As well as seeking a return for the capital they invest in a building, the landowner charges tenants for surrounding local services that create the location value of the site and are provided by nature (rivers, scenic views, etc.); public authorities (schools, parks, swimming pools, policing, transport, street cleaning, planning controls, hospitals etc.) and private businesses (energy, water, sewage, shops, banks, hotels, restaurants, bus and train services etc.).
LVT is paid by the landowner, not the tenant (the tenant already pays location value to the landowner who currently keeps all of it. With LVT the landowner will pass on a proportion of land value to the Government who can then reduce taxes like income tax and business taxes which fall on both the tenant and the owners of buildings.
The only way a landowner can pass on any part of the LVT bill they receive is if they are currently charging a rent that is below the market value – not very likely.
If a subsidy in the form of a reduced rent is being given to an organisation, this will be reflected in the valuation process. For example, if a building can only be used for a community group that has no substantial income, then the economic rent for that site is automatically below that of what it would be if the premises were for commercial use. Similarly, a site that has an old building with a conservation order on it will have a lower economic rental value than if it has permission to have a modern multi-storied office block built on it.
It is crucial for every site to be valued at its current optimum permitted use value.
Most of the register of ownership is already compiled (circa 70%) and it is the aim of the Land Registry to register all marketable land by 2012.
Possibly the easiest way to achieve 100% registration quickly would be for the Land Registry to be given the powers to advertise compulsory registration in the business, daily and property press with a convenient website for landowners to action their registration. A time limit would need to be given (say three months) and all land then left unregistered would be auctioned on a 99 year lease by the Government.
Of course the rate of LVT can be gradually adjusted upwards in order to control land price inflation but not so much as to create a collapse in land prices and prevent planned inheritance. A stable land market will encourage productive endeavour and new homeowners. Over time people will invest their savings into productive businesses paying very little or no taxes rather than into property and so inheritances in the future are more likely to be company shares rather than homes.
The current property taxes actually reward the property speculator and land hoarder communities need to have the empty and underused buildings and sites that blight our towns and cities brought into use. An annual LVT acts as an incentive for landowners to make proper use of their property either by renting it at its proper economic value (ie not at any speculative price) or by selling the property to another developer who will bring it into full use. By increasing the personal allowance, individuals and families will benefit by paying less income tax. A suggested proposal to pay a citizen’s dividend from an annual LVT – as happens in Alaska from oil revenues – will provide a direct financial benefit to every taxpayer in the UK whose taxes pay for the infrastructure and public services that generate land wealth.
In practice most poor people live in poorer houses with low land value and most owners who reside in a mansion on valuable land have considerable wealth, other than their home. However, in order to accommodate the few isolated cases that might arise it should be possible to defer payment of the annual LVT bill until the property is disposed of when both the back-dated LVT owing and interest accrued are paid to the government from the estate. In the meanwhile government investment in infrastructure can continue as the government will be able to borrow against this future income stream.
An annual Land Value Tax has never been implemented in the UK. (The Labour Finance Act of 1932 did introduce LVT but the new Coalition Government stopped the valuation and a subsequent Conservative Government abolished it). The development land taxes mentioned above all failed because the tax could be – and was –avoided by the land owner not carrying out the development. Any form of development tax is bound to fail simply because it can be avoided. If the government taxes an event (in this case development) the tax can be easily avoided simply by avoiding the event and waiting patiently for its abolition. These additional idle sites lead to lost homes and lost job opportunities in the factories and offices that are not built and add to company costs as they are forced to relocate onto less efficient sites (often creating urban sprawl and unnecessary commuting).
A development land tax is not even logical in its intent – why only tax the uplift on one site because of one action affecting its value at one time in its history? All sites have an economic value that has existed since two or more individuals desire to occupy them; as the economy has developed and as infrastructure and public services have been developed so the value of each site has changed to reflect those improvements paid for by others.
That is a question for the policy-makers in this and previous governments to answer. We assume that the main obstruction is that most politicians own land and have a misguided view of how LVT could disbenefit them personally.
Academia does not help, in fact the classical approach to understanding economics was based on clear and distinct classifications of labour, land and capital with the return to each being wages, economic rent and profits respectively. However, for almost the past one hundred years economists have been taught not only to conflate land with capital but also that economic rent can derive from labour and capital – which is of course complete nonsense.
