Tax on property values

Free-market capitalists and mainstream economists, such as the FT’s Martin Wolf and Samuel Brittan, have both argued the case in favour. Whereas left-liberals argue for land/wealth taxes on grounds of fairness and equality, free-marketeers tend to argue that the rapid accumulation of unearned property wealth over the last 15 years has made us all fat, lazy and unproductive. Tax wealth, so this theory goes, and we will be spurred into competing with fast-growing emerging markets. Right-wing libertarians also argue that wealth taxes are the least bad option because – paradoxically – they do the least to distort or depress wealth-creating economic activity. “Not only that,” says Tory Bow Group adviser Mark Wadsworth, “LVT is an entirely voluntary tax: you decide how much you are willing to pay and you choose a house or flat within that price range. Only, instead of handing over all the rent or purchase price to the owner, the location value would go to the government.”

Would it unlock the property market?

Both the left and right perspectives are concerned with the positive effects of a land tax on the next generation. The left worries that a whole generation will be excluded from property ownership. The right worries that letting the rich sit on the nation’s assets robs their children of incentives to work harder, damaging economic vitality. And everyone worries that concentration of property damages the social mobility that is crucial to future prosperity. The other argument in favour of a land tax (made by the doyen of LVT proponents Fred Harrison in his book Boom and Bust) is that taxing land encourages useful development. Landowners who accumulate it for speculation purposes face huge bills, encouraging them to sell up to developers with more of an incentive to put the land to work. Land-value taxes are not high on the political agenda so far, but they are an idea whose time may yet come.

Should the UK adopt a recurrent tax on property values?

No

• A new tax on property would destroy confidence in the fragile housing market and accelerate the decline in home ownership in Britain. 

• People buy homes out of taxed income. So unless income tax were abolished, a land tax amounts to double taxation and is inherently unfair.

• Proponents of land taxes hugely underestimate the difficulty of assessing the market value of all unsold land in the country. Without agreed values the tax cannot be levied.

Yes 

• The UK needs to be more productive, less lazy, and less property-obsessed. As the OECD points out, land taxes would smooth out damaging housing bubbles and encourage more productive investment.

• A land value tax would help address the inter-generational inequality between property haves and have-nots that was massively exacerbated by the long property boom of 1995-2007.

• A land tax is easy to collect, hard to avoid, and would help fund the large-scale infrastructural investment that the UK needs.

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Property tax

I am in general a fan of the land value tax. The idea is you tax the value of underlying land and not the value of the property on the land. This incentivizes building more because the landowner pays the same tax whether he builds or not, so he might as well build. It also puts a larger share of the tax burden on speculators who are sitting empty lots. For these reasons, there is a lot to like about land value taxes. However, the property tax, has a few advantages as well. Don’t think of this post as a definitive case one way or another, just some considerations on this issue I haven’t seen elsewhere.

The first advantage of property over land value taxes is that they serve as a consumption tax since the total property value is really capitalized value of housing consumption. You could tax imputed rent, but I don’t see how that transformation of net present value into the current value of the flow of services really improves the tax in any way.

I also think we it is wrong to assume that there is a always a significant efficiency loss if people build “less” in any way. Consider two identical mansions side by side, but one guy decides to tear up all his granite and replace it with marble. This strikes me as luxury consumption which would be fine to tax, is probably relatively inelastic, and the welfare losses of any realized lower output here won’t be that big. In other words, "more" housing does not necessarily mean more housing units or even square footage.

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In addition, there are other uses for land that have economic value. Imagine those same two millionaires are bidding on a big empty plot of land adjacent to their properties. One of them wants to build a mansion guest house for his son and the other wants to turn it into a nature preserve. Are we so sure that the mansion is the efficient outcome that we want to miss the chance at taxing the millionaire’s expenditure on housing to ensure that outcome? Seemingly vacant land can also provide a flow of services with real economic value. In Manhattan you can rent a yard for $50 an hour.

The other problem with a land value tax is that it is cutting taxes on a lot of capital that was built a long time ago and likely isn't going anywhere. Many houses were built over 100 years ago, and they’re very nice and expensive. Should we cut taxes for this kind of capital that was built so long ago? Some of these structures, or in some cases just parts of them like the facades, probably aren’t going anywhere in the next hundred years or more. In some sense these structures, or parts of structures, are more like land than capital.

So to summarize: some land is more like capital than you might think, and some capital is more like land than you might think. And don’t we want a progressive tax on wealth and luxury consumption? If I had to choose just one of the two, with a gun to my head, I would take a luxury home tax over a land value tax I think.  

