Mark Drakeford says a tax on land values would produce a common wealth and benefit society as a whole
Generally, the weekly ‘short debate’ slot at the National Assembly is not amongst its most prestigious occasions. They take place at the end of a long Wednesday afternoon and are usually a signal for a mass exodus of weary legislators, leaving the proposer and a duty Minister behind. Yet the short debate can be useful as a means of increasing the gene pool of policy ideas which are available for consideration. In that spirit, this week I used to slot yesterday evening to make the case for serious consideration of a Land Value Tax.
This would be levied on the annual rental value of specific pieces of land, where the value is determined by different usages, for example whether it was agricultural or industrial land. Of course, it would be an alternative to existing forms of taxation, not an addition to them. At its most radical, a Land Value Tax would allow for the abolition of Council Tax, Business Rates and Stamp Duty Land Tax, Instead it would introduce a levy on the annual rental value of every site in Wales including all residential, commercial and farming land, as well as privately owned estates.
A major virtue of the change would be that Land Value Tax is a progressive tax. On the other hand, Council Tax is regressive because it imposes a lower burden on the rich than the poor – and also a lower burden on rich places than poor places. The Land Value Tax reverses that proposition.
The basic idea behind it is that the supply of land is fixed. As Mark Twain said, when advising people to buy land, they aren’t making it any more. As a result, it is inherently scarce. Its price reflects three things:
- its scarcity value;
- the value of improvements made by the landowner; and
- the value of improvements made by other people, especially the public sector.
In modern conditions the first and third of these almost entirely swamp the second. Therefore it is right and fair that value created not by the landowner but (mostly) by national and local government should be taxed.
One practical example is the estimate that the Jubilee Line extension through south and east London from Green Park to Stratford has raised property values around the stations it connects by £10 billion. If only a small part of this windfall had been taxed, it would have paid for the extension very easily. At the same time, while those who benefit from big increases in land values as a result of such development pay more, those whose sites have suffered (such as, for example, housing close to railway tracks which may decline in value because of noise or vibration) would pay less. This is a form of automatic compensation without any complicated appeals system. In just the same way a Land Value Tax could easily pay for many other much-needed infrastructure schemes.
What, then, are the main practical advantages of a Land Value Tax? First and foremost, such a tax would be tricky for even the rich to avoid. It’s hard to hide land or move it offshore to avoid getting taxed. For economists who advocate a Land Value Tax, such as those at the Organisation for Economic Development and Co-operation (OECD), there are two other big advantages: land taxes increase long-term stability and growth by fostering more productive use of capital; and they stabilise government finances by bringing in revenue efficiently and quickly. In short a Land Value Tax is:
- Cheap to collect
- Difficult to evade
- Discourages speculative land holding
- Encourages active use of land, creating more job opportunities and wealth
Meanwhile, in Wales, we already have, in TAN 6, ‘One Planet Development’, a policy approach which is sympathetic to land value principles.
Is it, then, a practical, political possibility? Well, I don’t want to underestimate the problems of tackling taxation, especially in an economic downturn. And the experience of the poll tax remains one which has scarred the collective memory of tax change in the property field.
Nevertheless, a Land Value Tax has an impressive economic and political pedigree. Lib Dem supporters have included both Vince Cable and Chris Huhne. For Labour, Andy Burnham made it a centrepiece of his campaign for the Labour leadership, describing it as an idea so old-Labour it can be traced back to Thomas Paine.
It is also the official policy of the Green Party in Scotland where research carried out late in 2010 suggested that a land value tax of 3.16p per pound would generate enough cash to replace council tax and the uniform business rate, while leaving 75 per cent of Scottish households better off in the process.
But Land Value Tax is not simply a policy of the radical left. Free-market capitalists and mainstream economists, such as Martin Wolf and Samuel Brittan, have both argued the case in favour. And, indeed, on the right of the political spectrum, a Land Value Tax has gained new traction in relation to problems in Greece. Put simply, it is quite difficult to move an Athens mansion off-shore (or, indeed, one in Belgravia) in order to avoid taxation.
In Wales Land Value Tax is also an idea with a strong lineage. Inside the Labour Party, the idea was first seriously advanced by Keir Hardie, in his 1906 Manifesto to the people of Merthyr Tydfil and Aberdare. Here is what he said:
“The slums remain, overcrowding continues whilst the land goes to waste. Shopkeepers and traders are over burdened with rates and taxation whilst the increasing land values that should relieve the ratepayer go to people who have not earned them.”
