A Land Value Tax: an idea whose time has come


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11:01 am - December 9th 2012

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by Jack Chadwick

A tax on land – “the original source of all wealth” – would have a lot going for it; equally lauded by denizens of the Left and the Right. David Lloyd George, Keir Hardie, and even Winston Churchill numbered among the early advocates for land value taxation.

Finding justification for the idea is incredibly simple – there are both ethical and economic arguments for its implementation, complimented by a mutual underpinning in both libertarian and socialist ideologies.

But, for starters, what is ‘land value’? In short: socially-created wealth. All land everywhere has a value determined by the level of economic demand for its attributes; a piece of ground conveniently located in the midst of an oil field is worth more than a plot found in the desolate isolation of some barren waste, because the resource of oil is quite sought after.

Less extreme examples of the same can be found in the familiar confines of the UK economy; land prices are different from place to place, with spaces in some areas being more desirable due to the basic features of their location.

Monetising this abstract concept is quite straightforward – the land’s value can be estimated by calculating its rental price over a certain period of time – this ‘ground rent’ is what proponents of LVT suggest we tax.

Why an LVT then? Well, as said, land value is socially-created wealth. It’s the product of the community, of collective endeavour, and thus rightfully belongs to the community. Under the present system, this wealth is instantly deposited into private pockets – a phenomenon the political economist Henry George blamed for the economic inequality found in societies like our own.

The principal reason for having an LVT is that landowners don’t actually contribute to the value of the land they own, and yet can profit greatly from it. Whilst the owner may increase the value of the property on their land through construction and suchlike, they don’t in any way contribute to the base value of the land occupied by their buildings. As stated, this value mostly comes from the endeavours of the community: infrastructure is provided, utilities are supplied, and the existence of all sorts of services (both public and private) render the land far more valuable than it would be were all these things to cease existing.

Natural resources like oil and minerals also account for a lot of land value, and some would argue that ownership of these resources is a legitimate means of accruing wealth. However, as George argued in his pamphlet ‘Progress and Poverty’, “The smallest infant born in the most squalid room of the most miserable tenement acquires, at the moment of birth, a right to land equal to millionaires. And that child is robbed if that right is denied.”

While the argument for land value taxation can easily get clogged-up with lofty philosophising, it’s also important to take notice of the practical positives it would bring. As Telegraph journalist Jeremy Warner acknowledged, LVT “does not discourage any socially desirable form of wealth creation” in the same way that taxes on income and jobs do. “The incentive to buy, develop, or use land would not change. Economic activity that was previously worthwhile remains worthwhile” states the Mirrlees Review (the IFS’ grand tax tome).

LVT revenue could then fund meaningful reductions in economically harmful taxes like national insurance contributions and VAT, or plug the gap in our public finances – or both!

At the risk of making LVT sound too good to be true, advocates for the tax also point to its likely effects in other areas of policy. It would disincentivise urban sprawl by ensuring that all sites were used efficiently – landlords would no longer be able to profit from lethargically sitting on land without developing it. The private sector housing crisis would resolve itself. Likewise, it would end sterile speculation in the housing market, the same bubble that amplified the 2008 financial crisis to such a shocking extent.

Panaceas don’t come along often; if there is one for the current problems facing us all, then land value taxation is very likely it.

—-
Jack Chadwick is a member of the Labour Party, and, by extension, the Labour Land Campaign.

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Reader comments


It sounds great in theory but then, we all need to remember that the people were denied access to the land by the Inclosure Acts, the last of which was passed in the 1860s.

2. Richard Carey

This is not so much an idea whose time has come, as an idea whose time came and went a long time ago, when advances in economic understanding about land and capital nullified the Ricardian reductivism at its heart.

You will find people still passionately in its favour, although the strange thing about them is they don’t talk about anything else but this one issue, and they rapidly become antagonistic if you express dissent.

3. domestic extremist

@ 2. “an idea whose time came and went a long time ago, when advances in economic understanding about land and capital nullified the Ricardian reductivism at its heart”

Perhaps you could spell out for us lesser mortals exactly what these advances in economic understanding are which render a land value tax obsolete. I’m with Gerrard Winstanley on this one: “the earth is the common treasury of all mankind”. Or should be.

4. Richard Carey

@ 3,

“Perhaps you could spell out for us lesser mortals exactly what these advances in economic understanding are which render a land value tax obsolete.”

Well, you could always search around for the arguments yourself, they’re not hidden, but as you asked, I would start off with Frank A Fetter’s criticisms (early 20th century American economist). This is from his wikipedia page:

“Fetter participated in a notable debate with English economist Alfred Marshall, both through his 1904 Principles of Economics and a number of journal articles in the American Economic Association’s journals and in the Quarterly Journal of Economics. He contested Marshall’s position that land is theoretically distinct from capital. Fetter argued that such a distinction was impractical, stating that:

“The notion that it is a simple matter to distinguish between the yield of natural agents and that of improvements is fanciful and confusing…. The objective classification of land and capital as natural and artificial agents is a task that always must transcend the human power of discrimination.”