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Land Value Tax

But if LVTs are so great, why are they so rare? One explanation is that it is too difficult to value land separately from what sits on it. There is not much of a market, for example, for undeveloped land in central London. However, some think this can be overcome. The 2010 Mirrlees Review of British taxation argued that bean-counters could compare the price of similar buildings in different locations, for instance. In any case, the efficiency of the tax does not depend on accurate valuations. The bigger barrier is political. LVTs would impose concentrated costs on today’s landowners, who face a new tax bill and a reduced sale price. The benefit, by contrast, is spread equally over today’s population and future generations. This problem is unlikely to be overcome. Economists will continue to advocate LVTs, and politicians will continue to ignore them.

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Land Value Tax

Land Value Taxation is a method of raising public revenue by means of an annual charge on the rental value of land.

Although described as a tax, it is not really a tax at all, but a payment for benefits received. It would replace, not add to, existing taxes.

Properly applied, Land Value Tax would support a whole range of social and economic initiatives, including housing, transport and other infrastructural investments. It is an elementary fiscal measure that would go far towards correcting fundamental economic and social ills.

The value of every parcel of land in Britain would be assessed regularly and the land value tax levied as a percentage of those assessed values.

"Land" means the site alone, not counting any improvements. The value of buildings, crops, drainage or any other works which people have erected or carried out on each plot of land would be ignored, but it would be assumed that all neighbouring properties were developed as at the time of the valuation; other things being equal, a vacant site in a row of houses would be assessed at the same value as the adjacent sites occupied by houses.

The valuation would be based on market evidence, in accordance with the optimum use of the land within the planning regulations. If the current planning restrictions on the use were altered, the site would be reassessed.

The advantages...

• A NATURAL SOURCE OF PUBLIC REVENUE. All land makes its full contribution to the Exchequer, allowing reductions in existing taxes on labour and enterprise.
• A STRONGER ECONOMY. If we tax labour, buildings or machinery and plant, we discourage people from constructive and beneficial activities and penalise enterprise and efficiency. The reverse is the case with a tax on land values, which is payable regardless of whether or how well the land is actually used. It is a payment, based on current market value, for the exclusive occupation of a piece of land. In the longer term, this fundamentally new and different approach to revenue raising will stimulate new business and new employment, reducing the need for costly government welfare.
• MARGINAL AREAS REVITALISED. Economic actitivities are handicapped by distance from the major centres of population. Conventional taxes such as VAT and those on transport fuels cause particular damage to the remoter areas of the country. Land Value Tax, by definition, bears lightly or not at all where land has little or no value, thereby stimulating economic activity away from the centre - it creates what are in effect tax havens exactly where they are most needed.
• A MORE EFFICIENT LAND MARKET. The necessity to pay the tax obliges landowners to develop vacant and under-used land properly or to make way for others who will.
• LESS URBAN SPRAWL. Land Value Taxation deters speculative land holding. Thus dilapidated inner-city areas are returned to good use, reducing the pressure for building on green-field sites.
• LESS BUREAUCRACY. The complexities of Income Tax, Inheritance Tax, Capital Gains Tax and VAT are well known. By contrast, Land Value Tax is straightforward. Once the system has settled down, landholders will not be faced with complicated forms and demands for information. Revaluation will become relatively simple.
• NO AVOIDANCE OR EVASION. Land cannot be hidden, removed to a tax haven or concealed in an electronic data system.
• AN END TO BOOM-SLUMP CYCLES. Speculation in land value - frequently misrepresented and disguised as "property" or "asset" speculation - is the root cause of unsustainable booms which result periodically in damaging corrective slumps. Land Value Taxation, fully and properly applied, knocks the speculative element out of land pricing.
• IMPOSSIBLE TO PASS ON IN HIGHER PRICES, LOWER WAGES OR HIGHER RENTS. Competition makes it impossible for a business producing goods on a valuable site to charge more per item than one producing similar goods on less valuable land - after all, producers and traders at different locations are paying different rents to landlords now, yet like goods generally sell for much the same price and employers pay their workers comparable wages. The tax cannot be passed on to a tenant who is already paying the full market rent.
• AN ESTABLISHED AND PROVEN SYSTEM. Local government variants of Land Value Taxation, known as Site Value Rating, are accepted practice in, for example, Denmark and Australia.

Is it fair...

Land (unlike goods and services) has no cost of production. If an ample supply of land of equal desirability were available everywhere, there would be nothing to pay for its use. In reality land acquires a scarcity value owing to the competing needs of the community for living, working and leisure space. Thus land value owes nothing to individual effort and everything to the community at large. It belongs justly and uniquely to the community. Conversely, the reward for individual effort can belong only to the one who earns it, to spend, save or give away as he or she may see fit.

Because of differences in positional advantages, fertility or natural resources, some locations are more desirable than others. Demand for access to these features gives land its rental value. Land Value Taxation, being assessed on these values, is fair in its incidence.

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Land Value Tax

For a tax to be accepted it must be:

• Fair.
• Simple - so it can be understood without a tax advisor.
• Impossible to evade or avoid.

