February 7, 2018

On some measures, the UK is a modern, progressive economy. On others – such as land distribution – it remains feudal: there are around 60 million acres of land across England, Scotland, Wales and Northern Ireland, two thirds of it is owned by fewer than 6,000 people.

In previous centuries, landowners paid tax on their sprawling acreage. These days, thanks in part to the European Union’s Common Agricultural Policy, the landed gentry receive huge subsidies instead.

Ordinary homeowners cough up hefty rates of council tax each month, out of hard-earned income. After working a lifetime to pay off a mortgage, they’re then taxed heavily on any property inheritance they leave their children – who themselves, increasingly, may struggle to buy a home.

The owners of large country estates, in contrast, are somehow allowed to use ‘family trusts’ to pass on to their gilded offspring large chunks of our green and pleasant land joyously free of tax. As a young, undergraduate economist, these realities were an affront to my student sensitivities. Now older, and hopefully wiser, my sense of outrage, if anything, has grown.

Much is made of fat-cat salaries, and the visible wage gap between CEOs and rank-and-file workers, but the real driver of growing discontent with capitalism is widening wealth inequality
-

In the aftermath of the 2008 financial crisis, as central banks engaged in so-called ‘quantitative easing’, artificially expanding their balance sheets, asset prices – particularly for land and real estate – ballooned. As more and more gains accrued to those who were already asset-rich, the UK’s distribution of wealth as a whole, not just land, began to look feudal.

Recommended reading
Capitalism's richest got richer from central bank responses to 2008's bust (as well as from the boom before it)

By Liam Halligan

Since 2010, the wealth of the richest 10% of households has increased three times faster than that of the bottom 50%. Much is made of fat-cat salaries, and the visible wage gap between CEOs and rank-and-file workers, but the real driver of growing discontent with capitalism is widening wealth inequality – which is far worse and typified, above all, by the millions of young adults now ‘priced out’ of the property market. And the discontented votes of ‘generation rent’, of course, brought Jeremy Corbyn within a whisker of Downing Street during the June 2017 general election.

So, wealth inequality is getting worse. Yet we tax ‘earned income’ at a far high rate than ‘unearned income’ stemming from capital gains or broader speculation. That widens wealth inequality even more.

With wages taxed at up to 45%, and national insurance contributions on top, almost half of all UK government revenue derives from income tax and NICs: taxes on labour. A mere 8%, in contrast, comes from taxes on capital or property. This is not only inefficient, discouraging effort and enterprise, but also immoral.

These interrelated needs – addressing wealth inequality, making the tax system fairer and more transparent and encouraging more private-sector house-building – can all be met by using some variant of a Land Value Tax
-

As the tax system becomes increasingly complex, with ever more loopholes, the case for levying charges on tangible, immovable assets, as oppose to easily re-domiciled liquid cash and other financial holdings, grows stronger. And as more and more young adults strive to buy their own property, amid a chronic home shortage, the idea of using the tax system to encourage building on land otherwise left undeveloped is gathering pace. These interrelated needs – addressing wealth inequality, making the tax system fairer and more transparent and encouraging more private-sector house-building – can all be met by using some variant of a Land Value Tax.

Milton Friedman – no left-winger – called LVT the “least bad tax”
-

Nobody made the land. It is nature’s bequest. By building on it, or farming it, land may be made more valuable, but it was always there. If landowners want to own and occupy a plot of land, with the government protecting the title, then a payment should be made that reflects that land’s value, because it is the community, above and beyond the investment by the developer or farmer, which has created and continues to maintain that land value. And if they don’t want to pay such a levy, and use the land accordingly, they can sell it to someone who will.

This is the LVT, a policy which Milton Friedman – no left-winger – called the “least bad tax”. LVT has been praised and promoted by a broad range of thinkers and doers, as Charlotte Pickles outlines in her recent UnHerd audio documentary on wealth taxes, from Winston Churchill, all the way back to Adam Smith.