Fetter’s stand on this issue further led him to oppose Georgist ideas like the land value tax. Mark Blaug, a specialist in the history of economic thought, credits Fetter and John Bates Clark with influencing mainstream economists to abandon the idea “that land is a unique factor of production and hence that there is any special need for a special theory of ground rent…. This is in fact the basis of all the attacks on Henry George by contemporary economists and certainly the fundamental reason why professional economists increasingly ignored him.”

As for Gerard Winstanley, although he got short shrift for his proto-communist ideas at the time, they were well tried out in the 20th century with disastrous results.

5. domestic extremist

I’m not sure that arguments from 1904 are very apposite. One great virtue of taxing land value which was not apparent then is that unlike capital, land cannot be secreted in tax havens. And so what if the value attributed to parcels of land is imprecise? So is charging council tax by placing properties in rough bands.

Strange complaint from Fetter.
To find the “theoretical” value of unimproved land, you simply find how much it would rent for if there were no buildings/developments or any other manmade improvements on it.

Would such valuations be perfect?
They’d be pretty much as precise as the valuations we tend to use now in the market, so Fetter’s complaint seems quite strange.

7. lihfkydljhnl

As a person who has some experience of horticulture and agriculture, I find it difficult to understand how the value of land can be separated from the improvemnet value – this is after all what hort/agriculture is about ffs. You chuck on fertilizer / compost / horse shit and the value of the land increases. Some hippy permaculturalists (Mike Feingold has done this working with poor farmers in India) have taken marginal land of low value and increased the value in a few short years to make it quite valuable. The same incidentally was done in Devon in the 18thC by the landowners there who added lime to the soil creating the rich pasture we see nowadays rather than the impoverished acid soils that were previously the norm.

The realy interesting thing though is that, as the ONS showed just tht eother day, it is the lower 50% of the population whose assets are predominantly held as land and other imovable property – the top 50% hold their assets in pension funds and other paper investments. A land tax would therefore disproportionaly hit the poorer 50%.

For those lefties in the audience Karl Marx dismissed the land tax, pointing out that Goerge seemed to think that everything would be fine as long as we all pay ground rent to the government. I’m not a great fan of Marx, but in this regard he was spot on.

8. lihfkydljhnl

There’s also the issue that the value of a piece of land can be increased by the activities of other people on adjacent land which increases the landowner’s tax.

If for example I own a piece of marginal land of low value that I am using as a smallholding, and someone else builds a road on nearby land thus creating access to a nearby road or motorway, then the value of my smallholding is increased due to improved access, and my tax burden goes up. The net result of this would be to create a bias in favour of developement.

When we also take into account the fact that the rights to things under the land i.e. mineral rights, may not belong to the land owner, but to some other agent, and that planning restrictions are beyond the control of the landowner – there were no planning authorities in George’s day – then we have a bloody nightmare with the potential for massive injustice.

As Richard Carey quite correctly says. a land tax is an idea whose time came and went long ago.

And one last thing.

One mouthy land taxer of my (unfortunate) aquaintance gets all his money by dealing in stocks and shares. He owns no land or property. He believes in the abolition of other forms of taxation.

Go figure.

Introduce a land value taxe and we will return to all the old controversies and valuation appeals that prevailed with the old ratetable values, like that property has a better, unimpaired view of open countryside than I have, or I have to put up with that pub – or fish’n’chip shop – and all the traffic it generates as compared with that other property with no nearby pub etc. Believe me, there are many cases like that in older residential areas.

Yet another aspect, is that a uniform tax on land values will mean an even larger share of the national tax burden being paid by Londoners, who are already hit harder by IHT.

One mouthy land taxer of my (unfortunate) aquaintance gets all his money by dealing in stocks and shares. He owns no land or property. He believes in the abolition of other forms of taxation.

Presumably he lives under some kind of roof? IOW a tenant? Then the tax will form part of his rent.

“As a person who has some experience of horticulture and agriculture, I find it difficult to understand how the value of land can be separated from the improvemnet value – this is after all what hort/agriculture is about ffs. You chuck on fertilizer / compost / horse shit and the value of the land increases. Some hippy permaculturalists (Mike Feingold has done this working with poor farmers in India) have taken marginal land of low value and increased the value in a few short years to make it quite valuable. The same incidentally was done in Devon in the 18thC by the landowners there who added lime to the soil creating the rich pasture we see nowadays rather than the impoverished acid soils that were previously the norm.”

George suggested that there be a sort-of generational redefinition of what counts as artificial. Most trees in urban areas were planted by old landowners, it’s only through the process of aging that they’ve become accepted as part of the natural landscape. If a farmer goes to the effort of improving their land’s fertility then of course the added value should not be instantly be included in their ground rent – the difficulty is setting the point at which such improvements become part of the communal environment.

