Tax and Fiscal Policy

It’s time for a Land Value Tax

David Ricardo termed unearned income from land as a pernicious anomaly: “that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil”.

It is time the government seriously considers a land value tax (LVT). LVT is a periodic levy on the unimproved value of land only (that is, it disregards the value of buildings, personal property and investments on the land). The idea of LVT has been advocated by many economists throughout history (Adam Smith has said “nothing could be more reasonable”; Milton Friedman termed it “the least bad tax”; working papers from the IMF, the OECD and the IFS’s Mirrlees Review have also supported it at least in principle). The tax has attracted many proponents because it is as close as possible to an ideal tax – it is efficient (does not alter economic activity), equitable (the richer tend to have more land than the poor) and has revenue raising potential (the tax is difficult to avoid or evade). It also recognises land as a precious finite resource. More importantly, if implemented properly it can potentially seed economic growth, lead to greater productivity and even energise house building (as well as helping stabilise the cycle in land prices).

As the UK government grapples to tackle low productivity and attempts to increase house building, it is only right then that they should seriously consider one of the most widely endorsed taxes by economists. Ideally, as argued here, they should at minimum consider scrapping business rates and replacing them with LVT. Business rates have long been criticised by many businesses because of their complexity and discouragement of investment and growth. The government could potentially take a step further from business rates and completely/partially replace both council taxes and stamp duty with LVT. Like business rates, both of these taxes also dissuade investment and/or warp free market movements; the result is economic activity is displaced and depressed. There seems to be a perception among politicians that LVT would have little public support, but it need not be so difficult if the tax is slowly phased in and, above all, if it could be matched by cuts in other taxes (i.e. the new tax must be revenue-neutral). Another principal problem attributed to LVT is one of valuation and implementation. These problems exist, but they are exaggerated. There have been many practical proposals for accounting and administration of the tax (more than 30 countries already have some form of LVT put into practice e.g. Australia, Hong Kong and Singapore). The government should therefore now make a serious consideration in introducing LVT.

The government should first and foremost consider replacing business rates with land value tax. Although in theory LVT should be universally applied to all land, for reasons of practicality politicians should at minimum start with LVT for non-residential purposes. The problem with business rates and other similar taxes is how they affect decisions-making in an economy. At least at the margin, they discourage business investment. Furthermore there are several exemptions for business rates ranging from vacant land to agriculture. Thus the overall effect of business rates is that economic activity in the UK is unnaturally skewed away from property development and property-intensive production activities. This tax is therefore not fit for purpose.

LVT is much more favoured amongst economists because the supply of it is essentially fixed (Mark Twain famously quoted, “Buy land, they’re not making it anymore”) so taxing it could not reduce its supply, it would merely make it less valuable for its owners. It would help with house building (as landowners shift land to reduce their tax burden) and incentives against developing properties and developing land would be removed. In addition, the government would directly reap the benefit from new/improved transport links and other investments made in the area through future revenue. Especially, coupling the revenue from LVT with greater local devolution can go a very long way in stimulating economic activity in the country and incentivising the reduction of regulations (as suggested by Kristian Niemietz from the IEA). The new tax can help many businesses across the country to become more efficient, competitive and more responsive to market movements.

An additional benefit of initially replacing business rates with LVT is that it helps prime the market for a more complete rollout of the tax at a later stage. Business sites across the country will have their land value assessed to determine their rate of tax. This is made simpler by two reasons. Firstly, business sites are usually sold as brownfield sites or the existing property is knocked down for new premises meaning it is much easier to ascertain the value of the land. Secondly, especially in England, there are sometimes difficulties in determining the ownership of the land, but as business sites regularly transition to new owners it is much more straightforward to determine ownership here. If and when the government decides to take LVT a step further and extend it beyond businesses, it would be uncomplicated to appraise other land using the land values of nearby business sites and it would provide time to determine land ownership across the country (as well as to set up a compulsory land registry).

Land value tax can, of course, go much further than just replacing business rates if there is political will – it can also partially or wholly replace council tax (which, as it is calculates on the basis of the value of the property, stifles investment) and stamp duty (which affects the behaviour of buyers and sellers, and dampens and distorts the housing market). As well as simplifying the tax code, this would also recognised that non-business landowners should partially bear the cost of beneficial community investment. LVT discounts what is on top of the land, and is based on the estimated market value of the land itself. Any improvements in amenities or transport that makes the land more desirable and therefore valuable is in turn partially funded by the landowner themselves.

Yet despite the obvious benefits, politicians have shied away from land value tax because it could prove to be unpopular (similar to Thatcher’s poll tax)  – it would create big losers as well as big winners – and due to perceived problems of implementation and administration. Property or land taxes of any kind always spawn strong opposition, mainly because the tax is salient. Many landowners will quickly be faced with a large tax bill (chiefly because the rates would have to be high for the tax to be effective). Thus LVT has been thought of as too politically difficult and so far has been largely ignored by politicians. This is why politicians should, at minimum, consider taking the small step of rolling out LVT as a replacement of business rates which curtails political risk. As the merits of the tax became apparent, politicians can then consider extending the tax to partially or wholly replace council tax and stamp duty.

