After last week’s post on new approaches to tax, Byron mentioned a land value tax (LVT). It turned up again this week in a book I’ve been reading, so I thought perhaps I should write a bit more about the idea.
At present, individuals and businesses pay local taxes on the buildings that they own. For individuals, it is council tax, based on the value of the property. For businesses, it is business rates, based on the rental value of your commercial premises. It’s all about the building, not the land that the building sits on. This might seem like a fairly trivial distinction, but it has some serious repercussions.
The town I live in, Luton, has something of a housing shortage. It has a growing population and there is a pretty urgent need for new affordable homes. It’s also a post-industrial town. There are several large tracts of land near the town centre that are currently unused, including an empty site that once housed a car factory, and a largely abandoned industrial estate. These would make great locations for new housing, but the land is owned by speculators and they are not inclined to release it. Presumably, they are either waiting for the value of the land to increase so they can sell it at a profit, or they are waiting for the economy to recover so they can plan a new development with less risk involved.
The problem here is that they pay no tax on that empty land, so it costs nothing to sit on it and wait for better times. They contribute nothing towards raising the value of the land, and reap a reward from other developer’s work. What’s more, there is no incentive to maintain any buildings that might remain on the land. The more decrepit they are, the lower their value and thus the lower the taxes. So why bother to repair that fire-damaged roof or that vandalised fence? On this sort of unused industrial land, a tax on buildings creates a perverse incentive and actually encourages decay.
It’s similar with your own home. If you buy an old property and renovate it, you might find the value of your home goes up and into a new and higher tax bracket. Although your household won’t use any more government services than it did before, you now have to pay higher council tax.
And here’s another thing. Buildings taxes encourage bad architecture. Think about it. If you’re planning to build a hotel to serve Luton airport, you’re going to pay business rates according to the rental value of that property. Airport travelers are only going to be staying one night, so they don’t care much what the place looks like. So you’re hardly going to build the St Pancras Hotel. You’re going to crane in a soulless prefab accommodation block. A building-based business rate creates an incentive to use cheap materials and off-the-shelf architecture. Little wonder our towns are full of lowest common denominator buildings.
If you had to pay tax on land, you wouldn’t want it to sit empty. You’d either develop it or sell it on quickly – which would lower the price of land and make it easier to build in town centres, reducing pressure on greenfield sites in the countryside. If you were going to build, you’d be able to design great buildings with the long term in mind without the fear of paying for it over and over again through taxes.
There are other advantages to a land tax. You can’t dodge it or hide your land in Bermuda, because anybody with a measuring tape can see exactly what you’ve got. Because the tax would be based on land value, it would naturally and fairly raise more income from richer parts of the country and less income from the poorest parts.
At its most radical, a land value tax would eliminate multiple other taxes or even all of them, including income tax. That was certainly the dream of the first big advocate of LVT, Henry George. He believed it would be a fair and non-ideological way of raising taxes, asking more from those most able to contribute to society without the rich vs poor divisiveness of socialism. Interestingly, the game of Monopoly was originally devised to teach Georgist economic principles.
Land Value Taxes have been implemented in several different countries over the years. Denmark used them for a while, as did Australia, and Edmonton in Canada. The utopian experiment of Fairhope, Alabama, was created with a single-tax local government. Many towns in Pennsylvania still have a land tax, each town setting their own rates. Pittsburgh used LVT from 1903 to 2001.
Like all such ideas, Land Value Taxes aren’t a magic solution to all our problems. But implemented carefully and wisely, they could definitely play a part in creating a fairer, more sustainable century.
- For more, see the Land Value Taxation Campaign.
The Earthbound Report 
Jeremy, So as not to labour a point that I previously mentioned, I will just say that council tax is used sweepingly without due care and attention and for sure, land value tax would be applied in an equally undiscrimating manner. It seems that some people fall foul of various taxing systems which is clearly not reasonable. So, whatever system is fought for it should ALWAYS include an exception clause for genuine cases who may be continuously unfairly penalised/robbed. So, if and when you fight for improvements, please think of including this.
Yes, although there are many ways for a tax to fail. It can fail because it’s been badly implemented, or it can fail because it’s just a bad idea in the first place. Designed badly, a land tax would be no better than council tax, but designed well, I think it could be better.
The same thing applies to the Robin Hood Tax, incidentally. A badly designed financial transaction tax would be a disaster. A well designed one would be genius. It’s about doing it properly, being flexible, and knowing how to tweak it so that it works and as few people – like yourselves and your land – fall through the cracks.
Exemptions and exclusions create loopholes and doom the system to failure from the outset.
The problem is the poor old widow in a house on a valuable plot of land. Either raise pensions or allow the amount owing to be rolled up. LVT should replace IHT in any case.
Interesting idea. Any info on why those places might have stopped using such a tax?
