Tom Spencer argues for a land value tax, which he says will drive revenue and encourage development.
When we look to impose a new tax, we generally hope it answers a few questions: does it distort economic activity? Is it progressive? Is it enforceable? Is it simple? However, most the time the taxes we raise do not suffice to meet all of these criteria. For example, 25% of receipts in 2017 came from income taxes. This is efficient, mostly enforceable, relatively simple, and mostly progressive. However, a 2008 report from the OECD ranked personal income taxes as the most distortionary (in terms of reducing long-term GDP per capita). This is often an unwinnable battle and the taxes that do get imposed merely try to balance all of these demands, as well as they can.
So, what if I were to tell you that there is a tax that satisfies all of these criteria? Surely, this would be a perfect tax. The answer to this demand lies in an 1879 Book by Henry George titled, ‘Progress and Poverty’. To George, land is not a commodity to be profited off of. It is a natural resource to be shared. What the privatisation of land has done is allowed rent-seekers (landlords) to unethically profit off of tenants without contributing anything to the general welfare of the people.
However, George does not take the Marxist view that the response to this should be confiscation and socialisation of property. He only goes as far as to say that this is unnecessary, however it is more than that. In Why Nations Fail, Acemoglu and Robinson convincingly make the case that strong property rights are a necessary ingredient in the creation of successful societies. Rather, George considers that the right response to rent-seeking is a land value tax (LVT).
In effect, all LVT is, is what it says. It is a tax on the value of the land that one owns. This appears similar to property taxes, with one distinctive difference. Property taxes tend to disincentivise using land productively. For example, one who uses their land to develop a housing complex providing a home to many will be taxed more than one who just leaves their land undeveloped. The LVT works differently by taxing purely the unimproved value of the land. This means rather than acting as a reason against people developing and using their land most efficiently, it does the opposite providing a clear incentive to use land efficiently. This provides some key benefits which would massively help the biggest problems the UK is facing today.
This can be illustrated by reference to the housing crisis. This is particularly important as it is globally the world’s biggest driver of inequality and that the UK has seen real house prices grow faster than any other OECD nation. To address this, it is a wide consensus that we must be looking to increase supply. Indeed, Oxford Economics explain that an increase in new homes by 310,000 per annum will decrease prices by 5%.
A land value tax is a great way to deliver this need. We currently hold huge volumes of undeveloped land. This is not mostly land that is protected for environmental or cultural reasons, but merely just land under private ownership that is not currently being used.
What LVT does so well is disincentive the majority of England that has not been built upon, as shown above. Rather, it will encourage those landowners to start developing their unused land, because if they are to be taxed for their property, it makes sense to put that property to economically beneficial use.
Adam Smith famously pointed out that the burden of LVT “would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground”. From this it follows that the LVT will also be broadly progressive. Indeed, Guy Shrubshole pointed out in ‘Who Owns England’, half of England is owned by just 1% of the population. It is a long-standing fact that has been the same over centuries that the majority of those who own the land in this country have been the wealthiest people. By only taxing those people, and providing incentives for them to develop their land we can have a much more efficient country by only harming the wealthiest.
Furthermore, LVT is a remarkably efficient tax. In a 2010 OECD paper a ranking was devised showing which taxes had the greatest impact on reducing long-term GDP per capita. This showed that taxes on immovable property were the least impactful. When designing a tax system there is a trade-off a nation must deal with about how much to set taxes to efficiently fund public services, and how much they are happy to accept growth falling by. The evidence shows that LVT is the best tax for allowing a government to fund itself as much as possible without being contractionary.
At the start of this piece I outlined some features of an effective tax – progressive, non-distortionary, enforceable, and simple. Land value tax ticks all these boxes. As the ONS reported in 2017 that the total value of land excluding households sat at £5.4 Trillion a land value tax could be set incredibly low and still take in considerable receipts. Indeed, a Labour Land Campaign Paper estimated that a LVT of just 3% of commercial land would be sufficient to replace business rates in complete.
LVT presents a non-distortionary way to address inequality and the housing crisis that is less impactful on growth than any other tax. It must, therefore, be a high priority for the government to implement in the next budget.