Land value tax: the least-bad tax

Aerial view of houses © Alamy
Tax land. They’re not making any more of it

Adam Smith, Milton Friedman, MoneyWeek and the Labour Party are all fans of a land value tax. But what exactly is it and how would it work? Simon Wilson reports.

What is a land value tax?

It’s a levy paid on the value of the land upon which a property (or no property) sits, rather than a tax on a property itself. The basic idea behind the tax is that pieces of land get their value from their location, rather than the calibre of the development on them. And what gives a location value is what is going on around it. Is it close to the centre of a city? Is it in an area with great transport infrastructure, good schools, hospitals, and so on?

Why does that matter in tax terms?

Because the owner of the property hasn’t paid for all the infrastructure that determines the location’s value. Someone else has: generations of taxpayers.
And a land-value tax (LVT) is a good way of reimbursing them for their efforts, and sustaining the state spending that underpins the society – and thus the land value – of the property. In economic theory, then, an LVT (which has at various times been known as a site valuation tax, split-rate tax, or site-value rating) is a straightforward attempt to collect tax on what economists traditionally called the “unearned betterment” part of the value of a property –  the rise in value that has nothing to do with the owner’s efforts and everything to do with the community’s. 

Is it a new idea?

Not at all. Land-value taxes have their roots in the ancient principle that people enclosing common land for agricultural use had a duty to share some of the resulting crops. Around 300BC, the Chinese philosopher Mencius advocated the elimination of taxes and tariffs on goods, and the introduction of an urban land rent. In Anglo-Saxon England the unit of land measurement called the hide (around 120 acres) was used to assess peoples’ liabilities and obligations for such things as the maintenance and repair of bridges, fortifications and manpower for the army. A thousand years later, in The Wealth of Nations (Book V, chapter 2), Adam Smith argued in favour of a land tax, on the grounds that it would fall on the owner of the land, and not harm other economic activity. “Nothing could be more reasonable,” he concluded. Economist David Ricardo, too, was a strong advocate.

And more recently?

In modern times the most famous proponent of a land-value tax was the late 19th-century US journalist and free-trade campaigner Henry George, whose masterpiece Progress and Poverty sold more copies in the 1890s in the US than any book except the Bible (and inspired a board game called the Landlord’s Game, a forerunner of Monopoly). Later, Winston Churchill was a big fan, as was the free-market guru Milton Friedman, who regarded a land-value tax as “the least-bad tax”. These days, LVTs are supported by commentators ranging from MoneyWeek and Martin Wolf of the Financial Times to the likes of Labour’s Jeremy Corbyn and John McDonnell. The idea found its way into the party’s 2017 election manifesto.

What’s the case in favour?

Fairness and efficiency. The tax is very easy to collect, and very hard to avoid – land can hardly be concealed offshore. The rich will tend to pay more as they have more land. Proponents argue that an LVT would act as a strong disincentive to property speculation (landowners who accumulate prime land for that purpose would face a big bill) and would help smooth out cycles of boom and bust, making property more affordable to the young. Moreover, unlike current property taxes, an LVT encourages development. People would have an incentive to put idle and underused land to more productive use as any improvements to the land or the property aren’t taxed. Finally, while most taxes tend to discourage investment or interfere in markets, LVTs don’t distort economic activity. Rather, they help increase long-term stability and growth by fostering more productive use of capital, and help government finances by bringing in revenue efficiently and quickly.

Sounds great. Why aren’t LVTs common?

Forms of land-value tax have been levied (at the local level) in Pennsylvania, Kenya, New Zealand, Australia, Denmark, and Estonia – and in Hong Kong, Singapore and Taiwan. So they are not untested. However, a big reason why they are not more common is that they are hard to implement since land is hard to value.
Its price is not made explicit when property is sold; its value has to be estimated by subtracting the value of the buildings from the overall price. The scope for disputes and legal challenges against a levy on a hypothetical value is clear. Second, voters are typically hard to persuade of the merits of any tax on property. And opponents worry that LVTs would be unfair on asset-rich but low-income homeowners.

Why else?

Third, land ownership is less concentrated in the hands of a small number of
super-wealthy individuals than it was a hundred years ago, while the very rich hold a smaller proportion of their wealth in property than most of us. And they run the risk of constituting a one-off windfall tax on the current generation of land owners, since once they are introduced, land values would fall to reflect future tax liabilities. So they are not the easiest sell politically. However, the Institute for Economic Affairs says that valuation problems are exaggerated: with 30 countries already using a form of LVT, the administration doesn’t seem insurmountable; it’s largely a matter of political will. And on that front, note that we still don’t have enough taxes coming in to fund all our spending, while an ageing workforce implies lower tax revenue in future. New wealth taxes can only be a matter of time, and an LVT is the obvious one to try.

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