“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Jean-Baptiste Colbert
· Moving from income, council and business taxes to a land-value tax (LVT) would be revenue neutral whilst raising efficiency and equity.
· In taxing economic rent rather than effort and investment, LVT would boost growth and curtail speculative housing bubbles.
· LVT would reduce tax avoidance and foster a more productive use of capital.
· LVT would ameliorate material inequality both within and between generations.
Given its long and illustrious list of proponents, including Adam Smith, John Stuart Mill, Henry George and Winston Churchill, one may ask how it is we are still without a land value tax (LVT). The reason is Britain’s equally long and enduring tradition of entitlement. In the wreckage of the crisis, with the economy in a listless state of inertia and widespread indignation at the inequities all around, now may be a golden opportunity for change.
The analysis of any tax must address three concerns: that of efficiency, equity and revenue. The LVT is interesting because its advocates are both on the free-market right and egalitarian left, with their concerns for efficiency and equity respectively. The LVT breaks the usual trade-off between the two and so brings together these opposing factions.
A land-value tax is an annual levy on the on the unimproved value of land. This value is derived from its scarcity and the supply of local amenities, rather than the productive capacity or quality of what is on top. The LVT therefore taxes economic rent, rather than effort or investment. As the supply of land is perfectly inelastic (it does not vary with its price), the efficiency loss of its taxation is zero. Whereas most taxes such as income or council tax distort economic decisions, pushing resources away from their most efficient application, a LVT is non-distortionary, as it is payable independent of the land’s use. Geared rent-seeking, or speculative purchases of property, which drives up its price by virtue of restricted supply and local public services and infrastructure, has created house price bubbles. These serve only the interests of those speculators, and the costs of financial instability and unaffordable housing are borne by the rest.
A LVT would allow those who create the value of land to realise some of the return and would enable revenue-neutral reductions in other taxes, encouraging labour supply, innovation and investment in human capital. This is a view recently taken by the OECD, who also point out that “as real estate and land are highly visible and immobile these taxes are more difficult to evade, and the immovable nature of the tax base may be particularly appealing at a time when the bases of other taxes become increasingly internationally mobile.”
Inequality of wealth is far more severe than inequality of income. The top 1% of earners get 8% of total income, whilst the top 1% most wealthy have 23% of the country’s wealth. Income tax avoidance is rife at the top of the distribution and according to the ONS the poorest fifth of households pay 5% of their household income in council tax, the middle fifth 3% and the richest fifth less than 2%.
There is also an inequality of living space between generations. Young families with the most need for space are precluded from the property market by prohibitively high house prices, as the elderly hang on to their largest and only growing investment. Britons hold a disproportionate amount of their wealth in residential property (74%, compared with 54% in the US) and the problem of intergenerational inequality was massively exacerbated through the great moderation years of 1995-2007, when house prices increased by around 180%. These investments are not capital accumulating but rent seeking.
As for revenue, it is estimated that levied at a rate of 0.5% the LVT has the potential to raise around £30bn pa, enough to abolish council tax and give a tax cut to those living in cheaper properties. In Australia a LVT raises 4.5% of their tax revenues.
The difficulty comes in separating the value of a crop for example, and the value of the parcel of land the crop grows on. As data and technology have advanced it has become easier to make these calculations and indeed insurance companies do so all the time. A complete substitution of LVT for our present tax system would be politically and practically untenable, but a shift in that direction would serve to increase efficiency and equality, without damaging revenues.