taxes to fund free money for everyone else, even if they also get the same free money. It doesn't matter that the actual economic effect would be similar. Other advantages of the UIE are that it can't be lost, stolen or squandered as cash can; it doesn't worsen problems of addiction, gambling, crime, etc. as cash payments do; it is a reduction of government spending on poverty relief, housing subsidies, etc. rather than an increase in government spending.
Roy, it's a bit harsh describing CI as a bandwagon, it is a simplifcation exercise, and however it is funded, it is better than the current system of means testing etc. But politically yes, you are quite right that UIE is easier to explain to people who are used to the concept of "personal allowances". Clearly, a sensible LVT-CI system would see the two items netted off at source anyway, so people either are issued a small refund or make a correspondingly smaller LVT payment. The same applies to council rents, these can be knocked straight off a family's CI. So we could have a welfare system for some people and UIE for other people, it's all window dressing of course. I'm not sure what relevance your drugs comments have; if we refuse to give anybody cash on the basis that some people "squander" it, that looks a bit like collective punishment to me. I'm quite sure that there will be a couple of pensioners somewhere who spend it all on booze and at the bookies, that's not really an argument for scrapping old age pensions, is it?
I just wonder if we have to concern ourselves with CI or UIE at this stage. If the case for collecting the annual rental value of land is to be understood and accepted we have to Keep It Simple. There is so much that needs to be done to improve basic infrastructure, provide first rate education and health care facilities, provide care for the elderly, etc, etc. There may well be a surplus at some stage but to promote our cause on this carrot may upset the vegetable cart and detract from the basic message that all taxes on wages, production, sales and savings will be abolished and replaced by collecting the value of land we all create. If this isn’t sufficient incentive I give up!
Mike, it clearly isn't sufficient incentive because of Poor Widows In Mansions, army of surveyors, attack on wealth, tax on aspiration, houses bought out of taxed income etc etc, but please don't give up :-)
I have just noticed 2 items in today's paper to support my previous point regarding infrasturcture and health care. Nick Clegg said yesterday, 'Public spending is threatening to undermine economic prosperity and there is no choice but to rein in spending as the fabric of society could be undermined without austerity.' With LVT we could have all the public spending we need and prosperity on top! Another item says that 'Forty percent of NHS finance directors say that patient care will get worse and that the NHS will miss its £20billion efficiency savings by 2015.' There is plenty to do before we get round to thinking about CI!
@ Mark: "So we could have a welfare system for some people and UIE for other people, it's all window dressing of course." IMO the UIE is the key provision that LVT advocates have been missing for 250 years, the provision that enables us to show how LVT benefits all but the biggest landowners, and that frees the landless from the rent treadmill. That's not just window dressing. "I'm not sure what relevance your drugs comments have; if we refuse to give anybody cash on the basis that some people "squander" it, that looks a bit like collective punishment to me." We should not be giving anybody cash for a much more fundamental reason: they have no right to it. They DO have a right to use land, a right that private ownership of land has forcibly removed without just compensation. That is why the UIE will always be economically, politically, and morally superior to the CI. The fact that some people squander the cash government gives them is not the reason the cash gift is wrong; rather, the fact that giving people cash is wrong is what causes the bad outcomes like squandering. "I'm quite sure that there will be a couple of pensioners somewhere who spend it all on booze and at the bookies, that's not really an argument for scrapping old age pensions, is it?" Actually, it is, but it is not the relevant or best argument. The relevant and best argument for scrapping old age pensions is that they take too much money from people who both need and deserve it and give it to other people who neither need nor deserve it.
@ Mike "I just wonder if we have to concern ourselves with CI or UIE at this stage." Yes, we do. The UIE is absolutely crucial to the economic, political and moral success of LVT. It is not enough to remove the landowners' privilege of pocketing other people's taxes. We must restore the equal human right to liberty, and justly compensate its abrogation by exclusive land tenure. "If the case for collecting the annual rental value of land is to be understood and accepted we have to Keep It Simple." Could the broad income tax on wages ever have been passed if its advocates "kept it simple" by not including a UIE? "There is so much that needs to be done to improve basic infrastructure, provide first rate education and health care facilities, provide care for the elderly, etc, etc. There may well be a surplus at some stage but to promote our cause on this carrot may upset the vegetable cart and detract from the basic message that all taxes on wages, production, sales and savings will be abolished and replaced by collecting the value of land we all create. If this isn’t sufficient incentive I give up!" It's not sufficient incentive to those who see the value of their principal assets being compromised. We need to show them very concretely how they will be better off. The UIE is crucial in that effort.
