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.