Should we have a land value tax?

Land value taxhas proponents from both the left and right wings of political thought. So should we implement it? Simon Wilson reports.

Why are property taxes in the news?

In an article for August's Prospect magazine, the Organisation for Economic Co-operation and Development's (OECD) chief economist, Pier Carlo Padoan, argues that Britain should scrap stamp duty and council tax and replace them with a recurrent property tax based on market values.

What's the rationale?

As Louis XIV's finance minister Jean-Baptiste Colbert once observed: "The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing." The main advantage of direct taxes on property arethey are tricky for even the rich to avoid. It's hard to hide land or move it offshore to avoid getting taxed. For economists such as the OECD's, there are two other big advantages: land taxes (they argue) 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.

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Would any political party here risk it?

It's certainly a tough sell. Britain already has the highest property taxes in the rich world, at just over 4% of GDP (compared to an OECD average of less than 2%). In a downturn, in particular, homeowners are likely to be highly sceptical of any change they think might involve paying higher taxes overall. And the disaster of the poll tax (and the defenestration of Margaret Thatcher) are unlikely to encourage radical thinking on tax by UK politicians.

Nevertheless, there is a diverse and growing array of Liberal and Labour voices arguing for just such a change. The Lib Dems have a pressure group (Alter) dedicated to winning support for a land value tax (LVT). Meanwhile, cabinet ministers Vince Cable and Chris Huhne both voiced support in their pre-cabinet days. In last year's Labour leadership race, Andy Burnham made an LVT part of his manifesto ("an idea so old Labour' it can be traced all the way back to Thomas Paine"). And in Scotland an LVT is official Green Party policy. But it's not just left-liberals who support an LVT.

Who else does?

Free-market capitalists and mainstream economists, such as the FT's Martin Wolf and Samuel Brittan, have both argued the case in favour. Whereas left-liberals argue for land/wealth taxes on grounds of fairness and equality, free-marketeers tend to argue that the rapid accumulation of unearned property wealth over the last 15 years has made us all fat, lazy and unproductive. Tax wealth, so this theory goes, and we will be spurred into competing with fast-growing emerging markets. Right-wing libertarians also argue that wealth taxes are the least bad option because paradoxically they do the least to distort or depress wealth-creating economic activity. "Not only that," says Tory Bow Group adviser Mark Wadsworth, "LVT is an entirely voluntary tax: you decide how much you are willing to pay and you choose a house or flat within that price range. Only, instead of handing over all the rent or purchase price to the owner, the location value would go to the government."

Would it unlock the property market?

Both the left and right perspectives are concerned with the positive effects of a land tax on the next generation. The left worries that a whole generation will be excluded from property ownership. The right worries that letting the rich sit on the nation's assets robs their children of incentives to work harder, damaging economic vitality. And everyone worries that concentration of property damages the social mobility that is crucial to future prosperity. The other argument in favour of a land tax (made by the doyen of LVT proponents Fred Harrison in his book Boom and Bust) is that taxing land encourages useful development. Landowners who accumulate it for speculation purposes face huge bills, encouraging them to sell up to developers with more of an incentive to put the land to work. Land-value taxes are not high on the political agenda so far, but they are an idea whose time may yet come.

Should the UK adopt a recurrent tax on property values?

No

A new tax on property would destroy confidence in the fragile housing market and accelerate the decline in home ownership in Britain.

People buy homes out of taxed income. So unless income tax were abolished, a land tax amounts to double taxation and is inherently unfair.

Proponents of land taxes hugely underestimate the difficulty of assessing the market value of all unsold land in the country. Without agreed values the tax cannot be levied.

Yes

The UK needs to be more productive, less lazy, and less property-obsessed. As the OECD points out, land taxes would smooth out damaging housing bubbles and encourage more productive investment.

A land value tax would help address the inter-generational inequality between property haves and have-nots that was massively exacerbated by the long property boom of 1995-2007.

A land tax is easy to collect, hard to avoid, and would help fund the large-scale infrastructural investment that the UK needs.

This article was originally published in MoneyWeek magazine issue number 548 on 29 July 2011, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.