Getting practical: Land-tax reform poses a range of problems
Morning Star : August 4, 2004 : Jerry Jones
Reproduced here by kind permission of Morning Star.
It is all very well to argue in theory that society as a whole – rather than just the individuals who happen to own or occupy particular sites – should benefit from the rising land values that society itself creates.
But winning over people and governments for a policy to achieve those ends, such as taxing land according to its value, has a number of difficulties.
First, how land acquires value, as distinct from the value of buildings or productive activities based on the land, is not immediately obvious. It should, of course, be part of the geography curriculum in schools, but rarely is.
Only last Friday, the Morning Star carried a feature by Victor Grayson on house price inflation that showed no understanding that this was mainly due to rising land values, since buildings tend to decline in value due to wear and tear, and obsolescence.
As discussed in my last column, a land value tax (LVT) would tend to reduce the capital value of land, and therefore prevent house price inflation.
This confusion is perpetuated by the legal definition of land, which, unlike the economic definition, includes buildings on the land. This must change.
Another hurdle has been the perceived difficulties of valuing land. Again, as shown in my last column, the availability of modern information technology makes this much more straightforward – indeed, much more so, than the valuation buildings, the intricacies of which have not deterred governments from taxing property.
The task will be to convince people to have trust in the system of land valuation, and that taxing land values is a matter of natural justice.
Furthermore, people will need to be persuaded that they will be better off. The trouble here is that many of the benefits of LVT are long-term.
For example, the incentive it gives to developing sites to their full potential, thus creating jobs and homes, might not be realised immediately.
And it will depend on other developments in the economy, and, indeed, in the global economy.
At the very least, it should be ensured that for most people, when LVT is introduced, there is a noticeable equivalent reduction in other taxes.
Another problem with LVT is that its launch would indeed be a bold decision for politicians to take, involving risks.
First, it would lead to a considerable upheaval in how revenue is raised, and require a sizeable investment in a new Land Valuation and Registry Agency (LVRA) responsible for valuing land.
Its initial task would be to overcome the 80-year backlog of land still not registered, which is mainly that owned by wealthy landowners.
This could be done, perhaps, by requiring all owners of unregistered land to register it by a certain date, after which it would revert the LVRA, which could then lease it out.
Second, in a market economy such as Britain’s, there would be some uncertainty as to the precise consequences of introducing LVT.
In particular, since LVT tends to depress the capital value of land, this could reduce substantially the price of owner-occupied properties (houses plus land).
For most people, this would not matter because they would have less to pay for properties when they moved, but they would have the perception that they would have lost out – and some would lose out if they were selling but not buying.
Also, some could be left with negative equity, having borrowed to buy at the old price, and therefore end up owing more than their homes were worth.
However, this would be offset by the tendency for land values to rise with economic growth.
And, in any case, property prices, as now, will continue to be governed by supply and demand – and, in particular, the willingness of banks to lend, and borrowers to borrow – so that price fluctuations could just as easily be the result of these factors, and may well overwhelm any impact of LVT.
In short, one would not expect any great change in property prices caused by LVT, especially if it were introduced initially at a low rate, and raising it in stages, to give individuals and businesses, and the economy, time to adjust.
But, over time, whatever happens to property prices, the land component would definitely tend to decline as the rate of LVT was raised.
The advantage of lower land prices would be that more finance would be available for building homes and investment in other productive activities on the land, thus providing jobs and boosting the economy.
The downside of introducing LVT in stages is that it would give time for people standing to lose – particularly some people with considerable financial and political clout – to denigrate LVT, perhaps blaming any economic setback on LVT, whether or not it was actually the cause.
A government seeking to introduce LVT would have to be prepared to face down such opponents, exposing their vested interests.
For these and other reasons, governments have shied away from introducing a full-blown LVT.
Such timidity will only be overcome by a concerted all-party campaign across the political spectrum to win support, for even capitalists would gain from LVT – even large landowners if they sold their land and invested the proceeds in other productive activities.
The only exception is, of course, those engaged in land speculation.
Up to now, governments, mainly Labour governments, have sought to capture some of the increased value of land created by society through various piecemeal measures, which have ended up having effects opposite to those intended – all the more so because the legislation has been severely complex, with masses of exceptions, offsets, and rules and regulations.
Mainly they have taken the form of a land development tax, or “betterment levy”, which are a one-off when the land is sold, therefore only tapping land value at a point in time.
Moreover, mostly they have ended up deterring land development, because such measures encouraged landowners to sit on their land, and watch it rise in value while waiting for a new government to come in and abolish the measures, when the landowners could reap their rewards.
This is likely to be the fate of the so-called “planning-gain supplement” proposed by the Barker Review on housing supply published in March – assuming that it is ever implemented.
However, there is an important issue here. Land values are highly dependent on planning status, which, in Britain – unlike some other countries, such as the US, where a zonal planning system operates – is highly discretionary and depends on proposals being put forward.
For example, agricultural land on the edge of town could suddenly leap in value from £1,500 to £1 million an acre after planning permission had been granted for residential use, resulting in a windfall gain for the landowner when he sold it.
It is precisely such a scenario that the “planning-gain supplement” would seek to address.
However, this would be better dealt with through normal tax laws, using capital gains or income taxes, but at higher rates – perhaps up to 90 per cent or more once beyond a certain level, because, as will be discussed in my next column, much of the windfall gain would be economic rent owed to society as a whole.
Local or national?
One proposal as a first step is to replace the flawed council tax and uniform business rates with a land value tax, or site value rating (SVR), as LVT is often called when applied locally.
However, SVR has problems not dissimilar to the current council tax, especially if local authorities were free to set the rate of tax.
In particular, there is a huge variation in the costs of services that different local authorities have to provide – depending, for instance, on demographics or the number of people on low incomes – and therefore the amount of revenue that they need to collect.
Furthermore, many areas with high land values may have large concentrations of poor people, who, perversely, would be affected by a higher rate of tax.
Then there is the issue that the land values are not only, or even primarily, generated locally.
Thus, the higher land values in many large towns and cities, notably London, derive not only from their citizens’ own efforts and resources, but also from the economic activities taking place in their hinterlands, and, indeed, in the nation as a whole, or in other countries.
Their land values, therefore, cannot be said to belong solely to their inhabitants. With SVR, they would be in a position to raise revenue from a low rate of tax compared with a remote rural community, while those in the hinterland or nation contributing to the higher land values of towns and cities would receive nothing in return.
Collecting LVT at national level and redistributing the proceeds according to population and need would avoid such problems.
Read fifth article in series of 5.