Could a Land Value Tax work in the UK?
Are these pledges, milestones, missions, foundations, pillars, or targets? You tell me
It would be an understatement to say that Labour has found themselves struggling with the British finances since they took power in July. First, it was the £22 billion black hole. Second, it was the dispute about what constitutes a tax on ‘working people’. Thirdly, Labour currently is facing an ongoing dispute over the farmer’s inheritance tax adjustment. Britain has become an increasingly frugal state over the previous decade - a far cry from the naughties, under New Labour, where spending on the NHS and education increased by large amounts every year, all while the government was running a net surplus. Growth in the UK has become increasingly stagnant, and despite the best efforts of several governments, has not seemed to budge. With an NHS and pension system that ticks closer and closer to implosion with an aging population, it is increasingly clear that bold action must be taken. This series of articles is dedicated to exploring possible policies that could be used to fix the UK economy - examining their strengths and possible weaknesses, and assessing their practicality of implementation. This first article will cover Land Value Taxes, but future articles will cover alternative policies.
Land Value Taxes are not to be confused with council taxes, that tax property. Property taxes tax what’s built on land, while LVTs tax what’s under it. The amount of money that the tax could raise is still considerable. For the estimations, I will be using 2020 Census ONS figures. The ONS estimates that the total value of land underlying dwellings in the UK is £5.4 trillion (this does not include recreational areas, so that there would be no huge taxes levied on parks). Therefore, a 1% LVT could raise £54 billion - to understand how much finance this could raise, simply compare it relative to other state finance items:
This is about double the amount raised by council taxes, and business rates each
Around half the size of the total yearly state pension
Over three times the size raised by capital gains and inheritance tax combined
That all goes to show that LVTs are very effective at raising funds. But all this really shows is how much the tax burden can increase, which all could be achieved by raising income taxes, NI taxes, VAT, etc. (even if Labour have ruled out these taxes). The question is then - could LVT improve the efficiency of the tax system?
One key aspect to understand about the efficacy of LVTs, is that they are essentially a self defeating tax. As soon as an LVT is implemented, the prices of land will decrease by a fair amount, as the ROI of land speculation will massively decrease. Think of it this way - currently foreign firms are buying huge amounts of land in urban/suburban areas, and either renting out the buildings, or, if the land is undeveloped - simply waiting for the land value to increase (which it has been doing, at an alarming rate due to housing shortages), which all in all makes any form of property investment an easy profit. An LVT would immediately cause that kind of speculation to cease - and as the demand for land drops as a result, prices would too. Additionally, those looking to offload land they are not using to avoid the tax would create additional supply in the land market, further decreasing prices. As land prices decrease, so would the revenue raised by LVTs, which explains why it is a self defeating tax. So while it could lead to decreased revenues, it still benefits the populace by decreasing property values for first time buyers.
While I have noted that LVTs would discourage land-hoarding as an investment, it could actually encourage other forms of land-based investment. For example, it would have an immediate impact on the cost of housing in the UK - cheaper land means cheaper property after all, which would help to alleviate pains caused by the housing crisis. In terms of investment for developing land, decreased costs would also make it easier to develop - which would help to fix housing problems on the supply side, as well as creating a more hospitable environment for those looking to open new businesses.
LVTs would also act as an ‘automatic compensation system’ for those affected by new developments. For example, if a new ugly house is built on your street, you would be given lower land valuations and lower tax rates as a result. As land opened up in towns as a result of supply increases, the need for urban sprawl would also be decreased. LVTs are also preferable to property taxes as well, as improving an area would not directly increase tax rates upon it - as the tax is on the land, not the property.
The effect of an LVT on renting property is debated - some argue that LVTs would result in the cost being passed onto consumers, although the theory of supply and demand disputes this, arguing that the burden is placed entirely onto the producer due to fixed supply of land. Increasing rent on consumers would also be an admission by landlords that their property’s land is worth more - hence raising tax on themselves. The ‘race to the bottom’ that would result from the PED of rental property becoming more elastic (consumers would be able to more easily seek alternatives - property would become cheaper) could lead to a considerable drop in rental prices.
From an administration perspective, there are also mixed feelings regarding LVTs. It would require yearly assessment of land values, and it would be almost certain that large numbers of appeals would be made to land values due to its subjectivity. This would have the potential to increase admin costs for collecting the tax. However, proponents argue that the tax is unavoidable, unlike other forms of taxation (income, corporation, e.g.), as it is impossible to hide land as is done with other forms of wealth, which could be argued to offset the deficiencies of LVTs.
Some have also made moral arguments for the implementation of the LVT. Its target of taxing those who gain unearned income from the land (landlords, speculators), land that is given its value to those who contribute meaningfully (nearby shop owners, public service providers), means that revenue gained from land can be returned to those who meaningfully contribute. Additionally, LVTs can be argued to be economical in the sense that they reduce wastage of land in prime locations, which are a finite resource.
