Land Value Tax – an idea whose time has come

Many conservatives argue there should be no need to raise taxes or reduce public service provision to bring down the UK’s deficit. Simply cutting out all that waste in the public sector, they say, would solve the problem. The mirror image of this argument on the left is that we could achieve the same by collecting all the taxes due. Public sector cuts could easily be avoided if we could just catch these greedy rich tax dodgers, or so the argument goes.

Unfortunately, it’s not that simple. The left’s billions in lost taxes are just as elusive as the right’s billions of public sector waste. When you look at the detail, trying to get hold of either is like trying to nail jelly to the wall.

HMRC’s paper Measuring Tax Gaps 2010 estimated a shortfall of £42bn in uncollected tax for 2008-09. The big chunks of that are £15.2bn in VAT, £14.5bn in Income Tax, National Insurance and Capital Gains Tax, and £6.9bn in Corporation Tax. Go further into the detail and looks messier still. For example, the biggest hole in the Income Tax receipts comes from inaccurate self-assessments, of which around a fifth have under-stated liabilities of less than £500. Much of the missing tax comes not from large organisations or a few rich people but from thousands of people committing small fiddles or making small errors.

None of this is to say that more effort should not be made to catch fraudsters or to close tax loopholes but if the exchequer managed to get half of that £42bn it would be a miracle. As fast as the government closes one gap, the rich people’s tax advisors and the not-so-rich Del Boys will find another one.

All of which suggests that perhaps we need to look at new ways of raising revenue. Chris Dillow made a few suggestions in a post at the end of last year. The land value tax (LVT) has much to recommend it.

First the politics. A land value tax would be progressive because the richer people are, the more likely they are to own expensive land. It might even be more progressive than income tax because land wealth is even more concentrated in the hands of the few, argues David Cooper:

LVT is indeed fairer than income tax because property wealth is far more concentrated than income. The best-paid 1% get about 8% of the national income. The wealthiest 1% own 23% of the national wealth. It is in property where greatest inequalities lie, not income.

It would, therefore, be a more effective way of getting extracting extra tax from the rich than simply raising income tax.

Furthermore, LVT might help to even up the wealth gap between the South East and the rest of the country. Poorer regions where land is cheaper would become internal tax havens and would therefore be more likely to attract new businesses.

Then there’s the economics. LVT would, say its advocates, discourage people from leaving land unused. Because the tax is on the value of the land regardless of what is standing on it, you would pay the same for a plot of land with a derelict warehouse on it as you would for the same size plot next door with a mansion on it. This would give people an extra incentive to develop land. LVT might also act as a brake on house prices as, in general, higher priced houses would attract more tax. Given the damage that property bubbles have inflicted on the world’s economy recently, that can’t be a bad thing.

Shifting tax from wages and profits to land could also, say LVT’s supporters, encourage people to invest in business rather than property. Income and corporation taxes are taxes on economic activity. Increasing the taxes on land would give people less of an incentive to sit on their arses watching their property value rise and more of an incentive to put their money into job creating businesses.

So much for the politics and economics. As a horrid managerialist, what I like about LVT is that it is almost impossible to evade and you always know pretty much what you are going to get. A local government finance director once explained to me why things were so much easier when they raised revenue through the rates. Property doesn’t move so you don’t have to chase it, he explained. It’s impossible to hide and you can’t move it offshore. Provided you have a consistent set of rules and a good idea of how much property you have in your area and what it is worth, there isn’t really much room for argument, so clever tax advisors don’t make much difference. The revenue is therefore much easier to collect and to predict.

Perhaps it’s no surprise then that land value tax has advocates from across the political spectrum. Marxist Chris Dillow, Labour’s Andy Burnham, Liberal Democrat David Cooper and UKIPers Tim Worstall and Mark Wadsworth, to name but a few. Guardian economists Larry Elliott and Phillip Inman are also fans.

Earlier this month, the OECD said that the UK should consider implementing a property tax. Ireland is planning to bring in a full property tax once land values have been assessed and the Greens have proposed something similar in Scotland. For those interested in the details of how such a tax might work in the rest of the country, there is plenty of information here.

Of course, a land value tax has its downsides as any tax does. People have come to think of accumulating wealth through appreciating house prices as a God-given right. Before the financial crisis, wannabe rentiers devoured property-porn TV and buy-to-let mortgages. The British are addicted to property-based wealth. Think of the fuss about inheritance tax, or the suggestion that people should have to sell their houses to pay for elderly care. The wealth accumulated from sitting on your land and watching its value increase is regarded as sacrosanct. People won’t like paying tax on it.