“The realy interesting thing though is that, as the ONS showed just tht eother day, it is the lower 50% of the population whose assets are predominantly held as land and other imovable property – the top 50% hold their assets in pension funds and other paper investments. A land tax would therefore disproportionaly hit the poorer 50%.”

Quite. Some argue that an LVT should replace all other forms of tax, though this is not a feasible position for the reasons you outline. I personally believe that all potential revenue from a land value tax would be best spent on providing a basic guaranteed income.

“For those lefties in the audience Karl Marx dismissed the land tax, pointing out that Goerge seemed to think that everything would be fine as long as we all pay ground rent to the government. I’m not a great fan of Marx, but in this regard he was spot on.”

I agree with Marx as well. However, just because it’s not the exclusive solution doesn’t mean it’s not part of the solution. As I said, it could be used to fund a system of basic income, or a job guarantee scheme.

“There’s also the issue that the value of a piece of land can be increased by the activities of other people on adjacent land which increases the landowner’s tax.

If for example I own a piece of marginal land of low value that I am using as a smallholding, and someone else builds a road on nearby land thus creating access to a nearby road or motorway, then the value of my smallholding is increased due to improved access, and my tax burden goes up. The net result of this would be to create a bias in favour of developement.”

You’re assuming that the value of your land would increase with development. Plenty of people strive to find property in areas of low development, away from noise pollution etc. etc.. If you benefited from the development then your land would increase in value – you’d be wealthier and would thus pay more tax. If you didn’t benefit, then your land would decrease in value. The people affected by development projects like HS2 would receive automatic compensation through the tax system, because the value of their land would decrease. It goes both ways.

Yeah! Good article and hooray for LVT!

We’ve heard a million times about Poor Widows In Mansions (just give them exemptions, discounts, deferments, whatever, for a transitional period); we’ve heard a million times about the Army Of Surveyors (a nonsense, we manage perfectly well for Business Rates and housing is a lot more homogeneous than that); we’ve heard about LVT being an “attack on wealth” (no it’s not, income tax, VAT, NIC and corporation tax are attacks on private wealth – LVT is merely recollecting national wealth for national purposes).

I’m up to “Killer Arguments Against LVT, Not” number 258 and once you look at the counter-arguments, you realise that they are all based on outright lies or stupidity and you become ever more convinced that LVT is the best kind of tax.

14. William Davison

A depressing number of excuses for not adopting a tax that is used in 700 cities world wide.

Land is not capital its does not have the properties of capital, a) Capital is man made and b) depreciates in value over time, it rots, rusts or crumbles to nothing eventually. The value of land comes more often than not from government infrastructure or work of others. Its the only investment that is almost guaranteed to raise in value with minimal inputs for not just decades but centuries.

Land is the main way inherited wealth and privilege has been passed on down through the generations. Capitalism is more about creation and destruction; there are very few business that don’t have substantial land holding, that are still owned by the same families after 2-3 generation, where as large parts of central London are still owned by the same families that owned them in 1700.

Ask yourself this simple question, would it be better to own all the land in the world or all the money and what would the monopoly landowner charge in rent. Without a land tax and other taxes on economic rent inequality is inevitable. Those that own the most land will gain the most from the growth in the economy, be it a deregulated free market or mixed economy, its hard wired into the system. Yet even Capitalism does not need land ownership, as Hong Kong proves; as all the land is leased from the government and it raises over a 3rd of its income from land and property taxes.

Its depressing that so many on the left turn a blind eye to this rent seeking monopoly and many see nothing wrong with this speculative activity. This is despite clear evidence of hardship inflicted on individuals and families by the boom and bust circles in the property market. Why is it few in the media points out that it was property speculation that was at the root of Ireland’s and Spain’s problems and not government overspending, as they both ran surpluses in the years before 2008. Speculation on property which is really just land speculation, seems to be OK with many, but when a hedge fund manager speculates on an over valued currency that’s wrong.

@13 Bill, nice summary. Ireland and Spain property speculation also fuelled by the unwarranted expansion of money and credit. I.E. the banks and central banks are in on it.

They collect land taxes today — fail to play along and they will send armed men out to take your land. So much for being free. Your idea is just more extortion.

How can any sane individual take the federal government seriously when fedgov borrows 46 cents for every dollar they spend? How can anyone take the state and local governments seriously when cities are folding and many state governments are approaching bankruptcy?

It’s time to shrink the state governments by 95% and it’s way past time to dissolve the federal government.

A Labour manifesto commitment to introduce a tax on land value looks like an answer to a prayer from Lynton Crosby. Check the maths – Labour will find it even harder to win seats in the south with a land value tax and Labour has to win enough seats in the south to make it into government.