Implementation of the LVT worldwide is limited. One such country that has used an LVT is Estonia, which is used to fund local governments. Estonia employs an LVT depending on region anywhere from 0.1-2.5%, and this has contributed to Estonia having an owner occupied residency rate of 90% (owning second homes becomes more expensive due to taxes levied on the land), a higher relative rate than the UK.
As previously mentioned, LVTs have been proposed before in the UK. In 2021, following COVID, a proposal was put forward to replace council tax, business rates, stamp duty, capital gains tax, and inheritance tax with an LVT. To cover the taxes altogether (comprising £94 billion), a rate of 1.6% on average would be needed (or 1.4% on residential properties, 3.5% on business properties) as found by the paper provided. Interestingly, a ‘supplementation’ system was also suggested to provide deductions on the rate of LVT, which they suggested be done for positive environmental actions, or innovative business practices.
Coming up with a comprehensive LVT proposal in the UK is difficult, for multiple reasons. Firstly, it is difficult to decide what type of LVT would even be necessary - do we need an LVT simply designed to replace other taxes, as was suggested in 2021, or a tax designed to raise new funds - that could be used to pay down the national debt or invest in public services. Any tax would have to be squarely focused at replacing current tax channels, rather than more ‘tax and spend’ policy. Hence, policies must address the following issues, that I have tried to base loosely on the Labour government’s ‘milestones’:
1. Redistributing the tax burden away from ‘working people’, and addressing productivity issues
Currently, the tax burden is unfairly squared towards businesses and those who actively contribute to the economy, a directive that discourages that discourages growth, by incentivising non-productivity and unemployment. Currently, employed people pay at least 20% income taxes and national insurance contributions, while unemployed pay nothing in direct tax. This dynamic is partially necessary for the existence of a strong social safety net to prevent excessive welfare losses in society, but currently it is negatively impacting productivity in the UK - with current generations increasingly suffering from a productivity crisis that is being subsidised by the state. Changes in the tax code are necessary to deal with this problem. The Labour Party have already investigated these issues in the ‘Get Britain Working’ Policy Paper, and the alterations in tax code alongside proposals in the paper would help to incentivise productivity in the UK.
Proposal: cut the base rate of income tax by 5% (£32 bn), half the rate of council tax (£15 bn). Totals to £47 bn, which could be funded through a 0.89% LVT.
For a family with two parents who both work earning £30000, who also own £230000 in land with total property valued at £500000, the cuts in taxes would save them a combined £3497, and the LVT would cost them £2047. The net savings would be £1446.
2. Providing tax relief for business
As previously mentioned, taxes on businesses are currently too high, and are restricting enterprise opportunities and opportunities for much needed growth. Corporation taxes have been raised repeatedly in the last years, and the current system of business rates actively discourage physical locations for startup businesses. Reforming business rates is a much needed step to encourage enterprise in Britain and to encourage investment. Business rates were measured as collecting £29 billion in 2019; and similar figures can be assumed to be collected now.
Proposal: abolish business rates. Replace the funds to councils by Westminster administered taxes (£28 bn). Remove stamp duty for businesses (£3 bn) and cut in half for residential buyers (£6bn). Totals to £37 bn, which would be funded through an LVT of 0.7%.
3. A need for capital investment
The need for new British investment has become increasingly more apparent as time goes on, with NHS waiting times and train tickets costs have massively increased over the last decades. A Land Value Tax will decrease the cost of acquiring land for new infrastructure projects (as well as increasing willingness for land to be sold by private individuals). Funds obtained must then be put forth to build new, green infrastructure, and to be put forth into other worthwhile investments.
Proposal: revive Labour’s green investment fund plan through investments into Great British Energy (£28 bn). Triple the amount paid into the recently set up National Wealth Fund (£14 bn). Totals to £42 bn, which could be funded through an LVT of 0.77%.
4. Strengthening the UK’s debt situation
The UK has reached record borrowing levels over the last year, and the total national debt has eclipsed 100% of GDP. The level of debt is not set to start decreasing until the 2030s, and by that point the country will be forced to make budget cuts due to the level of interest paid on bonds. The government must therefore seek to reduce the deficit in any proposals made.
Proposal: reduce the UK budget deficit by 10% by raising an additional £12 bn in tax revenue. Could be funded with a 0.28% LVT.
If you wished to combine all these proposals, they could be financed with a 2.64% LVT.
To conclude, I think it is fair to say that an LVT could work in the UK, however, this would revolve around the implementation of said policy. Jeremy Corbyn in 2017 ran on an LVT, and it was quickly branded by Conservatives as just another militant-esque ‘tax and spend’ proposal (which to be fair, it was - Corbyn had no plans to use his proposals to redistribute the tax burden, only to increase it), with it being branded as a ‘garden tax’. If a politician were to market the policy as tax relief for working families, and instead passing the burden to the wealthy fox-hunters one could imagine the policy potentially gaining support. Most importantly, however, I think that LVT’s best possible use would be as a ‘growth policy’. For all the reasons I have explained, I genuinely think LVTs would have the potential to increase private investment in the UK and not to mention the possible tax breaks it could provide would be crucial to get money flowing through the economy at an increasing rate.