Three years later, a Land Value Tax was intended to be the centre piece of Lloyd George’s ‘People’s Budget’ of 1909. However, it was defeated by the vested interests of the House of Lords and property owners in the House of Commons. Now, in the era of devolution, there may be a chance for their uncompleted work to be brought to a conclusion in Wales.
Of course, it may be that the current settlement will not make it easy for such a reform to be introduced in the immediate future. Nonetheless, the whole future of responsibility for taxation is very much a matter of current debate. I hope that, by raising this matter, it can be brought to the attention of the Silk Commission so that it can include a consideration, if not of land value tax itself, then at least of the case for providing the National Assembly with powers to reform taxation in Wales, in this way, should it chose to do so.
In Wales – the part of the United Kingdom with the longest tradition of radicalism -we have no difficulty in understanding the notion that land is a resource we share in common, a true ‘common wealth’. As a result of being fixed and fundamental, it should belong to the people.
Those who have the privilege of ownership should pay something back for that privilege, through a Land Value Tax. Once this is understood and agreed, the serious work of detailed investigation of its pros and cons and its practical implementation here in Wales can begin.
12 thoughts on “Windfalls from public investment should be shared”
No ideas for creating new wealth then.
Forgive me for being a bit cheeky, but given the amount of infrastructure investment in much of Wales and the economic benefits accrued from it, I have to wonder if for many, the land tax might turn out to be a rebate to reflect what has been taken out, rather than what had been put in.
A land tax would surely be a big disincentive for land owners to make improvements to their property, meaning more unattractive buildings and underutilised land.
Mark , I don’t think you’re right to say land tax was proposed by Lloyd George and defeated by the Lords. In fact LG introduced three forms of land tax in 1909 and they remained on the statue book until 1920 – when they were repealed. Note that LG was prime minister in 1920. The problem was that issues of valuation proved very difficult, values were contested so the tax was hard to collect and its yield was disappointing. It was abolished as an unsuccessful tax. The logical case for land taxes is very strong, for the reasons you cite. Nearly all economists love them for the same reasons. They are not much employed though, and countries that introduce them either abolish them or let them wither on the vine. Why? Because they are intensely unpopular with the public and politicians respond to that. People hate paying large lump sums in tax that are not associated with any cash flow or transaction from which the tax can be deducted automatically. Note that Council tax could be turned into a progressive property tax quite easily but the political resistance is strong. The Commission I chaired made proposals for reform of Council tax. That is under the control of the Welsh Government and does not require London consent – the only element in the report of which that was true. Those recommendations have been studiously ignored. If they can’t do that, good luck in arguing for a land tax.
It’s hardly surprising that both Lloyd George and Keir Hardie should be interested in the idea of a land tax given the influence of Henry George’s ideas on the Progressive Left in the 19th century. Gerry Holtham is, however, right to argue that council tax could easily be turned into a progressive tax if the Assembly had the political will. The principle of some form of property tax is the right one. Instead we have a situation where effectively most local authorities have virtually given up raising any meaningful revenue through direct taxation because of the threat of capping. Rather ironic in some ways given Labour criticism of the Tories’ use of capping before 1997. If politicians really believed in local democracy then the amount raised via direct taxation by any council should concern only the electorate in that particular local authority area and no one else. Perhaps someone could give the reasons why in line with the recommendations of the Holtham Report the Assembly has not decided to introduce a more progressive council tax system. I thought that the slogan before last March was ‘Give us the tools to finish the job.’ Everyone knows that in tis present form council tax is a pretty flawed form of taxation. Surely this is an opportunity for the Assembly to show its faith in local democracy by using its powers to develop a better system.
Your history is flawed. Lloyd George’s budget in 1909 was so strongly opposed by the Lords (now why would they want to avoid a land tax?) that they were willing to create a constitutional crisis to defeat it. This lead to two general elections and the Parliament Act of 1911. By the time preparatory work was completed we were in the Great War, and I’m sure you know full well that Lloyd George’s post war government was a coalition with the Tories. Clearly, they would not have entered that coalition if Lloyd George had insisted on continuing with land reform.