As well as the political credibility of LVT, the problems of implementation (i.e. measuring the value of a land beneath a property) and the costs of administration and compliance are cited as another barrier for the tax. But these problems are overstated – there have been many practical  proposals in how to implement and administer such a tax policy, such as comparing the value of similar buildings across the country thus ascertaining the value of the land beneath it (as suggested by the Mirrles Review). Moreover, land cannot be moved so it is difficult to avoid or evade the tax (land cannot be shuffled offshore) so collection of the tax is cheaper than alternatives. At the onset, if business rates were first replaced by LVT, there may be businesses at the margins attempting to move premises to domestic residences to avoid the tax but this would be minimal (it is simply unviable for most industries). Another hurdle for LVT is those who are asset rich but cash poor and hence may not be able to afford to pay LVT – yet there is a simple solution here as well: the government can allow taxpayers to defer payment till death when the outstanding payment can be collected much like inheritance tax.

There is a strong case then for the government to review introducing LVT. The tax will serve as an ideal replacement for business rates and possibly stamp duty as well as council tax. These taxes reduce the incentive to invest or otherwise deter economic activity. LVT does not distort economic decision making. Despite criticisms of practicality, the tax may only require a one-off administration cost to determine land ownership across the country and then implementation is not too difficult. The biggest barrier to such a tax policy is therefore political. It is time the government takes the plunge and seriously considers shifting taxation away from other factors of production, and towards land.

19 thoughts on “It’s time for a Land Value Tax”

  1. Posted 15/02/2016 at 15:38 | Permalink

    We can do without the IEA advocating new taxes. Thanks.

  2. Posted 15/02/2016 at 17:18 | Permalink

    Anonymous, Daran says several times that he wants LVT to be revenue-neutral, and that business rates, council tax and stamp duty should go.

  3. Posted 15/02/2016 at 17:22 | Permalink

    Well revenue neutral is not good enough. Want revenue reducing.

  4. Posted 15/02/2016 at 17:43 | Permalink

    there is an unfortunate paradox of tax systems in democracies in that it is likely that the better designed is a tax system from the economic welfare point of view, the higher taxes are likely to be because the growth effects of higher taxes will be more palatable. Of course, that should not be a reason to adopt bad tax systems.

  5. Posted 15/02/2016 at 18:11 | Permalink

    Lovely article, I will share this. As a medium target we ought to look at replacing all existing taxes on land and capital with straight LVT… Council tax, SDLT, stamp duty, CGT, iht, insurance premium tax and the TV licence. The more you replace, the fewer winners or losers.

  6. Posted 15/02/2016 at 19:31 | Permalink

    Land value tax should indeed be applied to all land, but home owners are spoiled by preferential tax rates, which have raised the prices of residential land. That is, it does not benefit the home buyer, but the home seller. In any case, the only way it is politically feasible to tax all land value regardless of use is to couple it with a per capita dividend. That way the aggregate cost to home owners can remain what it is now.

    The point is to avoid picking winners and losers and focus on economic benefits that accrue to everyone.

  7. Posted 15/02/2016 at 20:49 | Permalink

    Landowners would simply recover the tax from tenants. The tax incidence would be on tenants, not on landlords

  8. Posted 15/02/2016 at 22:34 | Permalink

    Yes its a good tax.

    But why business rates 1st – would it not make more sense to do residential 1st?

  9. Posted 16/02/2016 at 08:14 | Permalink

    I see we have our first Killer Argument by Anon on Mon: “Landowners would simply recover the tax from tenants. The tax incidence would be on tenants, not on landlords”

    Thats clearly not true, but assuming AOM believes it, can he please clarify whether he thinks this is a good or a bad thing?

  10. Posted 16/02/2016 at 16:17 | Permalink

    Let’s kill of existing taxes. We don’t need “better” ones. And as for a tax “seeding economic growth”, please someone tell me Daran was joking.

  11. Posted 16/02/2016 at 20:19 | Permalink

    The last thing the IEA should be doing is advocating another tax, no matter how well intentioned. We all know that the state only exists to grow and new tax revenue only allows it to increase its scope further.

    What you’re actually going to end up with is the Land Value Tax AND all the other taxes currently in place. All it takes is a Gordon Brown-like Chancellor (or should I say George Osborne-like) with the power to tax at his fingertips.

    There isn’t enough money in the world to pay for the unfunded liabilities in the various pension and healthcare systems and I’m afraid these are all going to be forced upon us eventually just as they are already trying to prepare us for negative interest rates (tax on bank deposits) in a cashless society.