“There are 197 constituencies in the political south. At the 2010 general election ten Labour MPs were returned in the south, 4 in the south west, 4 in the south east and 2 in the east of England.”
http://www.southernfront.org.uk/p/labour-in-south.html

Most of the wrinkles in applying a land value tax mentioned in the thread are for real. Just think about the fun Lynton Crosby is going to have.

Land taxation makes sense with reference to business taxation, as argued by the IFS. Rates are a tax on business investment effectively, whereas a land tax would be a tax on rents. This is vastly more economically efficient and vastly less damaging to investment.

Stephen W

Wriggle as you may, a land value tax is going to raise a host of issues with contested valuations and an equal tax rate applied across the country will disporportionately add to the tax burden of London and SE region residents when they are already hit harder by IHT. This isn’t going to win Labour new Parliamentary seats in the south of England, especially when London and the South East make bigger net contributions to the national exchquer than other regions.

If there was to be such a tax it would finish a lot of farmers, resulting in larger agribusinesses becoming the norm. My feeling is that it’s better for food production and the environment to move away from such practices. There would need to be a system of rebates to protect small farms or farms on marginal land.

Large private estates can actually be better than commercial land use in that they have a better balance of economic activity and biodiversity. I wouldn’t want to lose such value. It’s one of my conundrums as a greenish lefty that the landed gentry can be the best for this kind of husbandry.

I’ve concluded that an LVT is a bad idea. Taxation on money flows such as profits and incomes are the least harmful as far as I can see.

I left a supportive comment yesterday evening, but it didn’t appear. Are comments here moderated?

Cherub talks nonsense.

The net tax payable by the UK farming sector minus agricultural subsidies divided by the number of acres of farm land is a princely £16/acre/year.

So that looks like a reasonable level to pitch our initial LVT on agricultural land (i.e. reinstating “agricultural rates”).

That’s a lot, lot less than the rental value of all but the most marginal land (which they shouldn’t be farming anyway).

That’s about 1/10 of the average value of food grown per acre.

An average sort of farmer with 150 acres would have an annual tax bill of £2,400 a year.

His comment about agri-business is ludicrous. If anything, LVT would have the opposite effect.

12 says:

“If you benefited from the development then your land would increase in value – you’d be wealthier and would thus pay more tax”

Can anyone explain how “you’d be wealthier”?

Very interesting discussion.

Could someone possibly talk me through example of say, suburban house in SE England. Market value £500k. Total area inc. garden 0.25acre.

On what basis exactly would tax be calculated?

24. Man on Clapham Omnibus

A land tax would free up land and ultimately lower its price.

Yay – Another tax. Bankcrupt the last of the struggling farmers and take more money for….nothing

27. Man on Clapham Omnibus

23. Blah

Not necessarily. There could be exemptions.

What is the purpose of this tax other than a load of people thinking up new ways to extract money from the hard earned that will make no difference to the country?

“12 says:

“If you benefited from the development then your land would increase in value – you’d be wealthier and would thus pay more tax”

Can anyone explain how “you’d be wealthier”?”

If you own land, and the value of that land increases, then your net wealth increases – land is an asset.

“If there was to be such a tax it would finish a lot of farmers, resulting in larger agribusinesses becoming the norm. My feeling is that it’s better for food production and the environment to move away from such practices. There would need to be a system of rebates to protect small farms or farms on marginal land.

Large private estates can actually be better than commercial land use in that they have a better balance of economic activity and biodiversity. I wouldn’t want to lose such value. It’s one of my conundrums as a greenish lefty that the landed gentry can be the best for this kind of husbandry.

I’ve concluded that an LVT is a bad idea. Taxation on money flows such as profits and incomes are the least harmful as far as I can see.”

Land value taxation doesn’t disadvantage farmers. Several acres of land zoned for agricultural use has relatively little value compared to a much smaller lot in a city like London. Though farmers own lots of land, it’s never particularly valuable. And, in fact, it would encourage the development of more land for agricultural use – perhaps lowering the amount tenant farmers have to pay in rent, and making it cheaper for them to acquire new land.

Yay – Another tax. Bankcrupt the last of the struggling farmers and take more money for….nothing

What is the purpose of this tax other than a load of people thinking up new ways to extract money from the hard earned that will make no difference to the country?

It’s not intended to be an additional tax, it’s intended to replace a number of taxes. Some proponents specifically exempt farmers / agricultural land.

You’d not be wealthier until you sold the land. Until that time, you’d be paying an increased level of tax without having a compensating increase in income.

You’d actually be poorer in the short-term, but with the possibility of getting the tax increase back in the future (IF the value remains higher).

@ Uk Liberty, thanks for the link. Just as relevant is my post “The Army of Surveyor” (singular)

As to farmland, let’s assume we want to make the tax system fiscally neutral, it happens that the total tax paid by farmers (income tax, NIC, council tax etc) net of subsidies received by ag land owners averages out at £16/acre/year, as against average value of food grown of £160/acre/year.

