Why we should be talking about Land Value Tax

Posted on April 19, 2010 by | 7 Comments

The landlord who happens to own a plot of land on the outskirts of a great city … watches the busy population around him making the city larger, richer, more convenient. .. and all the while sits and does nothing. Roads are made … services are improved … water is brought from reservoirs one hundred miles off in the mountains and -all the while the landlord sits still … To not one of these improvements does the landlord monopolist contribute and yet by every one of them the value of his land is enhanced … At last the land becomes ripe for sale – that means the price is too tempting to be resisted any longer … In fact you may say that the unearned increment … is reaped by the land monopolist in exact proportion not to the service, but to the disservice done.
Winston Churchill during debates on the Finance Act 1910, as quoted by Hagman and Misczynski, Windfalls for wipeouts: Land value capture and compensation, 1978

Land value tax may be an idea whose time has finally come for the UK, 100 years after the finance ACT of 1910, 131 after Henry George published Progress and Poverty and 220 years after the French Revolutionary Constituent Assembly established a land tax along Physiocrat principles. But what is land value tax (LVT) I hear many of you cry. It’s certainly not a tax we hear much about these days, and when we do it’s invariably described by the media as immensely complicated. In truth, though the arguments around it’s economic effects and certain practical details can be complicated, as can any system of taxation, it’s really rather simple. LVT, or SVR (site value rating as it’s also referred to as), is a tax on land, just land, not on improvements to the land, buildings or other works, levied as a percentage of the rental (or capital) value.

Land accrues value from the community around it, from the amenities, the transport links, from planning regulations and so on. While the improvements to the land, the shops and factories and houses, add an earned value created by the owner, the land itself is a form of unearned wealth, and it is this that LVT taxes. Since it is the community that creates the value of land it seems only fair that the community can claim some of that value back through taxation, thereby providing the public with money to further improve services and hence raise values further. LVT is a tax on wealth not on income, a tax that is sustainable, efficient, hard to avoid and economically neutral, in that it shouldn’t distort the market.

What LVT is not is council tax. Council tax is partly a tax on land but also on all property. In addition it’s banded in a highly regressive manner, with fixed ratios of taxation between bands, so house worth £70,000 pays fully half that of a house worth £1,000,000, or indeed, £10,000,000. Council tax covers only occupied properties, to full value anyway, with exceptions for second, or third or more, homes or abandoned properties. Land value tax, by comparison, would charge the full amount no matter what state of occupation, thereby encouraging redevelopment. LVT would be a direct percentage of the rental value of a property and, hence, fairer than the fixed bands of council tax.

LVT is a tax almost impossible to avoid, while money can income can be moved offshore, land is pretty solidly in one place. As it only taxes value of the land not improvements it should be easier to assess than a property tax that relies on the full value of the land plus improvements. That’s important as for any property tax to be fair, even in it’s own terms, the valuations need to remain up to date. As it charges for the full rental value of the land whether the land is developed or not it encourages efficient use of land, discourages speculation and empty sites and provides a natural impetus for regeneration and against sprawl.

It’s a tax which can’t be passed on to consumers; goods will be sold at broadly similar prices wherever a shop is, and just as shops already have different rents but charge similar prices so too LVT shouldn’t be passed on to the public. It allows other taxes to be reduced, if you want the overall take to be broadly similar, but doesn’t reduce income from other taxes, except at the margins where the tax causes land prices to drop and this affects income from capital gains or inheritance, though this would likely be a small effect.

But above all it’s a tax that’s fair, that could start to make some impact on the vast inequities of wealth in this country, as Philippe Legrain argues:

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.

LVT in some form is already used all over the world, in many parts of Australia they use versions of site value rating and in Pennsylvania they use a dual rate system, with different rates for land and improvements. The capital, Harrisburg, was listed as the second most run down city in 1982, before they introduced their dual-band system. After introducing it by 2004, the number of vacant sites was down 85%, unemployment down 19%, crime down 58%. In Hong Kong land taxes make up 35% of the city’s revenue. In Ireland it’s part of the programme for government proposed by Fianna Fail and the Irish Greens last year. And it was proposed by our own editor-in-chief in the Scottish Parliament a few years back now.

But what are prospects for LVT today? It’s supported by the Scottish Green Party and the Green Party of England and Wales, page 15 of their Westminster manifesto, and supported in part by the Lib Dems. ALTER (Action for land taxation and economic reform), a pressure group within the party, are behind the idea and their current president is Chris Huhne, Nick Clegg and Vince Cable are vice-presidents. The Lib Dem manifesto proposes to replace business rates with site value rating and return control to councils. Longer term ALTER want to replace council tax with SVR but the Lib Dems’s manifesto commits them to replacing it with a local income tax and it might be difficult to move back to a land tax if there has been a recent move from property to income. That said, efforts to move to a local income tax up here a year or two ago proved problematic and with council tax remaining unpopular, who knows, with a bit of prodding from one or two Green MPs and a greater attempt to explain the advantages to the public maybe the liberals could be moved in the right direction.

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Comments

7 Responses to “Why we should be talking about Land Value Tax”

  1. Keith BaynesNo Gravatar
    August 17th, 2010 @ 3:55 pm

    Absolutely splendid. I will try to keep in touch. It is a long time since I played an active roll. I was a member of The United Committee and taught at the Henry George School, long, long ago!

  2. Duncan McFarlaneNo Gravatar
    January 8th, 2011 @ 5:54 pm

    I completely agree with the criticisms of council tax, but i’m not convinced that a land value tax is a good idea. It could have a lot of unintended regressive effects which ultra- free marketeers on the right of the Conservative party might love, but Greens and other progressives might greatly regret.

    “LVT is a tax on wealth not on income, a tax that is sustainable,”

    That just doesn’t make sense. People can pay a share of their income indefinitely. They can’t keep paying from a limited amount of money if they don’t have an income capable of sustaining the ongoing tax. So not really sustainable.

    Also a land value tax is likely to result in much scrub land and forest which was previously managed for no profit, or even at a loss, by the owners, to the benefit of wildlife, walkers and cyclists, being sold to big supermarkets and agri-businesses, who can pay the land value tax by destroying the environment to make way for more mono-culture and more supermarkets, with the original owners forced to sell to them because they can’t afford the new tax.

    Peoples’ gardens also provide a haven to much wildlife – but if there’s a land value tax then developers will be even stingier in providing gardens for new houses than they are now.

    A local income tax combined with actually using fuel taxes to pay for better and cheaper public transport and a crack down on tax havens would achieve the intended aims far more effectively.

  3. JohnNo Gravatar
    January 21st, 2011 @ 12:11 am

    LVT is a misnomer. It is reclaiming community created wealth, not a tax. Community Reclaim Fee may be a better term for it. If a person cannot pay LVT because of being old, etc, there are exceptions. Winston Churchill called this the old Widow Bogey that detractors use to put down LVT. With full LVT income tax is vastly reduced or abolished, encouraging people to work as they keep what they earn.

    There is only so many supermarkets that can be built. LVT does not create scrubland and never did. It encourages people not to hoard land, discouraging speculation. It promotes development and improvement of land. If land is reserved for walkers, again exemptions apply. Leave it to gain in value doing nothing, and you pay LVT.

    LVT prevents speculation in land preventing world-wide crashes.

  4. Peter SmithNo Gravatar
    September 23rd, 2012 @ 9:28 pm

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