Winston Churchill referred to land monopoly as “the greatest of monopolies”. He, like Adam Smith, believed it fair to tax the landowner. Credit: Matt Crossick/Matt Crossick/Empics Entertainment

“The tax on land values is the most just and equal of taxes,” wrote the 19th-century US economist Henry George, stressing that the value of land derives from its inherent existence, coupled with the needs of households, firms and communities for food, shelter and space. “It is the taking by the community, for the use of the community,” wrote George, “of that value which is the creation of the community.”

George called the LVT “the single tax”. For him, and many other academic proponents, it replaces all other taxes. Under a ‘Georgist’ school of economic thought, the income you earn from your labours is yours entirely to spend in whatever way you like, with government revenue deriving entirely from LVT.

A classical LVT works by levying a percentage tax on the imputed rental value of the land – so as the needs of a community push up rental values, part of that gain is transferred from land owners to broader society. Those owning houses and other real estate also pay LVT – based on market valuations of the land underneath their home or business, which can be derived by comparing residential and commercial rents between different parts of the country. But that would be the only tax they pay.

And in a modern context, greedy property developers, sitting on prime urban sites and waiting for property prices to rise further before building, would be forced to pay LVT – encouraging them to build and sell homes quickly. At present, even when planning permission is granted, developers often ‘land-bank’, engaging in a deliberate house-building go-slow.

The Department of Housing, Communities and Local Government suggests that an astonishing 30-40% of residential planning permissions are allowed to lapse
-

A recent internal estimate from the Department of Housing, Communities and Local Government suggests that an astonishing 30-40% of residential planning permissions are allowed to lapse, before a home is actually built. This reflects a concerted ploy by an over-concentrated UK housing building industry: large developers sit on usable plots in a rising market, accruing wealth as they become more valuable – with ordinary workers saving desperately, as prices rise, in a bid to afford a home.

Possible – in spirit

The idea of scrapping all taxation and replacing it with LVT sounds pie-in-the-sky. The Labour party, in its last manifesto, said it would “consider options such as a land value tax to ensure local government has sustainable funding for the long-term”, but its LVT would be levied in addition to other taxes. The Green party also had LVT in its manifesto – again, sitting alongside conventional taxation. The Lib Dems, too, have argued for an LVT-related mansion tax – but only on homeowners rather than developers and, again, without scrapping other tax.

While an LVT-only world makes sense to an undergraduate economist, the reality is that no sizeable nation – to say nothing of a world-ranking economy such as the UK – is going to upend its entire system of revenue collection, brushing aside the protests of massively powerful landowners, and adopt a classical ‘single tax’ LVT.

Yet the spirit of the LVT can still be used to tackle the UK’s endemic housing crisis. Over the past 20 years, the UK house-building industry has built 2.5 million too few homes, with a growing supply gap now driving unaffordability – and all the political dangers that brings.

While additional planning permissions are required, the overwhelming immediate priority is to ensure builders use the planning permissions already granted on around one million homes. Our housing shortage is now so serious, and causing such economic and social damage, that it isn’t feasible to hope the situation will change without radical reform.

The campaign group Shelter estimates that, between 2012 and 2016, nearly one in three homes granted planning permission in the UK has not been built. An LVT would discourage such ‘land banking’. Credit: Andrew Matthews/PA Wire/PA Images

Existing privately owned plots that remain undeveloped for more than a year should attract an LVT, payable by the developer. Once planning permission has been granted, the developer owns a far more valuable asset, and so that asset should attract a much higher LVT. And, crucially, that levy should fall away not when a development is started but only when the homes are completed and available for sale directly to homeowners.

The campaign group Shelter estimates that, between 2012 and 2016, nearly one in three homes granted planning permission in the UK has not been built – amounting to almost 400,000 units. In London, the share of so-called ‘phantom homes’ is one in two. Over the same period, the profits of the UK’s five largest house-builders soared by 388%, reaching £3.3 billion.

An economy-wide LVT, implemented in its purest form with all other taxation disappearing, is a utopian dream. But the lessons and principles of LVT – taxation on rental values, with unused planning permissions landing developers with high tax bills – can and must now be used to fix the UK’s broken housing market.

Recommended reading
Audiocast: Charlotte Pickles presents her wealth tax manifesto

By Sally Chatterton