An Old Way Of Tackling A New Problem: Intergenerational Unfairness And The Land Value Tax

By Thomas Bailey, Oct 22, 2017 12:10

In this article, Thomas Bailey argues the case for taxing the value of land to help younger people and to fix our broken tax system.

Every year at the Liberal Democrat conference there is an event called ‘Glee Club’, where songs with their lyrics substituted for political alternatives are sung. Foremost among these is ‘The Land’, a song advocating for Land Value Taxation (LVT). The origins of this song stretch back to 1909 and the then Liberal government’s ‘People’s Budget’, which proposed the introduction of a Land Value Tax. Strongly opposed by landowners in the House of Lords, this budget triggered a constitutional crisis and two general elections. In these elections the Liberal Party adopted ‘The Land’ as their campaigning song. Yet while ‘The Land’ is still sung, the policy of Land Value Taxation has only just returned to the political agenda, with brief references in the Liberal Democrat, Labour and Green manifestos. This re-emergence is welcome: Land Value Taxation is as relevant today as it was over a century ago.

A Land Value Tax is more or less exactly what it sounds like: a tax paid on the value of the land owned. Unlike council tax or business rates, LTV is not a tax on property (the buildings) but solely the land upon which the buildings are located. It is clear that location (land prices) are a significant contribution to a property’s value – after all, identical houses have different prices in London and Sunderland – and it is this value that is taxed by the LTV. For instance the land value of a detached house in Oxfordshire is in the region of £300,000. If taxed at a rate of 2% a year (about half the land rental value) this would lead to a land value tax bill of £6000 a year. However, the land of similar house in Derbyshire would have a value of around £30,000, and an associated tax liability of £600.

But what makes such a tax something to campaign for? One long standing economic argument that dates back to the 18th Century is that LVT would have minimal economic distortion (deadweight loss). Assuming that landlords are currently charging the market rate for land, this means that any increase in price (in response to the tax) would result in empty properties (as people are unable/unwilling to afford the increased cost). Since these properties would still be liable for tax, landlords would lower their rents, to the market rate, to have income to cover the cost of the tax. Thus, the tax will not shift the market equilibrium and thus there will be no ‘deadweight loss’ (a loss of value due to market disequilibrium). This also means that the introduction of the tax can have no immediate effect on the price for tenants. Not only this, but a LVT would encourage development of brownfield land and curb land speculation, since the owner of unimproved land would still have to pay a LVT, but without the ability to generate any income from it. But the obvious reason to place LVT at the heart of a liberal manifesto is due to its potential to tackle intergenerational inequality.

Young people are increasingly locked out of the opportunity to own their own homes, with uncertainties in the labour market compounding the issue of sky-high property prices. Those in their 20s and 30s are now spending three times as much of their income on housing as their grandparents, while living in smaller properties with longer commutes. Land Value Taxation helps address this injustice by taxing the wealthiest, whose wealth has come largely from unearned increase in land prices. A LVT would encourage older people to downsize (as larger houses pay more LVT), freeing up larger houses for young families. It would also encourage the development of more housing, boosting supply and lowering prices. In addition, the new LVT should be revenue neutral, using the income to abolish council tax, cut VAT and increase the personal allowance. For owner-occupiers these changes would shuffle the tax burden around. The real difference comes to those who are privately renting. For them the tax will be paid by their landlord and thus, they would have only a tax break. This would benefit young (and poorer) people who do not own property, and help mitigate housing costs for many private tenants. Thus LVT could provide the basis to a liberal approach to the crisis in the rental sector, rather than alternative such as rent controls.

Finally, Land Value Taxation is actively liberal, in the sense that it affirms the values that liberals hold dear. By allowing for a reduction on taxes on work (income tax) and transactions (VAT) people are not disincentivised from fully participating in a free market economy. The shift of the tax base from earned income to unearned wealth will emphasise the importance of responsibility and individual choice, as people will keep a larger portion of the income from their choosing to sell their labour. More fundamentally, as outlined by the great liberal thinker John Stuart Mill, “the value of land, arising as it does from the efforts of an entire community, should belong to the community” Land existed before humans, and its value is derived from scarcity, infrastructure and networking effects, so little property owners do to the land affects its value. Thus, LVT can be seen as payment to the community for the benefits that you receive as owner of this land. LVT is thus a liberal tax, since land values are the product of the entire community, and individuals should not receive the benefits of a community without paying their fair share.

If the Liberal Democrats adopted Land Value Taxation wholeheartedly it would show a commitment to tackling the challenges of today’s housing market and to fairer taxation. It would show solidarity with young people and that the Liberal Democrats are willing to take on vested interests in British politics, much as the Liberal party of 1909 did. Land Value Tax is not only a fairer tax, it is also a liberal tax, and its role in correcting injustice between generations must not be overlooked.

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