Submission to Policy Commission on Economy and Welfare
Council Tax
No one likes paying taxes but there is no doubt that the most unpopular tax today is the Council Tax (CT). Although a marginal improvement on its predecessor, the iniquitous Community Charge (CC), it is a regressive and unfair tax. Wealthy property owners have been most generously rewarded since the demise of the domestic rating system and it really is time that this Labour Government gave urgent consideration to introducing a more equitable system of local taxation.
Tinkering about with extra bands is not an option. The system is seriously flawed. The need for the Chancellor to dole out £100 to each pensioner household to help pay their CT – this the response to angry pensioners taking to the streets to protest - is a sure sign that the cracks are appearing. This form of subsidy will now have to continue, probably at an increasing rate, until the end. Also, reassessment cannot be postponed forever. It was the need for a similarly long overdue revaluation which panicked the Tories into introducing CC. All round the world the hostile reaction to delayed property tax revaluations cause politicians to back away from property taxes per se.
Property Taxes
Property taxes are a valuable source of revenue, with high collection rates
and with the benefit of being potentially fair, in as much as they are related
to a most visible form of wealth. It is important to retain such taxes and
to resist the cry to shift the burden to earned income, which already accounts
for c 50% of revenue. It is also important to retain property as the single
source of local tax, which is one of the positive attributes of the UK tax
system.
The domestic rating system was a much more progressive tax than CT because it had a direct correlation with personal wealth. In its time it undoubtedly helped to curb house prices. It ultimately failed because of the reluctance of successive governments to maintain a system of regular revaluations.
Valuation
Valuing buildings can be a time consuming and expensive business, because
every single hereditament requires a physical inspection for true rateable
values to be established. Buildings of similar external dimensions can exist
as a palace in Belgravia or a block of mould-infested flats on a rundown
estate.
Far easier to value is the land element. As everyone knows, it is location
which is important and which represents a significant proportion of the
capital value of most property nowadays.
The skills and information required to determine the economic rental value
of a site exist today and are regularly used. This is not always recognised
and some professional valuers themselves claim they cannot differentiate
between the value of a site without the building value being included. However,
where a site has a derelict building to be demolished the value of the land
is determined today without any problem. The same approach is required for
determining the site value alone where the buildings will continue to be
used.
A form of land value taxation exists, and hence land-only valuations are
conducted, in many countries, including Denmark, Hong Kong and parts of
Australia, South Africa, New Zealand, Canada and the United States. Obviously,
UK chartered surveyors will need to recognise the current international
skills and knowledge used for land value assessments, together with the
rapid development of computerized tools.
In fact within the last year a number of independent land-only valuations
have been undertaken in the following UK locations:
· Vale of White Horse, Oxfordshire
· Parts of Liverpool
· Whitstable, Kent
· Along the route of the Jubilee Line, London.
Implementation
The following are the necessary steps to implement a residential land value
tax:
1. The Land Registry to be completed to cover, at least, all residential
land.
2. The Land Registry to auction all unregistered sites.
3. The Land Registry to provide a valuation of each registered residential
site.
4. Valuations to be on the basis of the rental value of the land, minus
man-made improvements and at the optimum use established for it by the community
as set out in planning legislation.
5. Revaluations to be carried out on an annual basis. (Denmark manages to
do this.)
6. All valuations to be in the public domain.
7. Local authorities to determine the rate to be levied on owners (not occupiers).
8. No subsidies to be permitted for second homes.
9. No automatic subsidies to be permitted for single occupancy.
The levy could initially be introduced on a tax-neutral basis within individual authorities or within a wider region. However, with far higher contributions from valuable sites, there would be scope for raising the rates sufficient to fund all of local expenditure. With the Inland Revenue relieved of the burden of such subsidies, there would be scope for elimination of other distortionary property taxes, e.g. Stamp Duty, and reductions in harmful taxes, such as Employers’ NICs.
To make a land value tax more acceptable it would be useful if the Inland Revenue set up a system of payment for UK nationals via direct deduction from income or benefit.
Owner-occupiers of modest properties on high value sites with low income could qualify for some form of tapered relief. Owner-occupiers of high value properties on high value sites on low incomes (elderly widows, perhaps) should not receive subsidies but could be given the option to defer payment, with rolled-up interest, until the property is sold.
Benefits
Replacing Council Tax with a form of land value tax would bring the following
benefits:
1. A link established between tax paid and benefits received (given that
land values are created by natural attributes, public investment and local
community activity).
2. Automatic stabilisation of house prices (as land rental values increase,
the extra tax payable will mitigate the actual increase in capital value).
3. A permanent brake on the inexorable increase in wealth inequality.
4. A significant contribution from wealthy individuals (via their offshore
holding companies) who successfully avoid most other taxes.
5. No longer would a multi-million pound mansion in Mayfair or a manor house
with extensive grounds in Surrey attract the same tax as a modest 3-bed
semi in Liverpool.
We urge the Government to prepare the ground for the introduction of the tax which economists, from Adam Smith to Milton Friedman, agree meets all the criteria for a good tax – a tax on the rental value of land.