I know you’re interested in alternative taxation measures, so here’s one from a prof of mine over at the LSE:
http://jonathanhopkin.blogspot.co.uk/2012/04/how-to-win-over-squeezed-middle.html
A lot of it is politics – people who have a lot of land don’t like land value taxation, so there is always political pressure to change it. And obviously in party politics if the other side did it, it must be a bad idea, so a lot of them have been swept away by changes in the local authority.
Pennsylvania’s long held LVT came a cropper because they realised they had been undervaluing land for a few years. When they corrected it, taxes obviously shot up for a lot of people and that made the tax very unpopular.
We have managed to keep it going in Sweden, just. But vested interests try to squeeze it out and if the benefits are not well understood this is likely to happen.
Thanks for picking up on my brief reference!
I’m still not sure what to think of the idea. I like the principles behind it (including the idea that land is a global commons, which is properly owned by all, and so anyone wanting to make use of it ought to pay the rest of us compensation (i.e. tax) for having exclusive right of use), though I’m unsure of all the consequences.
BTW, in Australia, the tax only applies in NSW (one state) and is not a true LVT, since it includes the value of the buildings. It also only applies above a certain threshhold.
Not so, Byron. The NSW tax is land value based only, and Queensland also bases its municipal rates on land values, too. The site http://www.thedepression.org.au discusses the virtues of capturing the annual value of land instead of fining labour and capital.
Yes, you’re right. Sorry. It’s been a little while since I’ve been in Oz and my memory was incorrect. Thanks for correcting.
Though if my slightly more focussed attempt at memory is correct, aren’t primary residences exempt?
we already have this in Germany: it has advantages as you describe, but also causes some difficulties. For example, farm land is taxed at a much lower rate to building land, because building land is much sought after and has a very high value. The problem with this is that it acts like a sales tax and gives the local government an incentive to find as much building land as they can politically get away with. Unfortunately, making more building land is also popular with a lot of voters because there’s a lot of wealthy people who want to build a house, so the area around the village is being nibbled away. Fortunately it’s usually high density housing.
There are problems: the local government starts to charge the higher tax rate from the point the land is reclassified, regardless of the owners wishes. This leaves the owner with a massive tax increase. On top of this, the town makes a compulsory survey of the land, and charges the owner, and the town then puts in water and sewage lines and charges the owner for that, too. This is fine if the owner is a speculator, but a bit rough on a retired couple whose allotment has just become building land. Usually what happens is development by fiat: the expenses are so high that people end up building and renting, and the fields get eaten up.
There’s a long term issue as well, in that locally the town runs the water company. They are now increasing water rates because the building has altered natural drainage in several places so now the area needs large storage areas to avoid flooding. These need to be maintained, so now we all have to pay more, even if we don’t live on the newly built areas.
It also means that only the very rich can build.
In our village we have an area where just after the war, people built houses without permission, because they didn’t need it. Now the town is trying to evict them and their descendants from the houses, because the land is classified as ‘non-residential’ so they can’t collect the same tax. It’s noticable that where much wealthier people have done the same, this hasn’t happened.
I think it’s a good idea, but it needs care in application.
That’s all very interesting Andy. I can see how this provision, when combined with zoning laws, gives local governments much greater power in enforcing development.
This sounds like there is a need for better democratic control of the planning process, and also that the tax must be levied on annual rental values, not selling prices. It is also unfair to base the tax on zoning. It should be based on actual granted consents, but it should be possible for applications to be made by third parties. The British system of planning control would lend itself to this quite well.
The example you give of people being evicted would not arise under the British planning system as they would have “established use” rights.
In theory the buildings are covered by ‘established use’ here as well, but the problem can be proving this, especially when one or two politcians seem to have a crusade going on against some residents.
I am surprised. I thought the Germans were good administrators. Planning consents are recorded in a planning register. Existing uses are regarded as established after four years. Third parties can make applications but these can be opposed, called in by the minister and made the subject of a Public Inquiry.
The system should be open.
Yes, land value taxation encourages more development, so if you don’t want more development, it’s not a good idea! It’s best used for regeneration, and is much better suited to local taxes than as national policy.
It’s also good for encouraging higher density development, as you mention. That’s because land is cheaper to buy, but more expensive to own. So you want to get as much onto your land as possible. If you have a problem with unsustainable urban sprawl, LVT is helpful.
That would explain why German towns are still relatively compact with medium/high density housing even in the suburbs. The land tax is also connected to public transport provision, which means that governments are given an incentive to provide bus/rail services because hey will get the money back in increased land taxes for years afterwards.
Yes, and that’s a great thing when you compare it to governments who incentivise sprawl because they are receiving political donations from property developers every time they open up new parcels of land (which has been the case in many parts of Australia at various times).
LVT has to be a national tax because in some areas land values are so low because they are disadvantaged. If it is a national tax and replaces other taxes, it creates tax havens where they are most needed.
