After last week’s post on new approaches to tax, Byron mentioned a land value tax (LVT). It turned up again this week in a book I’ve been reading, so I thought perhaps I should write a bit more about the idea.
At present, individuals and businesses pay local taxes on the buildings that they own. For individuals, it is council tax, based on the value of the property. For businesses, it is business rates, based on the rental value of your commercial premises. It’s all about the building, not the land that the building sits on. This might seem like a fairly trivial distinction, but it has some serious repercussions.
The town I live in, Luton, has something of a housing shortage. It has a growing population and there is a pretty urgent need for new affordable homes. It’s also a post-industrial town. There are several large tracts of land near the town centre that are currently unused, including an empty site that once housed a car factory, and a largely abandoned industrial estate. These would make great locations for new housing, but the land is owned by speculators and they are not inclined to release it. Presumably, they are either waiting for the value of the land to increase so they can sell it at a profit, or they are waiting for the economy to recover so they can plan a new development with less risk involved.
The problem here is that they pay no tax on that empty land, so it costs nothing to sit on it and wait for better times. They contribute nothing towards raising the value of the land, and reap a reward from other developer’s work. What’s more, there is no incentive to maintain any buildings that might remain on the land. The more decrepit they are, the lower their value and thus the lower the taxes. So why bother to repair that fire-damaged roof or that vandalised fence? On this sort of unused industrial land, a tax on buildings creates a perverse incentive and actually encourages decay.
It’s similar with your own home. If you buy an old property and renovate it, you might find the value of your home goes up and into a new and higher tax bracket. Although your household won’t use any more government services than it did before, you now have to pay higher council tax.
And here’s another thing. Buildings taxes encourage bad architecture. Think about it. If you’re planning to build a hotel to serve Luton airport, you’re going to pay business rates according to the rental value of that property. Airport travelers are only going to be staying one night, so they don’t care much what the place looks like. So you’re hardly going to build the St Pancras Hotel. You’re going to crane in a soulless prefab accommodation block. A building-based business rate creates an incentive to use cheap materials and off-the-shelf architecture. Little wonder our towns are full of lowest common denominator buildings.
If you had to pay tax on land, you wouldn’t want it to sit empty. You’d either develop it or sell it on quickly – which would lower the price of land and make it easier to build in town centres, reducing pressure on greenfield sites in the countryside. If you were going to build, you’d be able to design great buildings with the long term in mind without the fear of paying for it over and over again through taxes.
There are other advantages to a land tax. You can’t dodge it or hide your land in Bermuda, because anybody with a measuring tape can see exactly what you’ve got. Because the tax would be based on land value, it would naturally and fairly raise more income from richer parts of the country and less income from the poorest parts.
At its most radical, a land value tax would eliminate multiple other taxes or even all of them, including income tax. That was certainly the dream of the first big advocate of LVT, Henry George. He believed it would be a fair and non-ideological way of raising taxes, asking more from those most able to contribute to society without the rich vs poor divisiveness of socialism. Interestingly, the game of Monopoly was originally devised to teach Georgist economic principles.
Land Value Taxes have been implemented in several different countries over the years. Denmark used them for a while, as did Australia, and Edmonton in Canada. The utopian experiment of Fairhope, Alabama, was created with a single-tax local government. Many towns in Pennsylvania still have a land tax, each town setting their own rates. Pittsburgh used LVT from 1903 to 2001.
Like all such ideas, Land Value Taxes aren’t a magic solution to all our problems. But implemented carefully and wisely, they could definitely play a part in creating a fairer, more sustainable century.
- For more, see the Land Value Taxation Campaign.