Economic Theory

Would a Land Value Tax (LVT) get Britain building?

There are few things that most economists can agree on. But the appeal of land value tax (LVT) has long been one of them. So far, it has not gained much traction in UK policy circles – particularly when it is described by critics as a ‘garden tax’.

Three developments, however, suggest that its time might well be coming.

First, there is growing dissatisfaction with existing taxes based, at least in part, on the value of property. These include stamp duty land tax (which the OBR expects to raise £13.2 billion this year), business rates (£29.3bn), and council tax (£32.2 billion).

Stamp duty, in particular, has been widely criticised as an inefficient tax that dampens economic activity, restricts labour mobility, and prevents optimal use of the housing stock. The Government’s decision to exempt first-time buyers has only added further complications to an already flawed system.

Second, not enough homes are being built. This partly reflects a relatively restrictive planning system, including arbitrary height restrictions and an overly-protected greenbelt. Liberalising these rules might create the economic incentives to develop under-used land. But an additional tax on the value of land would sharpen that incentive further. This may be especially helpful when, as now, interest rates are relatively low, which is minimising the opportunity cost of holding land purely for speculative purposes.

Third, the latest official data on the wealth of the UK (the “national balance sheet”) has drawn fresh attention to the potential to raise a large amount of money. The ONS has estimated the value of land in 2016 at £5 trillion, or just over half the total net worth of the UK. As it happens, the average annual increase in the value of land since 2009 (6.6 per cent) has been slower than during the pre-crisis period 1995 to 2007 (12.4 per cent). Nonetheless, land prices have continued to outpace those of other assets.

The economic principles of a land value tax have been advocated for centuries, from the writings of Adam Smith and Milton Friedman to the Mirrlees Review. In its purest form, an LVT is a tax on the value of the underlying land, independently of any specific improvements such as the value of any property built on it. Crucially, the owner must pay even if the land is currently unused. Unlike most taxes, then, an LVT actually encourages economic activity.

There are other advantages too. LVT is a progressive tax, at least where the land owner is relatively well-off, and hard to evade. It can also be an effective way to ensure that those benefiting from improvements in local infrastructure – such as roads and other public works – make a fuller contribution. Indeed, this may be preferable to financing this expenditure through general taxation or borrowing.

Of course, there are some caveats and concerns. For a start, someone would have to work out what each individual holding of land is worth. It is one thing for national statisticians to come up with an estimate for total UK wealth, quite another for a local assessor to come up with a specific figure that may well be challenged.

Taxes on income or transactions are based on values determined in the market, which may not always be possible in the case of an LVT. However, many countries do operate some form of LVT, so the problems here are not insurmountable.

There may also be issues of fairness, which mean that an LVT can only be phased in over a lengthy period, if it is to apply generally. Otherwise, people who happen to own land could be hit with a large and unanticipated bill. It is certainly unrealistic to expect an LVT to replace all or many other taxes any time soon, which is what some of its keenest supporters are suggesting. Even the three property-related taxes noted earlier only account for around £75 billion out of the total UK tax take of £693 billion.

Finally, there is a danger that the introduction of any new tax is either used as an excuse to raise the overall burden of taxation, or to indulge in wasteful public-sector infrastructure projects that have limited value, or both. This suggests that any LVT should be revenue-neutral, at worst – with offsetting reductions in other taxes, including capital gains tax on property, as well as stamp duty, business rates and council tax.

The hurdle for assuming that a project can or should be financed by an LVT should also be set very high. The could partly be done by making it a purely local tax. All the revenue would then stay in the local area, ensuring that councils benefit from the planning gain resulting from improved infrastructure, housing, retail development and office space. If the local councils were also on the hook for the cost of the project, the increased devolution of both risk and reward should strengthen fiscal responsibility and deliver better outcomes.

So while LVT could be the answer to our housing woes, as ever, the devil would be in the detail.


This article was first published on CapX.

Julian Jessop is an independent economist with over thirty years of experience gained in the public sector, City and consultancy, including senior positions at HM Treasury, HSBC, Standard Chartered Bank and Capital Economics. He was Chief Economist and Head of the Brexit Unit at the IEA until December 2018 and continues to support our work, especially schools outreach, on a pro bono basis.

3 thoughts on “Would a Land Value Tax (LVT) get Britain building?”

  1. Posted 09/12/2017 at 17:18 | Permalink

    No tax will ever be perfectly implemented, but even the crudest LVT is better than those taxes you mention, or as my of the other taxes and charges related to land, buildings or construction.

    Even a perfectly implemented SDLT, CGT, council tax , business rates etc has bad effects, the drawbacks are inherent.

  2. Posted 11/12/2017 at 00:58 | Permalink

    Like the payment of wages, the LVT is compensation for opportunity loss. In the case of LVT, for being excluded from valuable natural resources. Not paying wages or LVT is not only unjust, but means that excessive inequalities and misallocation of resources are baked into our society and our economy. (That the state might collect and spend/redistribute that compensation on our behalf is a separate issue. Some might prefer different mechanism).

    A 100% LVT would mean that freeholders pay the same housing expenditure as renters on a pro rata basis (thereby increasing total expenditure and reducing demand). This level playing field would therefore eliminate the over consumption/supply our current dysfunctional market suffers from. However, while the LVT would reduce supply, it would increase turnover allowing resources to become optimally allocated.

    It is the distribution of land values among society that gives rise to excessive inequalities. Affordability issues for some groups are merely symptomatic of this. The LVT shares these values equally, reducing “land inequality” to zero, thus solving these issues instantly (as well as creating a true meritocracy). The selling price of land and rental incomes derived from it would drop to near zero, while the re-distributional effects would increase disposable incomes of typical working households by over £10K pa. Improving affordability for those households by a factor >3.5 as measured by ratio of discretionary incomes to prices. So housing becomes optimally affordable for those households.

    Thirdly, and perhaps most importantly, aggregated land rents are the best measure we have of the efficient allocation of resources in our economy. The higher the better. If LVT were to become its main source of revenue, the states role would change from being a passive recipient of taxes to a full market participant. In order to maximise its rental income, it would have to strike the correct balance of rules, regulations and laws that puts labour and capital to where it is most needed(agglomeration) while preserving and enhancing our shared environment.

  3. Posted 11/12/2017 at 13:53 | Permalink

    One of the unsung problems of releasing land already available in principle for residential development is building regulations compelling a partial social housing quota.
    No one will buy a house on a new build estate where their next door neighbour is a potential social welfare recipient.
    Which is why many sites remain undeveloped.

    Godfrey Bloom
    Mises Instiute UK

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