This is a contribution to Soft Left Politics by Anthony Molloy, Chair of the Labour Land Campaign.
The website of the Labour Land Campaign can be found through this link:
http://www.labourland.org

The economic case for land value taxation

In the war between left and right, one of the main ideological fronts is always taxation. In the trenches on the left, relatively high taxes with big government for a fair, equitable society which nurtures its most vulnerable; across the bleak strip of ravaged mud, low taxes, small government and rewarding hard work and enterprise to maximise economic efficiency. That’s the ideology but closer scrutiny of actual policy suggests that:

–          The right—far from being single-mindedly committed to economic efficiency—is as beholden today to the same narrow, vested interests at the expense of good governance as it ever was in the days of Rotten Boroughs and the Corn Laws, first and foremost among these vested interests landowners and other monopolistic rentiers who collect unearned income.

–          The fact that the left has never felt strong enough in power to launch a root and branch attack on the central question of taxation points up the power and influence that said vested interests have had in the past and still have now.

Because one of the central questions in taxation is what you tax. While battles about how much you tax and how you spend the revenue may be important, this article is not about that: it is about economic efficiency.

In this country (like almost everywhere else) fiscal policy is mainly based on taxing work (Income Tax and National Insurance Contributions), trade (Value Added Tax) and business (Corporation Tax and Business Rates): these five taxes on labour, sales, production, enterprise and investment account for over three-quarters of all Treasury revenue. Rule Number One in taxation is that the more you tax it, the less of it will get done. That’s why smoking and drinking are taxed so heavily. If Income Tax plus National Insurance amounted to 100%, not many people would go out to work; if they were at 40%, more might (one hopes so because that is where they are). VAT and Corporation Tax as well as taxes on labour drive up the prices of goods and services, thereby lowering competitiveness and killing jobs. In other words, taxation distorts markets. But there is one form of taxation that does not: land value taxation (LVT).

LVT is an annual levy on the unimproved value of land, ignoring any buildings or amenities added to it by the landowner’s industry and investment, past and present. Land value is a function of the area of a parcel of land, its location (proximity to amenities) and its actual or potential permitted use (essentially local planning regulations). The value—as opposed to its price—of the ultimate fixed-supply asset of land is driven exclusively by market forces and, unlike the value of elastic factors like labour and capital, is unaffected by taxation.

–          The rationale for LVT is a recognition that the land of a nation – even when privately owned – is a common good in which every citizen has a stake.

–          The elegance of LVT is that any rise in land value as well as all rent is unearned income, the level of which is mainly conditioned by local public sector investment—roads, transport, schools, hospitals, teachers, nurses and doctors, sewerage systems, etc.—so taxing it means that those who benefit most from rising land value contribute most towards what drives said rise, in a fair and proportionate measure. Because wealth correlates so tightly with land ownership, those who are most able to pay will be paying the most. And because land ownership is so highly concentrated in Britain, taxing the most fortunate in society more heavily would mean that the less fortunate could be spared. In fact, rather than being a tax, LVT could be seen as more like recovering a payment for benefits received—a share of the unearned income landowners get from their assets without having had to do anything at all. If the Duke of Westminster enhances the value of one of his properties by building an Olympic swimming pool in the garden, it might seem different from the increase in the property’s value because Westminster Council built an Olympic swimming pool down the road but without LVT, it comes to the same. In just two years around the opening of the Jubilee Line extension in London, land values within 500 meters of the 11 new stations went up by about £13.5 billion, a 200% annual return to private landowners on a public-sector investment of £3.5 billion. If such profit from public sector investment were harvested for more public sector investment instead of going into private pockets, a virtuous cycle could be established in which state spending drives ongoing rises in land value (as it has always done) which are in turn harvested to fund more public sector investment and further improve the quality of life of citizens. This is in contrast to the current vicious cycle of returns on taxpayer-funded investment being siphoned off out of the real, productive economy into private hands via the sterile, asset-based economy, depriving the Treasury of the resources it could invest to improve society.

–          And the practical beauty is that LVT is easy to collect and administer (at least compared with taxes like Council Tax and Business Rates that demand the valuation of millions of unique properties), and impossible to dodge (you cannot hide your mansion or shooting estate in the Cayman Islands).

