Land Value Taxation

Chris Waller - April 2012
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I have written previously advocating Land Value Taxation, and in response to numerous questions which have been put to me, I propose to revisit the issue and expand on my earlier article.

To recap: the fundamental idea of Land Value Taxation (LVT) is that there should be a single tax on the value of land, payable by the owner of that land; no income tax, no VAT and no excise duties. All transaction-based taxes would be abolished.

At the moment you pay tax on your earnings. You save a little and put it in a savings account - and you pay tax on the interest. You buy a house - and pay stamp duty and council tax. You buy insurance - and pay a tax on your premiums. You buy a car - and pay tax. You put it on the road - and pay tax. You buy petrol to put in it - and pay duty and more VAT. You buy a bottle of brandy - and pay duty and VAT. You manage, by some miracle, to retain your house and die in it - but it has appreciated in value, so you pay more tax. You are being skinned left, right and centre.

LVT has many advantages over transaction-based taxes. Firstly, land cannot be hidden, unlike transactions which can, using a variety of accounting devices, be sequestered; land cannot be 'off-shored'. The value of land can be ascertained relatively easily using the market test. Furthermore, transaction-based taxes make it necessary for the government to intrude into peoples' dealings, which is why there is a vast army of bureaucrats seeking to uncover tax fiddles; VAT fraud within the European Union results in a shortfall in tax revenues worth tens of billions while the army of bureaucrats, costing billions, runs around trying to catch the perpetrators.

It will be argued that LVT would be unduly onerous upon those who live in expensive houses yet have a low income - pensioners, for example. It is for this reason I propose that a proportion of the tax collected be repaid to all qualifying adults in lieu of all current tax allowances, rebates and benefits. Qualification would be dependent upon age and resident status, that is, it would be payable only to those adults who actually live in the country for the greater part of the year. The amount of LVT redistributed - the National Dividend - would be adjusted annually for inflation as measured by the Consumer Price Index. The National Dividend would, in effect, be the equivalent of a rental income to each qualifying adult in the country. The British aristocracy receive a rental income, as they have done for centuries, from their land holdings and I think this is such a good idea it should be extended to everybody.

It is envisaged that in the long term - possibly the very long term - the gradual redistribution of wealth and income would lead to a steady reduction in the National Dividend and ultimately render it unnecessary. It is also envisaged that due to the greater efficiency of LVT, it would be possible to reduce the total tax take. I do not have a current figure but the last time I researched the question I discovered that a full 17 percent of all tax collected went to pay those who collect it.

Numerous objections to LVT will be raised, and I propose to deal with some of them here.

'Property values will collapse'.

Why should property values collapse? LVT takes no more out of the economy than the current tax regime; indeed, it may well take less since LVT is simpler and thus cheaper to collect. The only property whose value will fall is that which cannot generate enough revenue to pay for itself. In accordance with the principles of free markets as propounded by Adam Smith, this is as it should be. If a property under its current usage cannot generate sufficient income then it will have to be sold, and at a price which represents its productivity. It also means that property speculators will not be able to allow buildings to stand empty while their value rises. LVT will push property onto the market and thus help alleviate the current shortage of housing. The major supermarket chains are currently accused of holding 'land banks' which prevent competitors setting up in business; LVT will make them pay for distorting the functioning of the market.

It will also be argued that rental values will fall and thus create a shortage of properties for rent. This might very well happen, but it would not create a shortage of rented properties. If landlords chose to sell off their properties then property prices would fall, making the purchase of property more affordable. The renting out of properties might become less lucrative but since it is not wealth-creating, merely distributive, its decline should not be mourned.

On a broader front, a readjustment of property values would be good for the British economy since its industrial performance is hindered by the insistence of financial institutions to pursue policies which maintain asset values, primarily property values, at the expense of wealth creation. Dambisa Moyo, in her 2011 book 'How the West Was Lost', refers specifically to our obsession with property values as a misallocation of resources which has cost the British economy dear over the last three decades at the very least.

There could only be a general collapse in property prices if large numbers of people sold up and left the country; but even if that were to happen it would not matter unduly since there would be fewer people requiring services such as schools and hospitals.

'Businesses would be forced to close'.