The point Andy makes regarding public transport provision and getting the investment back is spot on. The building of the Jubilee line extension cost taxpayers £3.5bn and produced a £13bn appreciation in commercial land values within 500m of all the new stations. With LVT the increased value would be returned to the community for further infrastructure improvements – a self-financing system that is fair, efficient and beneficial.
There have been a number of excellent points made in this discussion but something not mentioned is the zero rate on marginal sites. This is the key to the success of LVT. A land value map is like a pyramid – highest values in the centre with decreasing values towards the base. Most farmland would be zoned as marginal.
A high rate of tax on central sites will ensure that buildings are of the highest quality with modern facilities so that the landlord can charge the highest possible rent and get a fair return on capital investment. Vacant and under-used sites will be developed to the maximum permitted planning permission, increasing the supply of domestic and commercial buildings where they are most needed. This will reduce the pressure to develop green field sites and help reduce urban sprawl.
In addition to making tax avoidance impossible the other advantage of LVT is that it cannot be passed on in higher rent and price of goods. If central landlords attempt to pass on the tax, tenants will threaten to relocate to landlords offering comparable facilities at lower rents. Landlords will be in competition for tenants, not tenants competing for a limited supply of good premises.
“If central landlords attempt to pass on the tax, tenants will threaten to relocate to landlords offering comparable facilities at lower rents. Landlords will be in competition for tenants, not tenants competing for a limited supply of good premises.”
Commercially tha may work, but it doean’t work with residential property because tenents need to be near a place of work, whereas Landlords don’t, because they get income from rent.
An engineer from Mercedes locally, needs to work for a car company, so they need to live near enough to commute easily. As a result apartments are in high demand here and have high rent, and landlords know that for every family who moves into an apartment, a dozen will want it. Families here have to advertise for apartments, precisely because the transport connections are good for places to work.
Landlords take the higher rent and pass on the taxes to their tenants.
Landlords are already taking as much rent as they can possibly ask. Why would an LVT enable landlords to ask more? In fact, landlords would have to be careful not to ask too much or they would be saddled with the LVT bill and no income to pay it from.
Hello Henry. I’m describing the current situation in our area.
As I said above, the reason that the rents locally are high is because accommodation is at a premium, because this is a nice village but also very close to major employers like Bosche, Mercedes, Porsche and the local airport, to name but a few. It is also not badly served by transport links.
As a result there are often private adverts from families and also from companies like those above saying they have people with a secure income, looking for apartments. A landlord only has to make a phone call to an agent, and they can choose from half a dozen potential tenants.
Although the tenants have to live local to the employers, the landlords do not. In the fifties and sixties a lot of homes were built with the ground floor occupied by the owner and the upper one or two floors rented out. These houses have often been passed onto the children of the original occupier, who may or may not live locally: they don’t need to because they have the rent from three apartments.
There is a matrix of how much a landlord can charge per square metre, and how many people may live in the apartment per square metre, and there are lots of rules about age, heating and other things, but this doesn’t include the tax: the landlord just divides it by three and charges us our ‘share’ on top of the rent: we pay their tax for them, in effect. As taxes went up, so did rents. If one person leaves the landlord can find another in a day, and if not, they still have the income from two apartments, so they aren’t in any financial trouble.
You could argue that this is fair as we benefit from the transport links whereas our landlord lives in Switzerland and therefore doesn’t directly benefit, but then the landlord benefits indirectly because they can charge more rent (before tax) on the basis we have good transport links, so they get the benefit, and we pay the premium, and pay their tax on top.
It’s not a bad system overall, and it’s better than many unjust taxation systems in the world, but unfortunately it doesn’t mean landlords have to find tenants.
If rents are regulated by legislation then landlords can pass on all sorts of things if they can get away with it. And if they can’t then you get a secondary market like here in Sweden. In Britain when rents were regulated the tenancies would change hands for the price of a kitchen table which could be hundreds of pounds – in reality it was a premium for the lease.
Thanks Mike, that’s an important consideration too.
LVT is the core of Geonomics. Where land and its resources are taxed. Land is the lakes, in the land (ores,moil, etc), rivers, seabed, sea, air and electromagnetic spectrum – all COMMONWEALTH. Nature made these, not men. Also Pigovian taxes such as, alcohol, tobacco, congestion charges.
Revenue for common services are reclaimed from economic growth by commonly created wealth. The best way to fund common services – by commonly created wealth.
This reduces, or eliminates Income Tax (a tax on production), VAT (a tax on trade), leaving private wealth in private hands.
1. Socialized wealth is socialized
2. Private wealth stays privatized.
This promotes enterprise.
As a nice off-shoot, Land speculation was the root cause of the 1929 and 2008 crashes. LVT prevents land speculation and busts and booms, stabilizing the economy. LVT is self regulating as the free-market determines the value of land. Land cannot be taken off-shore and dodged.
yes,it is obvious that property taxes should be charged highly because there returns are high compared to the land and hence land taxes should be reduced and find alternative ways to increase revenue rather than rising land rents.
Can you clarify that please?