David Lloyd George and Winston Churchill.

A Land Value Tax for England. Fair, Efficient, Sustainable (4.1Mb pdf)

Over the past few months I have been undertaking research for Caroline Lucas MP into how a system of site value rating or land value taxation could work in England to replace the council tax and/or business rates. (1) Today we publish the report (link above) which looks at how such a system might work and what changes it would entail. Caroline Lucas has published a Land Value Tax Bill to mandate the Treasury to undertake research into the topic (Guardian report here). With the ongoing debate over a mansion tax, it is time to think more radically about the future of local government finance and property taxes. This report highlights the work of the Mirrlees Review which included the observation that,

“The economic case for a land value tax is simple, and almost undeniable. Why, then, do we not have one already? Why, indeed, is the possibility of such a tax barely part of the mainstream political debate, with proponents considered marginal and unconventional?”

Over the past two decades, a rapid expansion of private debt-based money, created by private banks, has led to a land bubble in the housing market. Not only has this had catastrophic consequences for countries such as Ireland and Spain but it has contributed to growing levels of inequality as illustrated in this frankly unbelievable graph.

This data was obtained from the Office of National Statistics by Faiza Shaheen of the New Economics Foundation and shows the upper bound of net property wealth for each 1% of the net property wealth distribution. The median value for household net property wealth is £90,000 (i.e. half of houseolds have less than this and half have more). To be in the top 10% requires net property wealth of over £314,500 whilst 32% of households have nothing. The top 1% of the population has net property wealth of up to £15,040,000.

A system of rating or taxation on land values would, over time, lead to far greater equality in the distribution of wealth and incomes, lower housing costs for 83% of households in England who will pay less in LVT than they currently pay in council tax, encourage investment in property, make land allocation more efficient and end land speculation.

LVT is practicable and is already implemented in New Zealand, Denmark, Sweden, Latvia and Australia. It could provide a fair, efficient and sustainable source of local government finance in England.

(1) an equivalent exercise was conducted for Scotland in 2010. The Scottish and English reports together with a range of references and literature are available under Hot Topics/LVT in the menu above.

25 Comments

  1. I think you need to add to the list of countries. Sweden has some direct LVT buried in its property tax system. Germany might have – someone needs to check.

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  2. How would LVT affect land that is valued by wildlife? e.g. gap sites in urban areas, or land where the landowner has chosen to forego more ‘productive’ uses in favour of habitat conservation (perhaps even for personal altruistic reasons). Would LVT not create a disincentive to maintain wild land and wildlife habitat in cases where more economic uses were permitted?

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    • If they are valuable wildlife sites why would they be given consent for development? This is a land use issue not a fiscal issue. If the owner decides to forego income from permitted development that is their choice but the will of the community through their democratically elected representatives says otherwise and thus the owner should compensate the community for imposing higher rental costs on them (for that is the effect of withholding land from a higher and better use).

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      • Maybe the answer to Andrew’s point is that there could be exemptions – all taxes have these and as well as nature conservation, a site may not be developed for heritage conservation reasons. An analogy (albeit not from taxation) is where a crofter is excused his duty to cultivate his croft when he’s leaving it fallow as part of a planned nature conservation

        Crofting also provides an example of the “will of the community through their democratically elected representatives” being overridden for the sake of a higher interest in that planning permission can be given then the Crofting Commission refuses to decroft, citing the supremacy of crofting interests.

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      • I’m slightly troubled by your choice of words. “Higher and better use”? I generally opt for the Green party in the hope that they will be the ones who value wildlife and biodiversity, but increasingly this seems to be overtaken by social engineering ideals. Who is to decide what is a “higher and better use”? Local residents may well prefer to concrete over a piece of land for a supermarket and car park despite its value to wildlife or to build a new town in the middle of a National Park heedless of potential habitat destruction due to their indifference to or ignorance of the importance or irreplaceability of certain habitats, ecosystem services etc. Their ‘chosen representatives’ are likely to be similarly uncaring or untutored in ecology or conservation biology. Politicians already give consent to development on land of high wildlife value (due to ignorance and/or political expedience and vote-chasing) – just look at the rate of loss of ancient woodland (yet more proposed with HS2), the furore over the rare shifting dune SSSI lost in Scotland to the Trump golf course, past Secretaries of State overriding the recommendations of Planning Inspectors, Natural England and the EA not to build on floodplains, and so on. The current government is busy trying to blame wildlife laws for holding back development and dropping heavy hints that they’d like to weaken European legislation and our implementation of such things as the Habitats Directive. The question on the first line of your reply therefore seems hopelessly naive.