£16 is a lot less than average farm rent so easily affordable – a typical farmer with 150 acres would have an annual tax bill of £2,400.

cjcc,

Could someone possibly talk me through example of say, suburban house in SE England. Market value £500k. Total area inc. garden 0.25acre.

On what basis exactly would tax be calculated?

Assuming a discount rate of 10 per cent, a site valued at £100,000 would have a market rental value of £10,000 per annum (£100,000 multiplied by the discount rate of 0.1). Let the total rental value of the site be R. If the rate of LVT is 20 per cent of rental value, the amount of LVT going to the community would be 0.2R. Meanwhile, the site’s total value would be its market rental value – in this case £10,000 – plus the amount of LVT going to the community, which is 0.2R.

In other words,
R = £10,000 + 0.2R
R – 0.2 R = 0.8 R = £10,000
Therefore, R = £12,500

http://www.labourland.org/downloads/papers/chapters/4.pdf

@27 I suppose it could be, though agricultural land prices have been rising recently. The details linked to by ukliberty make a good case and I’m willing to accept that with proper rebates and ratings this could be a good idea.

So what are the loopholes? Could the Duke of Westminster offshore his land holdings to a private company? How would this kind of tax avoidance be prevented?

A tax on land – “the original source of all wealth” – would have a lot going for it; equally lauded by denizens of the Left and the Right.

In principle – in practice I imagine that the people it would hit hardest mostly vote Tory.

Having said that, it would also hit a lot of Labour/ LibDem voters. And floating voters. But if you used it to fund cuts in income tax and VAT, I think this could be a winner.

Indeed, the fact that many Tories would support it on ideological grounds, but many of their supporters would oppose it on self-interested grounds, strikes me as a big win for the other two parties.

Cherub,

So what are the loopholes? Could the Duke of Westminster offshore his land holdings to a private company? How would this kind of tax avoidance be prevented?

If the tax isn’t paid the taxman puts a lien on the land. If the debt approaches the market value of the land, the taxman applies for ownership. (stolen from a comment on Mark Wadsworth’s blog.)

Returning to farmers, here is an article about that specifically:
http://markwadsworth.blogspot.co.uk/2012/10/killer-arguments-against-lvt-not.html

@33 thank you for that – one further question on the “discount rate” – how would that be determined?
Would it relate to e.g. BoE bank rate, so could/would be subject to large fluctuations, very large ones in percentage terms from current levels!

Hmmm. As put forward here I don’t think that it would work. Sure plots floating on oil would be subject to more tax, but what about agricultural land as compared to a Belgravia mansion. This idea doesn’t seem to sit with a lot of people idea on here that the rich should pay more tax, because in this case it would be the turnip grower with “socially important” land that would pay more. So expect food prices to rocket as inner London becomes a haven of carrot growing.

“Less extreme examples of the same can be found in the familiar confines of the UK economy; land prices are different from place to place, with spaces in some areas being more desirable due to the basic features of their location.

Monetising this abstract concept is quite straightforward – the land’s value can be estimated by calculating its rental price over a certain period of time – this ‘ground rent’ is what proponents of LVT suggest we tax.”

But that is not considering the social benefit of the land. That is relying on the market pricing mechanism to determine tax level. Much like they do at the moment. Not sure if I follow the argument here. Think it has a lot of thinking to be done, but the concept could work.

I would however disagree that VAT is a damaging tax. The fact is that VAT is predominantly paid by wealthier people. A lot of the ubber left call it regressive, but I think that is because it threatens their little ivory towers of extreme progressive taxation. All staple products are almost always VAT excluded anyway. Food for instance makes up more of a poor persons wage than a rich persons, but it is also zero rated. Similarily with childrens clothes, books, etc. Poorer classes actually make very little contribution to the VAT pot because of the type of spending they do. Really VAT is one of the fairer taxes. It is incremental, and the more you spend, the more you pay. It is also ultimately fair because we all pay the same rate.

NI I would agree is a waste of time though. It is a con. None of it is ring fenced for healthcare and its just a form of income tax with a different name.

I really don’t think that this proposal for a LVT (call it a tax because LVT actually already stands for the Land Valuation Tribunal) will work. I think there is a scope for one, but would have to be in a different form and would have to be introduced while other taxes are gotten rid of, like reducing everyones income tax liability.

Freeman, try applying common sense. The rental value of land per acre in Belgravia is several tens of thousands, if not hundreds of thousands, times as high as that of farmland. Fact. I explained “agricultural rates” above, we’ve answered that one to death. Always start with “facts” and then have a think and all these supposed problems with LVT just melt away into nothing.

And there were two more tip top silly comments above, which I have responded to on my blog for posterity

http://markwadsworth.blogspot.co.uk/2012/12/killer-arguments-against-lvt-not-287-288.html

In any case, why on earth would Belgravia landowners convert their land to agricultural use? You can’t just say to the taxman, “er, it’s agricultural now, ignore that mansion with the swimming pool and home cinema in the basement, it’s a figment of your imagination. Concentrate on the swinging turnip… yesssss, that’s it, watch the swinging turnip… see the furrowed land, look, that isn’t a convertible, it’s a combine harvester…”

@39. Mark Wadsworth

Thanks Mark but I wasn’t actually responding to your blog, I was responding to the article as written here.