The valuation argument is spurious. It was completely feasible in 1909, but was never completed for reasons explained above. Today, it is very easy. Many countries, including the United States and Scandinavian countries use software to value land on a regular basis. Denmark levies a land tax as explained above for which it must be valued.
The reason why land reform of the kind necessary to avoid future depressions of the kind we are now experiencing are rarely implemented is quite simply because of vested interest.
And what is this lump sum tax you refer to? Land Rent is a regular payment to the community for services rendered. There is no lump sum. To damn with faint praise and dismiss with spurious and irrelevant arguments is a cynical way of keeping people ignorant of how a Land Rent would really work, and how enormous the benefits would be.
On the contrary, Land Rent would be a HUGE incentive for landowners to improve their properties because the Rent would be levied on the value of the land only. Any improvements would be completely free of any tax. This bring all sorts of benefits. For example, currently the cost of making old properties more environmentally friendly is prohibitive, especially when weighed against the unearned increase in the value of land over time. If that unearned value is paid over to the community that created it, improving the property and making it more efficient to run will increase its value, tax free.
There is a desperate need to bring to people’s attention the huge benefit of removing from the economy the deadweight losses imposed by so called ‘progressive taxation’ and stopping the transfer of wealth from labour to land that this system involves.
The question of local autonomy is also relevant to Non Domestic Rates. At the moment the Local Government Finance Bill is going through Parliament, which will provide for a business rates retention scheme for England, allowing local authorities flexibility to benefit from growth in their business rates. The current pooling arrangements under the Local Government Finance Act 1988 will cease for English councils after enactment, and will then only apply in Wales.
Mr ap Gwyndaf’s elaborations of the history are valuable. Nonetheless it is true the taxes were on the books between 1909 and 1920. No doubt he is quite right that the vested interests of the landowners created the valuation difficulties but that did not make them less of a problem. Colbert said of taxation that the art is to extract the most feathers from the geese with the least hissing. Land taxes, for all their great theoretical appeal, always generate a lot of hissing. By lump sum I merely meant a large sum paid at intervals with no associated income stream or transaction. To be clear, I acknowledge the advantages of land taxation but I observe again that if politicians find it hard to make council tax more rational they are unlikely to introduce a new land tax. And if the resistence of the public to taxes on land (or other assets) is to be explained psychologically rather than rationally, the supporters of land taxation sometimes also go beyond the rational in the extent of their enthusiasm. I do not see how land taxation would “avoid future depressions of the kind we are now experiencing”.
Colbert’s approach to taxation seems somewhat cynical. In any event, ‘land tax’ is misleading. Land Rent is merely a payment to those who create the value, namely the community.
The land tax was, in fact, not on the books in 1909. The Lords’ determination to defeat the Commons led to the People v the Peers election of 1910 and only then, one year to the day after Lloyd George delivered the Budget, was it given royal assent.
As for the valuation issue, I refer to my previous post. Doubtless we’ll revisit the valuation red herring again in the near future. It’s a favourite.
Land Rent would obviously be paid ‘at intervals’, though the concerns you insist would be there (and which no doubt you’d continue to stir with disinformation!) would be assuaged by the disappearance of income tax and national insurance, council tax, corporation tax, CGT etc etc.
Again, the attempt to dismiss land tax as a theoretically wonderful idea but impossible in practice, whose exponents are a little over enthusiastic should be treated with caution. People do not see how Land Rent would “avoid future depressions of the kind we are now experiencing” because they do not understand it. The current crisis is due to land speculation. Land Rent would dampen land speculation and lead to the abolition of boom & bust that poor old Gordon was so convinced he’d achieved.
I fully support you. I have done much EMPIRICAL research showing the advantages of land value taxation as applied in literally hundreds of instances. I would gladly supply you with brief reports on these many instances, but only if you request them. The main problem for us is – LVT implementation (not philosophy); I can make suggestions on that score, also, if you so request. I have had implementation experience.
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Don’t tax buildings (we need them), gradually raise the tax rate on land assessments and lower the tax rate on building assessments. Don’t tax what you want (i.e., buildings) – tax land assessments more. It needs to be done gradually, and could take 10 years. Don’t unnecessarily disadvantage even a minority. For political reasons, be mindful of “investors” who have sunk money into land investments. Ask how & why this tax has worked well in practice. Clearly, it is better to tax something that can’t be produced rather than discourage economic development by taxing it instead.
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