Corollary benefits are many and various. LVT will remove incentives that encourage land banking and speculation, thereby encouraging the productive exploitation of currently under-developed land (brownfield sites) to mitigate the housing crisis. It will encourage the regeneration of disadvantaged areas where land values are lowest, bringing jobs and economic activity to those parts of the country where they are most lacking. Moreover, LVT will encourage the optimisation of land use across the board so that landowners obtain as much income from their precious resource as they can.

But the most important corollary benefits by far will be those that result from getting rid of worse taxes with perverse economic consequences because LVT would be a replacement tax, not an add-on. You could choose to substitute LVT for taxes on labour: this would have positive economic benefits on competitiveness and the balance of trade. Replacing taxes on sales would similarly enhance productivity and competitiveness at the same time as getting rid of VAT, surely one of the most grotesquely regressive taxes ever dreamed up by Man. Abolishing property taxes like Council Tax and Business Rates would remove the disincentive to improve current stock leading to better housing and working conditions. Broadly speaking, in any arena in which advantage would accrue from making land use more efficient or labour and investment more lucrative, LVT will bring about corollary benefits.

So if LVT is obviously so much better than all our current taxes … ?

You know the answer: historically fiscal policy was drawn up by landowners who were the only ones entitled to vote or sit in Parliament and this has not changed as much as we might think in the one hundred years since property restrictions on suffrage were finally removed in the wake of the First World War (the vicious Housing and Planning Bill was recently passed by a House of Commons in which fully 30% of the Members—as opposed to just 2% in the population as a whole—declare receiving rental income; there are more landlords in the House of Commons than there are women!). So would our Prime Minister who is all about  organising the fiscal system to reward hard work agree with Winston Churchill that, “The Conservative Party … speaks of the profits of the land monopolist as if they were the fruits of thrift and industry and a pleasing example for the poorer classes to imitate … All goes back to the land, and the land owner is able to absorb to himself a share of almost every public and every private benefit …”. In March, will George Osborne be bringing in LVT, what his idol’s economic guru Milton Friedman called “the least bad form of taxation”? Of course not, because the constituency to which the Conservative Party is beholden is the wealthy and in particular the land-owning class. In the case of obviously decent guys like DC and GO, simple ignorance of the whole rich pageant of modern British life and a constrained world view as a result of limited experience may have lead them to actually believe that their policies encourage entrepreneurship and economic growth. A more jaundiced eye undertaking an analysis of actual policies might see that, far from any ideological commitment, their priority is to cater to certain vested interests—of which they are not only members and to which they naturally owe allegiance but which also fund their political machine—to the detriment of most of the citizens of the country that they rule. And, dear reader, you decide whether that includes you and what side you are on.

The core constituency of the left that is denied unearned income represents the majority of the population so the battle lines can be redrawn with LVT at centre stage—the big gun of economic efficiency solidly implanted on the left after years of accusations of economic irresponsibility in government (not entirely without justification). Of course, the right’s Big Media Bertha will be wheeled out to strike fear into regular homeowners and turn them into foot soldiers for the forces of reaction with an important human shield in the asset-rich, cash-poor “Widow in the Mansion”. But if LVT is formulated in such a way as to ensure that the vast majority of citizens (including said regular home owners) end up paying less tax and no specific population other than the tiny one of the wealthy rentier loses out—and we manage to communicate effectively—we may be able to take back some of the ground we have lost in recent years and perhaps even force into retreat the tiny (1%?) but armed-to-the-teeth elite that has so long called the shots.

The strategic reason why LVT is a natural policy for any socialist, democratic party operating in a mixed liberal system is because it is fairer and more economically efficient than all others form of taxation. The tactical reason why, for a political party that does not have to appease a powerful, internal vested interest, it is sensible to advocate a form of taxation that is patently better in every way than the current system is that the opposition will never be able to do it.

Let battle commence …

This was a contribution to Soft Left Politics by Anthony Molloy, Chair of the Labour Land Campaign.
The website of the Labour Land Campaign can be found through this link: http://www.labourland.org

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