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        • Your concerns are well-founded – our democratic land use planning system os not perfect. However, another Green principle is putting local communities in charge of their own affairs. A key part of this is the land use planning system which, whilst imperfect, we should seek to continually improve. What is the alternative – some sort of benign ecological dictatorship? Or a return to pre-1947 days when private landowners made decisions about land use? If a local community want to build some houses for example, within the framework of law (including environmental law) should that not be allowed?

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  3. Forgive for being unclear, is it being suggested that persons who own land could be taxed each year on the land they own on the governments guess on what the land is valued at? the value of anything is only what another is willing to pay for it, not a guess of an average figure.

    And how does that go then for farmers who own many acres of land and still are not allowed a decent profit margin due to supermarkets dictating prices, yet another burden for an already struggling industry?

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    • Not on the government’s guess but on a professional valuation of the unimproved value of the land based on the ususal criteria that valuers use. This is not a problem – it is done by valuers across the world. I would suggest that a bigger burden for farmers that being squeezed by supermarkets (which is a question of how commodity and retail markets currently work) is the rent they have to pay and the interests payments to banks on land that is over-valued. LVT does farmers a favour by reducing the price of land – part of the saving is passed to the community to be spent on local services.

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  4. There needs to be tax breaks for land that is put to environmental use (particularly woodland) otherwise the only option for landowners becomes building, agricultural or bouncy castle theme parks.

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    • The LVT on woodland etc will be very modest. remember woodland owners benefit from the services of fire brigades, police, courts etc and should make a contribution. Building etc will only take place if planning consent is granted.

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  6. We have this system in Australia. Whist it works efficiently as a methid of raising revenue for local government the forced equality you’re chasing won’t eventuate. Local Governments where land values are high can offer excellent services whilst in lower valued areas councils struggle to provide basic services – so unless you’re also planning something abhorrent like centralising revenue and then distributing via some sort of pseudo socialist formula based on percieved need and it wint change much. Also our distribution graph would, at a guess, look pretty much the same as yours.

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    • If you read the report you will see that I propose a national rate as well as a local rate. The property tax on business (non-domestic rates) are a central tax – the rate is set centrally and it is collected and distributed according to need http://goo.gl/RBBjN

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  8. Thanks for this report Andy. I’m circulating it via the LVT facebook page.

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  9. I totally get the Winston Churchill thing – i.e. if the taxpayer makes an investment in infrastructure (typically transport) which makes the value of your property go up, then that’s an unearned windfall which is ripe to be taxed. But is that not already taxed through Capital Gains Tax?

    I appreciate that homes are exempt from CGT but the point applies to other types of property which aren’t exempt. Perhaps it might be simpler to withdraw (progressively so as not to distort the market unduly) the CGT homes exemption?

    If LVT is introduced, will gains on *all* property (land and buildings, not just homes) be exempted from CGT?

    More fundamentally than that, though, I don’t understand how you make the leap from taxing “the Churchill increment” to taxing the *entire value* of a property. That seems like taxing not just the capital gain during your own period of ownership but the gains of all the previous owners as well?

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    • CGT taxes capital gains but not on domestic property which is exempt. Also CGT is an “event” tax that only kicks in when the owner decides to sell. LVT is an annual levy on land rental values (a bit like business rates except they are levied on land values alone and exclude buildings etc). Logically if LVT were to be introduced then yes, CGT would disappear but only if LVT were levied at 100% of rental value would CGT disappear completely.

      LVT is not an increment tax. That is what Lloyd George proposed and is what some argue for but that leaves a legacy of unearned capitalised gains prior to LVT introduction at the base year. LVT should, over the period of transition and beyond steadily eat into this legacy of unearned wealth until it is impossible to make any unearned gains at all and land returns to its economic value.

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      • Would it not be more accurate to say that CGT would disappear if LVT were levied at the same rate as CGT on a proportion of the rental value corresponding to the uplift in that value during the current owner’s period of ownership?

        It’s interesting if you read Lloyd George’s budget speech, what he was proposing was awfully like a hybrid between what’s now CGT and Inheritance Tax at 20% (not the bit about duty on undeveloped land, admittedly, but at 1/2d in the pound – 0.2% – that seems to have been pretty modest).