A small number of fair and simple taxes, which are impossible to avoid, is much better than the multiplicity of taxes we have at the moment which are unfair, highly complex and very easy to avoid (if you have enough money to get the right advice.)

"Only little people pay taxes." - Leona Helmsley, businesswoman.

A key factor in any new tax proposal, such as a land tax, is that it must be easy to explain to the mythical Man In The Pub (MITP).

A bad tax is one that takes more than five minutes to explain to the MITP.

A new tax must be exactly what it says on the tin!

Starting with the obvious

• A field with cows is worth less than a field with houses.
  Land value depends on permitted usage.
• A field with houses in Derby is worth less than a field with houses in Chelsea.
  Land value depends on location.

A tax on the value of land

PROS

• The value of agricultural land is easy to understand - it's what someone is willing to pay for it.
• The value of housing land is the value of the site without the buildings on it.
  Ask: "if there were no buildings on this site how much is the land worth with planning permission to build those buildings?"
• If LVT was used only to replace Council Tax and National Non-Domestic Rates (NNDR) with a flat rate tax it would be set between 2% and 3% of Land Value.
  If it was decided that land used for business should pay more than land used for housing (as NNDR does at the moment) then LVT for houses would be under 2%.
  Selling the idea of a tax of between 2% and 3% is reasonable.
• These ideas are easy to explain and understand.

CONS

• There are no cons to a tax on the value of land.

A tax on the value of rents

PROS

• The tax is based on the concept of an economic rent.

CONS

• If the tax was used only to replace Council Tax and National Non-Domestic Rates (Business Rates) it would be set between 10% and 20% (or more) of Land Rental Value.
  Selling the idea of a tax of over 10% is quite difficult

• How does one explain economic rent to the MITP?
  An economist might explain it simply as:

  "Economic rent is an excess payment made to or for a factor of production over and above the amount expected by its owner. Economic rent is the positive difference between the actual payment made for a factor of production (such as land, labour or capital) to its owner and the payment level expected by the owner, due to its exclusivity or scarcity. Economic rent arises due to market imperfections; it would not exist if markets were perfect, since competitive pressures would drive down prices. Economic rent should not be confused with the more commonly used "rent", which simply refers to a payment made for temporary use of an asset or property."

  The MITP would have been lost somewhere before the end of the first sentence.
  The trouble is, the MITP remembers economists as those who failed to spot the crash of 2007/8 and who believe in the inevitability of global economic market forces.
  The left-wing MITP recalls reading that they no longer cover Marxist economics on university economics courses.
• Rent is not the same as "rent". Tenants pay "rent" so the assumption is that the tax will be based on this value - but this is not the case because "rent" is paid on the combination of land and buildings.
  We are left with the complexities above and general confusion when the same word, "rent", means more than one thing.
• Home owners don't rent their homes - so the concept of rental value is new to them
• We have to separate the portion of rent due to buildings from the portion due to land.
  This is more difficult than it seems because homes are not the same as factories - one does not write off the cost of building a home in the same way as the cost of building a factory.
  We would be forced to look at the on-going costs of the buildings (insurance, maintenance, repairs etc.) and deduct them from the overall rental value to give the portion of rent due to land.
  This is unnecessarily complex - and will create endless arguments and appeals - as well as lots of very annoyed people.
• For all sorts of complicated reasons it is not always possible for a property owner to charge an economic rent
• Agricultural land prices are rising dramatically because land is seen as a safe investment.
  Land is seen as a "status" investment by high earners wanting their "little shooting estate in the Cotswolds."
  The rental return on land is very low - so any tax on rents would not reflect the value of the land. Land would still be a good place to bury wealth.
• These ideas are difficult to explain and understand - unless you are an economist or tax advisor. (Actually, economists have never been very good at explaining anything in a way that non-economists can understand.)

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Land Value Tax

Dave Wetzel, president of the Labour Land Campaign, said: “This is an example of Jeremy Corbyn's Labour Party not only listening to us but also other economists across the political spectrum such as the Institute of Economic Affairs, The Adam Smith Institute and the Institute for Fiscal Studies that have all advocated Land Value Tax.

“If Land Value Tax were to replace business rates all productive businesses would benefit, land speculators keeping homes and premises empty would transfer their wealth to productive investments that create jobs and house builders would release their land banks for building new homes at reasonable prices.”

In 2011 the respected think-tank the Institute for Fiscal Studies backed scrapping business rates and replacing it with a Land Value Tax. 

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Land Value Tax

There is stiff competition but stamp duty on house purchases has a strong claim to be Britain’s worst tax. That’s “worst” in the sense it creates economic distortions while doing absolutely nothing to guide behaviour in a socially helpful direction.