The suggestion of the Article (again not your blog) was that tax be applied on the basis of social usefulness. That is clearly not going to work, and that is what I was responding to, so I would ask you to apply some ‘common sense’ and realise that it was in fact this article that was being responded to, not yours. I know you would like to take it down the rental value avenue solely, but again, not what was written here was it? Clear?

Lets address some of the problems with what you have written:

“The poorest thirty per cent own no land whatsoever, in fact they own negative land because they have to pay rent. They would be entirely unaffected by LVT, whether it’s a replacement tax or not.”

But the poorest still have to pay rent don’t they? And who do you suppose is going to see their rentals go up in price? You can’t stop tax incidence.

“The next twenty per cent might have the bulk of their assets in land and buildings and the top fifty per cent might have the bulk of their assets in other investments, but that is only in relative and not absolute terms.”

Then the example you give considers total take, but not proportion of income, and is rather simplistic in its illustration.

Paragraph ‘c’ is an interesting one because you have looked at cause, but not effect. No doubt the 1% would stand to lose far more than the rest, but you don’t consider what this land does. There is an implied assumption that land is somehow an asset no matter how it is held (like gold). Yet there is absolutely zero value to land unless a particular skilled use of it is made. So in this country for instance the wealthy who hold land, the question has to be asked what is done with this land, and also if they ceased to do this activity with the land, what would the impact be on the poorest 50%?

Tax has a distortative effect on everything it is applied to, so you can be assured that if there is an apparent benefit somewhere, there will be a comparative disadvantage somewhere else. The saying that there is not such thing as a free lunch stands true. We cannot tax to obtain a benefit, and think that it will bring as ‘free money’, or indeed a redistributive effect necessarily.

Where activity ceases to take place on land (and it is not just farming, what about large factories, offices, airports, train stations, docks, retail, distribution, etc, etc. They all impact differently in ‘value’ terms) there is an equivalent impact on the necessary use of that land. How many companies would be impacted to the point of a loss of profitability if a tax on land were to take place? I hardly need to explain what would follow in these instances.

Lets consider residential. How does a Land Value tax (if we are to take your approach of a rental value above a base line) take account of a family were both parents work, have 3 children, and live in a suburb of London? Does it take account of the fact that their house is likely to be very valuable because of the larger amount of space needed for a family like that, or the fact that they may want to educate their children privately because it is the best school in the area, or that they are already having nearly 50% of their income taken on tax? Its doesn’t take account of any of the factors, not just residential but business either. It doesn’t take account of it because it is the inappropriate tool to carry out a job which is far to complex for property tax to tackle.

You may say great! this will all cause a drop in property prices and all will be sorted as all will be able to afford bigger properties for themselves. Apart from the fact that such an action will resign the country to a colossal net slash in wealth that will make the depression of the 30′s look like a party, again consider not only residential, but business productivity. In relation to your question as to why food prices would increase I suspect there is a lack of understanding. The increased transaction cost does not come from within the supply chain. It is a tax and therefore external. That tax is paid by farmers isn’t it? So instead of costing X it would cost X+1. Well to cover that cost farmer will charge X+1 won’t he (or is most often the case X+1+a little extra). You are not going to stop the passing on of tax costs to the next link in the chain and finally the consumer. Again, tax incidence.

I apologise if I sound condescending, but your blog, or indeed the problems considered in this article do not even begin to comprehend the extent and impact such a change in taxation would have, and despite your insult of ‘wankers’, I would point out that I am in fact a CTA so whilst I may be a wanker, I am at least a wanker who understands the problems, which were again answering this article, not yours. Sorry if you were trying to piggyback the popularity of LC.

Freeman,

How does a Land Value tax (if we are to take your approach of a rental value above a base line) take account of a family were both parents work, have 3 children, and live in a suburb of London? Does it take account of the fact that their house is likely to be very valuable because of the larger amount of space needed for a family like that, or the fact that they may want to educate their children privately because it is the best school in the area, or that they are already having nearly 50% of their income taken on tax?

The increased transaction cost does not come from within the supply chain. It is a tax and therefore external. That tax is paid by farmers isn’t it? So instead of costing X it would cost X+1. Well to cover that cost farmer will charge X+1 won’t he (or is most often the case X+1+a little extra).

Again, LVT is not an additional tax, it replaces several taxes (including income tax, NIC, council tax).

@42. ukliberty

And again. I am referring to the article, as well as Mark’s statements now. As I said in my original post. There is an argument for a land based taxation system, and indeed it would have to replace a number of other taxes, unfortunately the systems being proposed at the moment are Heath Robinson in the extreme and unfit for purpose.