As the "pure" idea of LVT moves into the party political arena there are bound to be calls for allowances and exemptions. One of the ideas which is already going the rounds is a "homestead allowance", a threshold value below which no LVT is payable on the land holding. Apart from diluting the concept, it is open to avoidance, eg by sub-division of plots. A personal LVT allowance, however labelled, is a concession which does not dilute the fundamental principle that everyone should share in land value. One question this raises is who should be entitled to receive it? All UK citizens? All UK citizens resident in the UK? All UK residents? Everyone with a NI registration?
Henry, apply common sense. The answer is "All UK [sic] citizens resident in the UK" Clearly, if somebody has lived here long enough (three years? Five years?) he is entitled to apply for a British passport, and if he has kept his nose clean he will have no trouble getting it. Applying for citizenship shows a bit of commitment and it would be spiteful in the extreme to prevent people born abroad from getting the personal allowance (or whatever we wish to call it); similarly, it would filter out a few undesirables (the idea of making people wait a few years before getting benefits here is a good idea anyway, even though the EU doesn't like it). And non-residents whether British citizens or otherwise do not get the exemption, clearly, as that would be a subsidy to non-resident landlords. If you want to move abroad, feel free to do so but not at everybody else's expense.
Did Mrs Thatcher support a site value tax ? Why do so few countries have one ? Why does it receive so little support from all sections of UK society ? Use it to abolish labour taxes.
Dave, funnily enough, the UK has quasi-LVT on commercial land and buildings (Business Rates), and it used to have Domestic Rates and Schedule A. So all these horror predictions are quite simply unfounded, we know how to administer them in practice, we know all the knock-on effects, what collection rates are etc. And as it happens, it is easy and cheap to administer, there are no bad knock-on effects (apart from empty property discounts - when these were reined in, occupancy rates went up, of course), the price bubble in commercial land and buildings was nowhere near as big as in residential (the last house price bubble but one was caused by the shift from Domestic Rates to Council Tax), collection rates are very good (98%, I believe) and there is still plenty of investment into new factories and office buildings (to the extent the NIMBYs allow it). Experiments with Enterprise Zones show that when Business Rates are reduced, rents just go up, they have no positive impact on business activity etc.
There is so much that needs to be done to improve basic infrastructure, provide first rate education and health care facilities, provide care for the elderly, etc, etc. There may well be a surplus at some stage but to promote our cause on this carrot may upset the vegetable cart and detract from the basic message that all taxes on wages, production, sales and savings will be abolished and replaced by collecting the value of land we all create. On the expenditure-side, even if we get the tax-side correct with LVT, there is still the issue of whether pouring money into the existing modes of services is the right thing to do. I've yet to come across a representative of an institution of public provision in education, health etc. claiming that "we've actually got all the money we need now"...
"There is so much that needs to be done to improve basic infrastructure, provide first rate education and health care facilities, provide care for the elderly, etc, etc. There may well be a surplus at some stage but to promote our cause on this carrot may upset the vegetable cart and detract from the basic message that all taxes on wages, production, sales and savings will be abolished and replaced by collecting the value of land we all create." On the expenditure-side, even if we get the tax-side correct with LVT, there is still the issue of whether pouring money into the existing modes of services is the right thing to do. I've yet to come across a representative of an institution of public provision in education, health etc. claiming that "we've actually got all the money we need now"... There...
Sounds like someone who is wanting to build a house in the country to me.
@ KJ > On the expenditure-side, even if we get the tax-side correct with LVT, there is still the issue of whether pouring money into the existing modes of services is the right thing to do. I've yet to come across a representative of an institution of public provision in education, health etc. claiming that "we've actually got all the money we need now"..." The extent and allocation of public spending are surely for voters to decide. The point is that to the extent that money spent on public services and infrastructure isn't just wasted through incompetence or stolen through corruption (which is a smaller problem in the UK than in most other countries), it is a subsidy to landowners, because they are empowered to charge everyone else full market value for ACCESS to those services and infrastructure. LVT provides the only way to recover the value that public spending creates in order to pay for itself, and is therefore the ONLY POSSIBLE tax system that aligns government's own financial incentives with the public interest in efficient public spending.
RL: agreed.
