It’s time for a Land Value Tax
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.