Of course I am far more a supporter of the idea that property should be free from taxation and that we should actually have a flat tax system, which is ultimately fairest of all.

Freeman: “And who do you suppose is going to see their rentals go up in price? You can’t stop tax incidence.”

Answers: “nobody”, and “correct”.

The incidence of a recurring tax on annual land values (such as mortgage interest) falls entirely on the owner of the land and not on the tenant. I know more about tax incidence than most people, this is backed up with example from Enterprise Zones (when Business Rates goes down, rents go up to match), with logic (supply of land inelastic, demand for land is elastic) and with the common sense view.

The Homeys say, quite correctly, that with LVT, selling prices would fall. That is because the rental value of homes is a constant, and the selling price is merely the capitalised value of the amount of rent that can be collected privately.

So to then argue that rents would go up is silly. If that were true, then house prices would be unaffected by LVT (and we know that Council Tax has a downwards effect on house prices – even though it is legally borne by the tenant, the economic incidence is on the landlord/owner).

The other equally daft Homey argument is “But LVT is not fair, because tenants wouldn’t pay it”. Of course they would – that part of their rent which is pure location value IS the LVT. Alternatively, if the tax on landlord/tenant house is £5,000 then the tax on the identical owner-occupied house next door is also £5,000, so nobody is being hard done by.

Freeman, I am not only a CTA, but also LLB BA and ACCA and a reformed BTL landlord, don’t try and pull rank on me.

“In relation to your question as to why food prices would increase I suspect there is a lack of understanding. The increased transaction cost does not come from within the supply chain. It is a tax and therefore external. That tax is paid by farmers isn’t it?

“So instead of costing X it would cost X+1. Well to cover that cost farmer will charge X+1 won’t he (or is most often the case X+1+a little extra). You are not going to stop the passing on of tax costs to the next link in the chain and finally the consumer. Again, tax incidence.”

Nope.

Food prices are set by the market (indeed, by the global market). The farmer incurs costs in producing it (including the value of his own labour). The balance goes to rent. A tax on the rent cannot possibly affect global food prices. It cannot possibly affect the farmer’s costs (or the value of his own labour). Therefore it must come out of the rent collected by the landlord. And the rent is not external, it IS part of the whole thing.

Again, let’s look at REAL LIFE examples (to which UK LIberty has already linked where I explain this.

1. The farm gate price of food is only one-tenth of what you pay in the shops anyway.

2. A tenant farmer sells his food for the same price as an owner-occupier farmer. The rent which the tenant farmer pays cannot possibly increase the prices he can charge.

3. Some tenant farmers rent from the government or Crown Estates. What they pay in “rent” is to all intents and purposes the same as LVT. Do these farmers charge higher prices?

4. So as a thought experiment, if the government merely nationalised all farm land and rented it to private farmers why would food prices go up?

5. A tax on capital or labour used by farmers, or their profits, is of course entirely external, and this will reduce supply slightly (possibly pushing up prices slightly). So if we replace taxes on income and capital (minus ag subsidies) with a fiscally neutral rate of LVT (about £16 per acre per year, you are deliberately ignoring this point) then food prices would NOT go up as a result (either they’d come down or stay the same but the shopper would not notice either way).

So there.

@45. Mark Wadsworth

Mark, a CTA and you can’t appreciate the principle of incidence? You say you understand it, but you still blindly plough on ‘trusting’ that a landlord will not pass the cost on.

Let us use a very simple example. I am Mr. Freeman I purchase a property with a mortgage costing £1000 per month. The rental value of that property is £1200 per month. So lets take that we have £200 profit, minus say £100 per month on various maintenance issues. We are left with an EBIT of £100 p/m or £1200 p/a (in a very simple calculation). Now let’s suppose the government seeks to charge a levy on the property. Let’s assume this to be 3% on rental value, or £432 p/a. That reduces the profitability of the property to the landlord from £1200 to £768. Instead he would choose, as he is free to do, to increase the rate of his rental in a proportion adequate to cover the tax so that he maintains his £1200 p/a. You see without introducing regulation in relation to the expenditure of ones capital which would be utterly un-workable, and fraught with holes, such an action could not be stopped.

If in fact you are suggesting that this be introduced with further reductions in other types of tax then we may be some way to outlining a system that can work, but it is still unlikely to be borne solely by the owner. It’s a condition of taxation that is irrefutable, from the economics of the 18th century to present day, both left and right of the argument, unless you have a different method. If you are in fact talking about something completely different please do say, and make the point clearly.

If you had also read what I wrote you will notice I was not trying to pull rank on you (although even with those qualifications I do), I was simply replying to your comment of referring to me as a ‘wanker’. Your school yard antics aside, the reference was made to indicate that you are in fact discussing this with someone not only capable of understanding the concepts, but having them tested in the High Court (hint as to what my job is).

“So there.”…really? Squabbles best left at the door.