Again, why? Businesses already pay tax, and have to employ a further army of accountants who try to outwit, as far as the law will allow (and occasionally further), the army of bureaucrats trying to collect tax. What a monstrous waste of human resources. If a business cannot generate sufficient income to pay LVT then it must either find a more lucrative market or close. Again, this is fully in accordance with free market principles.

Wages would have to be adjusted in light of the payment of the universal dividend, as indeed would the minimum wage.

If a business were to make a loss one year which it believed to be a transient occurrence, it could borrow money to tide it over in anticipation of better fortunes in the future.

At the moment, businesses only pay tax on profits; profits are a matter of opinion and can easily be misrepresented, as the late Robert Maxwell and many others have shown. With LVT there is no argument.

'Farming will be devastated'.

It will not. The true value of farmland is very low since, currently, farm incomes are low. The land might be worth more as building land but planning laws still apply. The value of farmland is artificially propped up by agricultural subsidies; the Duke of Westminster currently receives over 400,000 per annum in subsidies. An acquaintance of mine, a farmer, once said, and not wholly in jest, "We no longer farm crops and animals, we cultivate subsidies." Given true free-market conditions, farmland would attract very little taxation under an LVT regime. In addition, one of the advantages of LVT is that tax rises occur only after increases in income have become consolidated to the extent that they are reflected in property prices.

'The wealthy would leave the country'.

They already do, and why should we worry? At the present time Britain seems to attract all manner of 'non-doms' who pay little or no tax; and some of them seem to attract a lot of attention from undesirables ('beware Russians bearing radioactive isotopes') against whom the government has to provide protection, at considerable expense.

'People coould go and live in boats'.

Boats moored on inland waterways would pay for moorings which would include an element of LVT. Even if someone were to go and live in a boat in the Thames estuary, that person would still not escape LVT. Every time that person set foot onshore to buy goods, LVT would be paid in the prices of the goods purchased. A shop would add a percentage to everything it sold to pay its LVT, thus customers, even visiting tourists, would pay LVT as they set foot in Britain.

'People would stop buying houses and live in tents'.

That would be their choice. Even then, they would have to rent a pitch from someone and thus pay a small part of that landowner's LVT. And every time they bought food, and paraffin for the primus stove, they would contribute to the LVT paid by the shops which they patronised. It is true that they would pay very little LVT but it would reflect their correspondingly small impact upon the environment.

'What about roads and car tax'.

Roads are a common good and financed through central taxation; this would not change. Only a small proportion of the money currently collected by vehicle excise duties is actually spent on the roads; the rest goes into the general government pot. Whatever the government needed in revenues in order to provide roads, it would be included in the total LVT collected. This would appear in the cost of goods sold and would thus also reflect the cost of transporting them.

'What about green taxes to protect the environment'.

In a true free-market situation, the market would price according to supply and demand. As landfill sites fill up the remaining space would become more expensive and thus an alternative would be found. As oil and gas supplies diminish their prices will rise, giving the stimulus to find alternative energy sources. Ultimately, the costs of environmental degradation will impose costs; as sea levels rise, defences will have to be improved; this will require the allocation of resources which thus cannot be spent elsewhere; what we spend building sea-walls in Essex cannot be spent importing televisions from China or steel from India. Thus, international trade will decline, as will the environmental damage caused by it. Or, we could choose to allow Essex to flood and keep watching television.

Another thought; as landfill sites became more lucrative, and thus more valuable, their LVT charge would increase. This would have the effect of curtailing landfill as a method of waste disposal even more rapidly.

The current high level of duties on fuels might be seen as a good thing for the environment. Of the total price of a litre of petrol, over eighty percent is duty; it might be thought that reducing the price of petrol to 20p per litre would herald an era of profligate consumption and environmental disaster. But, bear in mind that wages and other prices would change under LVT. Petrol might drop to 20p per litre, but disposable incomes would also change. True, no one would be paying income tax, but the company would be paying LVT and would have to adjust wages accordingly. Again it must be stressed that the total tax take would not change, but the points at which tax was taken would change and the economy would adjust its structure to accommodate that change.

What about tobacco and alcohol? Would there not be a huge loss of tax revenue?

Tobacco and alcohol are currently huge tax farms for HM Government. It is argued that the duties on alcohol and tobacco help to pay for the NHS treatment that their consumption necessitates and that this is morally correct since the cost falls on the user rather than on all taxpayers. There is some merit in that argument.

