The case for land value tax
By implementing LVT and imposing a tax on landowners which they cannot easily pass onto buyers, we would be witnessing a truly fair and progressive tax in action.
The concept of Land Value Tax (hereafter ‘LVT’) is not a new one. Yet in recent times it has received significant attention. Favoured by many across the political spectrum, it was even considered in passing by the 2017 UK Labour party manifesto.
So just what is an LVT? Simply, an annual levy charged as a (low) percentage of the unimproved value of a plot of land. A landowner would pay the same levy for a plot of empty land as one with a house on it, assuming all other aspects, such as location, of the plots were identical. This means there is no incentive to hold onto an unimproved plot of land, nor to own real estate without making productive use of it. This shift in incentives could promote more productive use of land throughout the economy.
We should always be sceptical of introducing new taxes or increasing existing ones. LVT though is perhaps the most morally justifiable tax. To understand why, consider that when the value of unimproved land rises, it is often a result of either publicly funded infrastructure and developments or developments funded by private actors other than the landowner in question. If a new public park is created near to a residential plot of land, this plot of land will become more valuable. It is not logical for landowners to retain the entire benefit of this increase in value. LVT effectively taxes rent- seeking in this way.
Consider also that large businesses often own a lot of land. They would pay their fair share of LVT. Successful small businesses meanwhile would likely pay less than they now would in corporation tax and business rates.
Taxes should of course also be evaluated on their economic efficiency. It is for this reason that LVT is favoured by many free market economists, with Milton Friedman describing it as the ‘least bad tax.’
In theory there is no inefficiency created by LVT, making it almost unique among taxes. It does not distort markets or create a deadweight loss, unlike taxes on productive activity.
This is because usually the implementation of a tax results in a reduction in supply, but the supply of land is fixed. This means a tax on land cannot be passed onto buyers through a reduction in supply, so the incidence of the tax is entirely on landowners. An LVT therefore does not raise rental prices.
The UK’s current stamp duty tax on housing, on the other hand, hammers geographical mobility as it is mostly paid by buyers. Using the introduction of LVT to phase out stamp duty would be a positive economic move. It could also act to correct the housing market in some capacity, due to the aforementioned shift in incentives.
By implementing LVT and imposing a tax on landowners which they cannot easily pass onto buyers, we would be witnessing a truly fair and progressive tax in action.
LVT is almost impossible to avoid as land, unlike income or wealth, cannot be transferred abroad or hidden. Landowners are generally more well-off than those who do not own land. They also benefit the most from infrastructure and public investment projects. Some of the funds raised by LVT could be used for such projects.
LVT has the capacity to modernise the UK economy, but to achieve this it must be a replacement, not an addition. With the value of land so high, introducing even a modest rate of LVT would present plenty of opportunity to axe taxes which create huge deadweight loss. Stamp duty has already been mentioned, but beyond this there are many economically damaging taxes.
The revenue raised by an LVT would allow for a severe reduction or axing of taxes which disincentivise productive activity. Such taxes include income tax, particularly on lower-middle earners, and corporation tax. On a local level, business rates and council tax could both be scrapped, with a proportion of LVT revenues being directed to local councils instead. These taxes are some of the most regressive and arbitrarily determined in the UK.
Make no mistake, these are bold suggestions, but significant reform to the economy is exactly what is required. If we get it right, we could see upticks in productivity, housing affordability and the progressiveness of the tax system, all at once. Surely this would be worth striving for.
