Wednesday, 16 December 2009

The UK needs Annual Land Value Tax

Dave Wetzel

This last pre-budget statement before next spring’s General Election gives the Labour Party an opportunity to set the UK economy and our social relations on a totally different path.

The concept of “annual land value tax” sounds just like another detailed fiddling with tax policy that will have no greater impact on the economy than an extra penny on a pint of beer. But in fact, the introduction of an annual land value tax (LVT) would be truly radical.

Our planet is 4.5 billion years old. For most of the hundred thousand years of humankind’s existence on this planet, land has been shared as a common resource like the air we breathe, the wind that turns windmills or the sunshine we rely upon to grow our crops and provide us with energy and good health.

Circa eleven thousand years ago we began to change from hunter/gatherers in the wilderness to adopt nomadic and settled agriculture on community owned land. Five thousand years ago city states began to develop on the basis that the surplus arising from the land (rental values) was used to create new communal infrastructure such as roads, defensive walls, bridges, temples, piped water and irrigation systems etc.

It is only in the past three thousand years that individuals began to seek ownership of the surface of our planet and claim nature’s rent as their own.

Most economists ignore the role of land in production arguing that since the industrial revolution, land does not play an important role in the economy. They couldn’t be more wrong.

But why emphasise land?

Because we cannot survive on this planet without access to land.

We need land to grow food, for mining, to locate homes, commerce and industrial production. In a modern economy we also require tools and machinery (capital) to create wealth. The major difference between capital and land is that capital is man-made and has a cost of production, whereas land is a free gift of nature with no cost of production. Imagine a modern Robinson Crusoe cast away on his own – he can survive without capital (although he would soon utilise his labour and nature to provide simple tools and perhaps a spear to hunt more effectively) but it would be totally impossible for him to survive without access to land and the benefits of nature.

Today landowners benefit from the provision of public (and private) services. As these services improve, so the rent and value of their land increases – without any effort on their part.

The Jubilee Line Extension of the Underground railway in London cost taxpayers £3.5bn but increased land values in the vicinity of the eleven new stations by £13bn.

Two householders in adjacent houses, earning the same wages would pay the same amount in tax to provide good local public services. The one who owns the freehold land and their home would see their tax investment reimbursed as the value of their property increases but the other who rents their home would receive a higher rent demand from their landlord as the value of their location rises – this cannot be equitable, just or fair!

Tony Benn often reminds us that land privatisation was the first privatisation.

So, how in the next budget, can a Labour Chancellor reverse the effects of recent history and restore the rights of all to share land wealth?

The simplest method would be to assess the annual rental value of all sites, identify their owners and levy a percentage of the value each year – an annual land value tax.

This would be the opposite of Labour’s development land taxes that have failed so completely in the past. A one-off tax on development can be easily avoided by not developing whereas an annual tax on the rental value of land cannot be avoided and is therefore very cheap to collect.

The immediate effect of LVT would be to discourage land hoarding and land speculation. The owners of land would be encouraged by the tax to put their land to good use. Brownfield sites and empty buildings would be brought into use. Land would become cheaper to acquire. The cost of social and private housing would reduce. Cheaper land and premises would facilitate new start-up businesses and the expansion of existing ones.

An important effect of LVT would be to make our towns and cities operate more efficiently. Not only does a dense population make more use of public and private services but local authorities would be encouraged to provide better amenities such as parks, sports facilities and nature trails as these increase the land values in the immediate neighbourhood.

The whole economy would benefit. Jobs would be created and poverty alleviated.
By making better use of wasted sites and buildings in our towns and cities the demand for urban sprawl would be reduced. This would cut unnecessary commuting and transport costs and assist the battle on climate change by reducing carbon dioxide emissions.

The revenue from LVT could be used to address our budget deficit and to reduce taxes on wages and production.

Just imagine the effect of a 5% vat rate, no council tax, no business rates on buildings, no stamp duty and no income tax for workers earning less than the average wage.

David Cameron would be lost for words!

Of course, as with any tax change there would be losers. We need not shed tears for the Duke of Westminster and his ilk who own swathes of the most valuable urban and rural land, but will need to consider transitional help to protect pensioners and others on low incomes but who own their own homes and those on modest incomes with high mortgage repayments. For example, LVT payments could be deferred or rolled over until the property is disposed of and then the outstanding amount (with modest interest) could then be repaid from the sale price, and/or LVT could be introduced with a tax-free personal allowance similar to the personal allowance for income tax. In this way we could ensure that nobody pays LVT on a principal home worth say less than half a million pounds.

Similarly, small businesses operating at the margin of profitability, could also be given transitional assistance which would be of particular benefit in sustaining those businesses which provide unique local services such as the community baker or the local post office.

Like Denmark, parts of Australia and Hong Kong, Harrisburg, the Capital of Pennsylvania, has a modest land value tax. The effect over thirty years has been startling with reduced unemployment and greater prosperity in the city leading to a lower crime rate.

It is not just land that can provide a communal rental value. Personal number plates for cars should be rented for 20 year periods and not sold outright. Toll roads and car parking fees can collect the economic rent of our highways and car parks. Aircraft at busy airports demand both time and space for the creation of valuable landing slots which should be rented to airlines by the government, and yet even for the new proposed third runway at Heathrow (which I oppose) this Labour Government is suggesting we GIVE these landing slots away instead of collecting this public revenue by auctioning them for 10 year periods. In 2000, Gordon Brown rightly rented the spectrum for 3G mobile phones and his 20 year licences raised £22.4bn at auction. He has endowed his successor with the opportunity to raise a similar amount in ten years time.

A Labour Chancellor, Philip Snowden, introduced a land value tax in his 1931 Budget which was repealed by the Tories before the valuation of the land was completed. Herbert Morrison proposed a Land Value Tax for London in 1938.

Alistair Darling needs to break with post-war tradition instead of rummaging in The Treasury’s rusty old toolbox.

As land values reach their nadir in the current land cycle, 2010 would be a propitious time to introduce an Annual Land Value Tax.

• Labour Land Campaign -

*This article is taken from the LEAP Red Papers: The Cuts, which can be discussed in full on the LRC website

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