Freeman, if the landlord is free to increase the rent, why doesn’t he do that whether he’s taxed or not?

46. Freeman @10:59 pm, December 12, 2012 wrote:
Mark, a CTA and you can’t appreciate the principle of incidence? You say you understand it, but you still blindly plough on ‘trusting’ that a landlord will not pass the cost on.

Mr Wadsworth appears to be using the standard textbook definition of incidence as used in economics textbooks the world over. Those textbooks say that the incidence of any tax on goods in inelastic supply and elastic demand will fall mainly upon the supplier. Which in this case is the landlord. The more inelastic the supply, the greater the incidence on the supplier. Since land is in extremely inelastic supply (they ain’t making it no more), it is fair to say that the LVT incidence will fall exclusively on the landlord.

And it’s hardly a question of “trusting” the landlord not to pass the cost on. Some landlords will indeed be foolish enough to try. They will soon find that they have no tenant because they are charging more than the market will bear. As a result they will be solely responsible for paying the LVT but without the income from a tenancy to help them. Such landlords will either reduce the rent to a market level again or will sell the property.

UK Liberty, Derek R, thanks, but Freeman is incapable of ever conceding a point (i.e. admitting that the rental value of an entire UK farm is about £5,000 – £10,000 per year, and the rental value of a single mansion in Belgravia is £100,000 to £1,000,000 per year)…

1. Or even bothering to google the terms “supply demand elastic inelastic incidence” and read up on the subject.

http://en.wikipedia.org/wiki/Tax_incidence

Land/location (as distinct from buildings thereon) has zero production cost and the supply is almost entirely inelastic; but demand is price elastic so the tax will be borne to at least 99% by the landowner. This has never been disputed by any reputable economist, from the earliest days of economics onwards to the present day (Smith, Ricardo, The Physiocrats, Alfred Marshall all agreed). The idea was blanked out of the textbooks about a century ago, is all, but it is as true today as it ever was.
——————————–
2. As it happens, we do not need to speculate on how the landlord will respond to such a tax, because

a) I have already referred him to the topic of Business Rates (payable by tenant but incidence on landowner), where a BR reduction/exemption in Enterprise Zones led to a corresponding increase in rents (so the landowner benefitted from the reduction, not the tenant). He can’t be bothered to google this either so here’s the link for people who are interested in learning something new:

http://www.hmrc.gov.uk/research/report42.pdf
———————————–
b) Turning back to his hypothetical landlord, we have the real life example of mortgage interest (which is a kind of privately collected LVT).

Let’s say the bank puts up their interest rates, so now the landlord is paying £1,432 in interest/tax. Can the landlord just increase the rent by £432 a month? Nope. The landlord cannot pass on a single penny of his costs (in tx or otherwise). if the roof blows off in a storm and he has an expensive repair bill, can he increase the rent? Nope.

If that were true, then over the last decade, rents would have been falling in line with falling interest rates. Again, not true.
And if it were true that landlords can blithely “pass on” a tax (or an interest rate rise) to their tenants, why are the big land investors always compaining about Business Rates and/or calling for interest rate reductions?
———————————–
3. We also know as a matter of fact that house prices are lower in areas where property taxes are higher, you can control this for average incomes, basic minimum and so on, there is a very clear link. That’s because the total cost of renting is a constant (depends on wages minus basic minimum), and the selling price is merely the capitalised value of the privately collected part of the rent.

Again, for people who are genuinely interested, some proper factual research:

http://markwadsworth.blogspot.co.uk/2012/08/earnings-property-taxes-house-prices.html
————————-
4. I note that Freeman, Cherub, and all the other Home-Owner-Ists are going round asserting things without a single bit of real life numbers and evidence or supply-demand curves to back it up.

Isn’t this how it works in the High Court? Don’t you have to present evidence?

@47

Because there is no Market incentive to do so. Whereas if everyone faces the same increase in costs it will lead to unintentional coordinated price increases. Consider when they brought in fuel duty for airline tickets.

@48

Thanks, I’m am aware of where he is getting it from but it hardly ever works that way in practice. Again as per my response to 47 above you have to consider the price increase because of Market conditions. You will also find a lot of landlords having to increase rent to avoid losses. Landlords do not often run significant margins without their BTL property. The margins is often quite tight.

51. David Cooper

@lihfkydljhnl

Excellent piece by John Chadwick, but your comment about improvements of agricultural land can and do need to be addressed.

A good example is the Fen country in East Anglia, whose present value is due to historical improvements (drainage and fertilizers). This example shows that in some cases the owner most definitely can improve land values by his own action.

I believe the most economically efficient approach may be to allow the owner make some improvements tax deductible against future land tax. Certainly the present situation, where improvements including repairs are subject to VAT, is pernicious.

This is idea generally in accordance with the principle that the tax burden should be moved from productive work to resource consumption (which after all is the desired outcome of productive work).


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