My idea of a basic tax free income of 10k per annum for each adult UK citizen solves the spending dilemma. Govt spending could be reduced to 15 % of GDP. All welfare, education and health spending could be abolished.
"Relaxing planning restrictions would lead to a rebalancing of land designations towards their most profitable use, namely residential housing and business." This would hold true until food prices rose to a level at which agricultural land value exceeded residential and business uses. Distorting effects notwithstanding, although we could potentially maximise the financial _value_ of the land, we could damage its financial _productivity_. We could maximise financial returns from the land at the expense of creating negative externalities. For instance, mechanised agriculture only apparently increases net returns from the land (higher incomes for larger more mechanised farms), but creates negative externalities in the form of decreased biodiversity, decreased land use (evidence shows that multi-crop integrated smallholdings are the most agriculturally productive - don't have reference to hand, but can produce) increased pollution, reduced rural employment, etc. I am persuaded that with a sufficient science of space that relates productive capacities of land, labour and capital, that LVT might offer an optimal solution to land use. However, this science is almost non-existent, and as such it is difficult to accept that the financial value created through LVT would not come at the expense of uncounted negative externalities, which may exacerbate the financial costs of inequalities beyond present levels.
DC: "evidence shows that multi-crop integrated smallholdings are the most agriculturally productive - don't have reference to hand, but can produce" I am very much inclined to believe that - compare some allotments with a similar area which is a single field. More crops per acre, more diversity (because everybody plants different stuff etc). Now, why are allotments so small and so intensively cultivated? Because they cost £100 rent a year for a hundred square yards. A larger field rented by a farmer costs £100 a year to rent for a whole acre. And also because the allotment gardener does not have to pay income tax on the value of what he produces. So allotments are very efficient in terms of crops per acre and large farms are very efficient in terms of crops per labour input. So therefore it is reasonable to assume that taxing farm land more heavily and earned income more lightly would lead to there being many more smaller farms (more smallholders, fewer agri-business). As ever, LVT solves the perceived problem before it has even arisen. My new blog explains all (click name for index).
I am persuaded that with a sufficient science of space that relates productive capacities of land, labour and capital, that LVT might offer an optimal solution to land use. However, this science is almost non-existent, and as such it is difficult to accept that the financial value created through LVT would not come at the expense of uncounted negative externalities, which may exacerbate the financial costs of inequalities beyond present levels. If by that science you mean an accurate estimate of what future land-use requirements are for farming in the equillibrium between the alternate uses of land, well, that is not possible, but that's not a fault of LVT. There's a whole range of levels between loosening planning regulation, to abolishing them. I can agree in the sense that I would be careful with abolishing all control of greenfield development if I was the enlightened monarch, just out of conservatism. OTOH, it's not certain that the degree of greenfield development would be that great, with the force of optimizing existing land in use working the other way. As for externalities, such as runoffs, reduced biodiversity etc., there is nothing about LVT that says you can't correct for that with other policies. And you may be right that more intensive, small-scale ag has better productivity, but AFAICS, that's enhanced under LVT by moving away from taxation of capital and labour. But as always, the price system in a functioning market is the correct and only rational method of measuring productivity, not pounds of produce and calories produced.
@DC: Food prices would not rise at all with LVT. They would _decline_, as prices of almost all goods and services would, when their production was relieved of the burden of taxation. Relaxation of planning restrictions would not make that much difference, as LVT would stimulate more intensive, productive use of all the vacant and under-used sites that already have planning permissions but are being held idle for speculative gain.
I am just starting to become interested in this so excuse my ignorance, I am trying to understand how this works.If, for instance, instance a large, Victorian semi could house on one side a hedge-fund and in the other a creche, they would both pay the same tax. The hedge fund is relocatable, the creche is not. How is this fair?
"If, for instance, instance a large, Victorian semi could house on one side a hedge-fund and in the other a creche, they would both pay the same tax. The hedge fund is relocatable, the creche is not. How is this fair?" 1. If you can find me a single example of such a house, occupied half by a creche and half by a hedge fund, I would love to hear of it! 2. May I paraphrase: "A hedge-fund and a creche both have to buy paper for printing off stationery and pay the same for electricity. How is this fair?"
The only hedge on the site of a Victorian semi is the one in its front garden. Hedge funds located themselves in tiny offices in financial centres, as they need to maintain their networks. But since hedge funds are a part of the rent-seeking "industry", which an LVT would largely knock on the head, the question relates to a state of affairs which wouid largely have been brought to an end.

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