There are two approaches to this question. One would be to argue that all premises selling alcohol or tobacco should be charged a premium on their LVT. This would not necessarily be exactly pro rata their value of sales but one could argue that a supermarket with a large floor area and customer foot-fall would sell more tobacco and alcohol, and since their premises, being more valuable, would pay more LVT, one could take it as an reasonable accurate proxy measure. A small shop, with a smaller volume of tobacco and alcohol sales, would pay less LVT and thus a lower premium sum.

A second approach, though hugely more contentious, would be to argue that the NHS should not be obliged to treat those suffering the effects of tobacco or alcohol consumption. This approach would give rise to serious questions about the accuracy of diagnoses, and would also be politically very difficult to sell. The principle of a premium loading of LVT on premises could also be extended to those producing, storing and selling motor vehicle fuels.

'Drug dealers would be given a blank slate'.

They already have a blank slate. Drug dealers do not submit accounts to HM Revenue and Customs, it is all 'under the counter' or 'off the books', or whatever other euphemism you wish to use. In fact, under LVT, tax revenues would be collected more effectively through the expensive houses and cars which their drug dealing financed.

How is LVT collected through their cars? Easy - the car is bought from a dealer who has premises upon which LVT is paid and that LVT is collected in the selling price of the cars. Fuel is bought from a garage which also pays LVT, which is collected via the price of the fuel it sells. It is serviced at a garage which also pays LVT and collects that LVT via the prices it charges. There is no escape.

International illegal drug-dealing is possibly the most efficiently organised business in the world and a prime example of a free-market in action. There is demand and there are people only too happy to supply given the potential revenues. Don't misunderstand me here: I am not advocating drug-dealing as a socially desirable activity but merely observing that it is a fact and a very efficiently organised business which leaves most multinationals looking positively geriatric in terms of its reach and profitability. Since governments seem ineffective at stopping the trade or its causes, then they should at least collect the tax revenues it offers.

A peripheral thought here. Adam Smith, originally holder of the chair of Moral Philosophy at Glasgow University, asserted that not only the material good but also the moral good would be achieved by free-markets. Afghan and Colombian farmers grow opium and cocaine because it provides a much higher income than agricultural crops. The principal market for their product is in the deprived areas of the putatively 'developed' economies. If economies were truly free, then I contend that the Afghan and Colombian farmers would be able to earn a living from agriculture and the developed world would not have the entrenched deprivation which gives rise to drug abuse.

What is true of drug-dealing applies to all organised crime. At present, the proceeds of crime pass untaxed; LVT would ensure that this situation did not continue. The government would, of course, be in some measure the beneficiary of crime - but then so would we all. The increased revenues could be used to provide more police, more efficient judicial processing and more medical facilities to treat the victims of drug abuse. Criminals would pay for the damage they cause. It has been said that those who most vigorously resist change are those who have benefited from the current regime and so LVT has never received the consideration it deserves. When general taxation was first mooted to pay for the war against Napoleon, the legislature, being exclusively landowners, argued for income tax, knowing that they could finesse their accounts in order to appear impoverished. The prospect of LVT would raise howls of protest from the aristocracy but the question is, do we need an aristocracy in this twenty-first century? Would they be prepared to submit to a cost-benefit analysis?

Land Value Taxation is a huge subject and to do it justice would require an entire book, not just a short article. However, this article, one hopes, will get people thinking about it. Those sufficiently interested might like to try a few thought-experiments to trace out the paths by which revenue would accrue to the Treasury under LVT.

LVT is highly visible, unlike the current tax regime, which slices a little off here and there (and everywhere) such that it is almost impossible to know how much tax we are paying in total. LVT would also mean that politicians could not play the annual game of fiscal 'find the lady' in the Budget Speech - the Chancellors' speech would be reduced to a simple statement of the percentage increase in LVT, taking all of a minute even allowing for the pulling of the shirt-cuffs, the drinking of the water and the clearing of the throat. That alone is worth the undoubted upheaval of a change to the tax system.

Chris Waller - Permission granted to freely distribute this article for non-commercial purposes if attributed to Chris Waller, unedited and copied in full, including this notice.

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