        LG was also at pains to point out he was not proposing a retrospective tax whereas what’s being proposed now IS a retrospective tax. You say it’s a tax on unearned wealth but it’s not unearned to the person who has paid full market value for the land being taxed.

        So, as what you’re proposing is nothing like what LG and Churchill were proposing, it’s not clear to me why LG and WC figure so prominently in your (and Caroline Lucas’) presentations. Someone more cynical than I might suspect a politically disingenuous attempt to sugarcoat a potentially rather unpalatable concept with a veneer of a sort of “venerable respectability”.

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  10. My google alert notified me to your report, which I enjoyed reading immensely, and it was telling that the link to this site was the only one in your further reading I had not seen before.

    I’m now going to sound like I’ve jumped out of turn of the century USA:

    Much of the excellent research on LVT focuses on having LVT as a replacement for existing property taxes or as an additional revenue – but the potential revenue raising power for government of correctly assessing and collecting economic rent negates the need for regressive taxes on labour (and or capital). We need to replace not property taxes, but the majority of income/capital taxes, with the collection of the marginal product of land use (aka rent).

    That is by no means a criticism of your work, I’m really asking if you have an opinion on why the LVT suggestion is narrowly bounded as an alternative property tax?

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    • I would quite happily take it further and it can easily be taken further. The brief I was given, however, asked me to look at what would be involved were it to replace on a like for like basis Council tax and Business Rates.

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  11. As a landowning farmer I would welcome the introduction of an annual land value tax but only as a replacement for existing taxes such as income tax, NIC and VAT. The price of farmland is far higher than can be justified by its productive capacity because of its favourable treatment for capital gains tax and inheritance tax. Farm subsidies also increase land prices. Many of us receive subsidies which are not needed ( non means -tested income support for wealthy landowners!). We invest the subsidy money to obtain more land so that we can get more subsidy….. Need we wonder why it is so difficult for young people to obtain land to make a start in farming? The valuation of land for LVT is quite simple and need not be expensive. In Australia in 1910 land owners made their own assessments but the taxing authority retained the right to purchase at the owner`s valuation. No land was purchased!

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  12. Factual question about the report as regards replacement of Council Tax by LVT to make sure I’m following it.

    You say LVT will be phased in over 10 years with CT being decreased by 10% each year while LVT is increased by 10% (para 61). In para 62 you say the CT requirement is £26.7bn. In para 54 (2nd row of Table 2) you say the total residential land value is £1,464.7bn. The former divided by the latter is 1.82%

    In para 67 and Table 4, you appear to be illustrating the results of applying LVT of 1.83% in Year One. My question is, is 1.83% not “job done” in Year Ten? I.e. when the CT requirement is totally covered by applying a percentage to the total residential value without having to resort to a blend of LVT and CT?

    Taking the example of the top left box of Table 4 (Band A in the NE), why is the tax *in Year One* not 90% of CT (£1,017) + 10% of LVT (£947) = £1,010?

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    • Year 10 job done – yes. Table 4 shows LVT (green – 947) after applying 90% + 10% formula

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      • OK. Again – just to check I understand – that would make the final LVT in Year 10 (ignoring inflation, and any divergence in the property market or local authority spending patterns from inflation) for the Band A house in NE £317 (67% reduction from Council Tax) and for the biggest loser – Band H house in East – £8,110 (172% increase from Council Tax). Is that right?

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        • I would have to interrogate my raw data to give you a definitive answer but this sounds right. Bear in kind, however, that one of the reasons for a transition is to allow the market to adjust. LVT liability will be capitalised into property prices – prices that one would pay now with a modest annual CT liability are higher than will be paid with an increased annual LVT liability.

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  13. Coming from a jurisdiction – Toronto, Canada – that uses MVA (Market Value Assessment) I can tell you it is not a perfect system. In fact there are many calls to reform the current system and the Municipal Property Assessment Corporation, or MPAC, which administers property assessments and appeals of assessment in the Province of Ontario.

    One of the criticisms levied against MVA is how MPAC asses small commercial properties. The highest and best use model ignores rents and income on the property and makes very optimistic development assumptions. These assumptions have lead to 400% property tax increases for some property owners.

    The current thinking is to move to a system of assessment at sale

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