But people don’t like paying tax on anything and it’s not as though we have many options left. Plugging the gap between government income and expenditure is going to become extremely difficult as demographics and other pressures add costs to the public purse. Based on  the OBR figures, PwC calculate that, even after the government’s £81bn cuts, another £20 billion shortfall will open up early in the next decade. We will need to raise more revenue. Engaging in constant battles with corporate tax lawyers or chasing VAT dodgers around Peckham market will only get us so far.

A land value tax has much to recommend it, in terms of fairness, economic benefits and ease of collection. Pressure on the public purse is rising but squeezing more out of the current tax base is like pulling teeth. We need to be a bit more creative about how we raise revenue in the future. LVT has to be worth a try.

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10 Responses to Land Value Tax – an idea whose time has come

  1. Pingback: Land Value Tax – an idea whose time has come - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Laurie A says:

    It is an intriguing idea. The ease of collection is a big selling-point, particularly as ownership of land is usually registered at the Land Registry, and there could be forfeiture provisions as the ultimate sanction for non-payment – which would be effective enforcement even if the property is held by an overseas company.

    More problematic is what would happen with many elderly people who may have large properties but no income to pay any tax, and the ease with which the wealthy could shift their property holdings (or second home) overseas.

  3. Left Outside says:

    More problematic is what would happen with many elderly people who may have large properties but no income to pay any tax, and the ease with which the wealthy could shift their property holdings (or second home) overseas.

    They can just take out a loan against the value of their house with the express purpose of paying the tax in exchange to the value of their house + back interest on payable on death, some financial firms would develop that.

  4. Cahal Moran says:

    For anybody more interested in the free lunch that is the LVT (yes, really), here are a couple of articles and videos:

    Ricardo & the great tax clawback scam:

    Landlord = tax collector:
    http://www.progress.org/banneker/omara.html

    Michael Hudson on rent:

    A more in depth discussion of why LVTs are fantastic:
    http://forum.prisonplanet.com/index.php?topic=160421.0 < ignore the fact that his avatar says 9/11 was an inside job on it, it's a good piece.

  5. Derek R says:

    The issue of elderly people with large properties but no income exists right now. Even without LVT large properties are expensive to maintain, expensive to heat and subject to high band Council tax. But most of the owners seem to be able to deal with it. They generally take out reverse mortgages or, more sensibly, sell up and move into smaller houses. I see no reason why they would act any differently if Council tax, and perhaps VAT and other taxes, were to be replaced by LVT.

    On the topic of the wealthy switching to second homes overseas, I would suggest that this is actually a Good Thing since it would mean that young people in places like mid-Wales, Cornwall and Highland Scotland might actually be able to afford a first home in their local areas, once the wealthy stop bidding up prices there.

    As far as the property holdings are concerned, replacement of corporation tax, VAT and income tax by LVT has effects on the economics of British property ownership but it also has effects on the economics of British industrial ownership. After the replacement of these taxes by LVT, it might make sense for the wealthy to replace their British property holdings (which do not generate much employment in Britain) with overseas property holdings, but it would also make sense for them to replace their overseas industrial holdings with British industrial holdings (which generate much more employment in Britain). So again this is probably a Better Thing than it might at first appear.

  6. Thanks for the link, agreed to all that!

  7. Pingback: The Advantages of Taxing Land « Decisions, Decisions, Decisions

  8. margecsimpson says:

    you may just be onto something if the front page of yesterday’s Sunday Times is anything to go by

  9. Tim Craig says:

    Beyond LVT, a Wealth Weighted income tax

    Income tax weighted by volume size is less equitable than an alternative income tax weighted by a factor determined by the total size of already accrued assets – including bank deposits, savings, property, investments and so on. A vital requirement in such a strategy would be for true record of all significant assets and maintained. I believe policing of this record should be self-financing since evaders would clearly be only those holding hitherto undeclared and now, presumably, newly found accessible assets which can be used to make-good unpaid income tax and recovery costs.

    I believe such a scheme would be quite achievable using our present IT connected infrastructure, through fine-tuning of banking disclosure and reporting requirements and the application of statistical analysis to follow anomalous money adjustments.

    Example. An entrepreneur, starting out, could claim no disincentive in their chosen path as they would, arguably, have, at this stage, accrued little by way of assets so would be taxed more lightly. A young person, saving for a home would be equally lightly taxed. Again, a low-earner with a paucity of assets would see the tax level weighted downward. However, the already successful businessman with a large portfolio of assets and general wealth would see their tax rate weighted higher. Exceptionally, perhaps, the high-earning spendthrift with the high income and few assets would see their recycling of cash back into the economy rewarded by lighter taxation.

    I think this would present a fair system in principle and attractively arguable in its implementation.

  10. Pingback: Enough talk – five concrete ideas for a more responsible capitalism | Liberal Conspiracy

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