Labour reintroduced stamp duty bands in 1997. These kicked in on the entire value of properties sold above £60,000 (1 per cent), £250,000 (2 per cent) and £500,000 (3 per cent). But there was rampant house- price inflation in the next decade (10 per cent a year on average) and politicians failed to lift the thresholds in step. The result was more home sales were pulled into the tax net. The proportion of property sales liable for stamp duty rose from half in 1997 to three-quarters in 2003.

Governments have been fiddling around the edges since. Alistair Darling removed the tax from most first-time buyers. George Osborne brought it back (although he has replaced the perk with equity loans and subsidised mortgages). His Labour shadow, Ed Balls, still talks of granting new buyers a “holiday” from the duty. But this is no way to run a taxation system. Short-term relief and arbitrary tinkering creates uncertainty and pushes the problem out to another day.

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Land Value Tax

The Labour general election manifesto talks of a land value tax.

“We will initiate a review into reforming council tax and business rates and consider new options such as a land value tax, to ensure local government has sustainable funding for the long term.” (p86)

But what is a land value tax? How would it work? And who would pay it?

So for residential property, home owners would pay a tax based on the market value of the house (since this would generally reflect the value of the underlying land). This would replace the council tax.

Meanwhile, firms would pay an annual tax based on the value of the business premises, including the land. This would replace business rates.

Wouldn’t it be a bureaucratic nightmare to value all the land in the country every year?

Not really. Business properties are already valued regularly (although not as frequently as they ought to be) by the Valuation Office Agency to determine business rate liabilities.

There is no reason why this could not be tweaked to cover business land values and also why the same could not be done by the VOA for residential properties. A wealth of online data from estate agents should make it easier for assessors to get it right.

How is this different from council tax?

Council tax is a regressive tax system which (for historic political reasons) means that those with lower value properties pay a larger share of the value of their property in tax each year than those in higher value properties.

Presuming a new tax were levied as a flat percentage of the value of the land, then those with property in the most expensive areas (or the largest amounts of land) would pay more because the market value of their asset would be higher.

Would this mean landlords would have to pay the tax, rather than residential renters?

It might if the levy was designed in that way. But one would expect landlords to fully factor the tax into rents, meaning that renters would not really be any better off in the end.

And business tenants?

As with a residential land tax, if the landlord was liable to pay it, business tenants could expect to see their rents rise commensurately. 

There would also be an important difference from the existing business rates system: a land value tax would be based on the full value of the commercial land, not just the buildings. 

What do economists say about the tax?

It has a lot of support. Taxing land is seen as practical and non-distortionary because land is an immobile asset. A wealthy person can’t move his or her land offshore to avoid the tax inspectors in the way that they can with stocks and shares.

It is also seen as efficient because it encourages landowners to use the land as productively as possible. The Institute for Fiscal Studies is pushing for business rates (on property) to be replaced with a full land value tax since this should encourage landowners to develop their land.

Land value taxes are also widely seen as fair, since urban land and residential property market values usually rise due to improvements in local infrastructure, which are paid for by all taxpayers. Under a land value tax, some of this uplift in wealth flows to the local community rather than accruing entirely to the lucky landlord.

Where does the idea come from?

It is commonly associated with the 19th century American economist Henry George, who recommended that taxes on land should replace all other taxes.

In Britain the Liberal government in the early 20th century came close to establishing a form of land value tax. Winston Churchill (who was then a Liberal) made a famous speech in Parliament in favour of a land value tax in 1909 in which he stressed the socially equitable nature of the levy:

“Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains - and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.”

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Land Value Tax

A land/location value tax (LVT), also called a site valuation tax, split rate tax, or site-value rating, is a levy on the unimproved value of land. It is an Ad valorem tax that, unlike property taxes, disregards the value of buildings, personal property and other improvements.^[1]

Land value tax has been referred to as "the perfect tax" and the economic efficiency of a land value tax has been known since the eighteenth century.^[1][2][3] Many economists since Adam Smith and David Ricardo advocated this tax, but it is most famously associated with Henry George, who argues that because the supply of land is fixed and its location value is created by communities and public works, the economic rent of land is the most logical source of public revenue.^[4]

A land value tax is a progressive tax, in that the heaviest tax burden would fall on the wealthiest.^[5][6] Land value taxation is currently implemented throughout Denmark,^[7] Estonia, Lithuania,^[8] Russia, Hong Kong, Singapore, and Taiwan; it has also been applied in subregions of Australia, Mexico (Mexicali), and the United States (e.g., Pennsylvania).

The value of land (and many other macro-economic quantities) can be expressed in two ways. Land value is directly related to the value it can provide over a certain period of time, also known as ground rent. The capitalization of this ground-rent by the land market is what creates land prices, the other measure of land value. When ground-rent is redirected to the public, through LVT for example, the price of land will decrease, holding all else constant. The rent charged for land also decreases as a result of efficiency gains from the ad valorem aspect of LVT.

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