  12. Posted 16/02/2016 at 22:08 | Permalink

    Landowners would *not* pass the tax on to tenants. To the contrary, it would lower rents. This is agreed upon by major economists, including conservatives like Samuelson and Friedman. The tax is most burdensome to holder of prime vacant land who have no tenants. The tax pushes them to put that land to use, giving tenants more options (i.e., increasing supply). Increased supply lowers rents.

    Meanwhile, the landlords with actual tenants are the ones who would see their building taxes reduced, so their total taxes would in many cases be lower. So they *can* lower rents because their own tax burdens are lower, and they *must* lower rents because other land is coming on the market.

    As for Peter Snow not believing in land value tax “seeding economic growth,” evidence that it does exactly that is overwhelming. Dozens of cities in Pennsylvania and hundreds in Australia have proven this beyond a shadow of a doubt. The real estate editor of Fortune wrote about it in his article, “Higher Taxes that Promote Development.”

    Residential already gets massive tax advantages compared to business property. It is economically wrong to do this in a way that would further these advantages, and politically impossible to take those advantages away until the tax proves itself. However, it would be good to couple land value tax with per capita dividends, which would only increase taxes for people in the most posh neighborhoods or sitting on great estates.

  13. Posted 17/02/2016 at 11:25 | Permalink

    Take a leasehold block of flats. The leaseholders must pay to the landlord ground rent and service charge every year. Usually, the ground rent is token and is set by the lease agreement.

    Along comes LVT. The landlord must now pay to the governmentt each year an amount far in excess of the receivable ground rent. The choices open to the landlord are:

    1. Sell the freehold interest to a 3rd party. The transfer price is llkely to be at a hefty discount on the original purchase price, giving rise to a capital loss for the exiting landlord. This would appear to be an infeasible option because the incoming landlord wuld be acquiring a net liability – not a very attractive course of action.
    2. Sell the feehold interest to the tenants of the block. They would then become liable for their share of the LVT. The tax will have been passed to the tenants under this option. It also seems likely that the leases will need to be redrafted – an additional and significant cost to the tenants.
    3. Stay put and suffer the losses incurred by the introduction of LVT.

  14. Posted 17/02/2016 at 11:52 | Permalink

    I see that Anon is contradicting himself nicely. The likely outcome is that the tenants acquire the freehold at a discount in exchange for taking on the future tax liability. So they break even on the deal – the discount is equal and opposite to the future tax liability. Duh. So this is not a problem. The example is not even realistic – a sensible LVT system would apportion the LVT bill between long leaseholders (most of it) and the freehold (a small part of it – the LVT on the freehold would be no more than the ground rent income). Click my name for the “Killer Arguments Against LVT, Not” blog.

  15. Posted 17/02/2016 at 13:58 | Permalink

    @Mark Wadsworth

    OK, so LVT would enfranchise long leaseholders. Good, I am all for that. But the long leaseholders would also become the effective freeholders under enfranchisement and so become liable for the whole LVT, the exiting freeholder having transferred the freehold to the leaseholders so as to escape liability.

    Of course, the newly engranchised leasholders may offset their newly acquired additional liability by reducing the service charge previously due to the outgoing landlord. But it’s all “ifs” and “may”. The supposed benefits of LVT are far too speculative for it to be a serious runner.

  16. Posted 17/02/2016 at 19:58 | Permalink

    Anon, the merits of LVT are not in the slightest bit speculative. The UK has a quasi-LVT called Business Rates and used to have quasi-LVT called Domestic Rates replaced with a poll tax called council tax. PLus a thousand examples from other countries. The damaging effects of VAT, National Insurance and higher rate income tax are not speculative. Neither are the damaging effects of SDLT or the inherent unfairness of Inheritance Tax or the TV licence fee in any way speculative. These are all just measurable facts, whether you like it or not.

  17. Posted 18/02/2016 at 00:15 | Permalink

    The benefits are only speculative to those who are ignorant of the rich history of LVT applications.

  18. Posted 18/02/2016 at 17:54 | Permalink

    Common Law and the early stages of feudalism were based on land value tax. It was the “fee” (feu) that kept people from grabbing land they were not using. The class system was based on landlords pocketing those fees for themselves and making people pay taxes even if they had no land. Thus William Godwin wrote in “Enquiry Concerning Political Justice,”

    ‘First then, legislation is in almost every country grossly the favourer of the rich against the poor…. Thus in England the land tax at this moment produces half a million less than it did a century ago, while the taxes on consumption have experienced an addition of thirteen millions per annum during the same period. This is an attempt, whether effectual or no, to throw the burthen from the rich upon the poor, and as such is an exhibition of the spirit of legislation.”

  19. Posted 22/04/2016 at 09:46 | Permalink

    There are a few babyish objections to Land Value tax on here from free market apostles who clearly do not understand free market economics.

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