It is our duty to educate and alert people to the benefits of LVT so that where there is a genuine lack of understanding we share our knowledge. Of course, this will not alter the actions of those who mistakenly oppose LVT through misguided self-interest.
Today, discussions held with Treasury officials, politicians and academics frequently end with them saying they agree that an annual LVT is a good, sustainable, redistributive, fair and green tax but after the poll tax riots it would take a courageous government to introduce it! This is not a logical response and makes no sense to dismiss a tax that will not only benefit business, workers, the environment and the economy but help to rectify an injustice inflicted on people over centuries.
Many ‘controversial’ policies have been opposed by “right-minded” people in the establishment for decades in the past but eventually introduced by governments in the UK including the abolition of slavery; Trade Union rights, giving women the right to vote; the National Health Service; equalities and anti-discrimination policies; green policies to address climate change, banning smoking in public places and London’s congestion charge.
This statement can only be answered at a theoretical level because there is insufficient date to properly argue what income could be raised under LVT. So, to answer this properly, there first needs to be an understanding of, and agreement on, the theory of economic rent.
Briefly, the argument is that there are three inputs into the production of goods and services: labour (mental and physical), capital and land (all natural resources). The return to each of these is wages, (a reasonable) profit or (reasonable) interest and economic rent. The economic rent of a site is the surplus income that remains after wages and profit and interest are paid. Of course there is another cost to the employer and employee –taxes. Some economists argue that all taxes are paid from economic rent; they are not an input in the production and delivery of goods and services and therefore must come from the surplus income. If that argument stands, then, in theory, all existing taxes could be replaced by an annual LVT. To support this argument, one has to consider what the outcome on land values would be if there was no taxation. History shows that land values would increase by the amount taxes previously collected.
When local authorities decided the poundage to be set for business rates, land prices in areas with a high business rate bill were lower than in similar areas where the rate was set low because rent and rates charged are inversely related. The same applies with subsidies paid from the CAP or Enterprise Zones or regional grants etc. The more the level of income of an occupier of a site is raised, the more those land values and therefore economic rent increases and similarly, the greater the unavoidable costs the occupier has to pay, the lower the value of site and therefore the lower the economic rent of that site.
Because all sites would be charged LVT, those sites that are currently idle or underused and pay reduced or no business rates, would have to pay the full LVT bill and would therefore be brought into full use thus making land more affordable and thereby increasing productivity. Therefore, the argument is if most or all taxes were abolished and an annual LVT was applied to every site, the amount collected could be increased or revenue-neutral depending on the government of the day.
This statement can only be answered at a theoretical level because there is insufficient date to properly argue what income could be raised under LVT. So, to answer this properly, there first needs to be an understanding of, and agreement on, the theory of economic rent.
Briefly, the argument is that there are three inputs into the production of goods and services: labour (mental and physical), capital and land (all natural resources). The return to each of these is wages, (a reasonable) profit or (reasonable) interest and economic rent. The economic rent of a site is the surplus income that remains after wages and profit and interest are paid. Of course there is another cost to the employer and employee –taxes. Some economists argue that all taxes are paid from economic rent; they are not an input in the production and delivery of goods and services and therefore must come from the surplus income. If that argument stands, then, in theory, all existing taxes could be replaced by an annual LVT. To support this argument, one has to consider what the outcome on land values would be if there was no taxation. History shows that land values would increase by the amount taxes previously collected.
When local authorities decided the poundage to be set for business rates, land prices in areas with a high business rate bill were lower than in similar areas where the rate was set low because rent and rates charged are inversely related. The same applies with subsidies paid from the CAP or Enterprise Zones or regional grants etc. The more the level of income of an occupier of a site is raised, the more those land values and therefore economic rent increases and similarly, the greater the unavoidable costs the occupier has to pay, the lower the value of site and therefore the lower the economic rent of that site.
Because all sites would be charged LVT, those sites that are currently idle or underused and pay reduced or no business rates, would have to pay the full LVT bill and would therefore be brought into full use thus making land more affordable and thereby increasing productivity. Therefore, the argument is if most or all taxes were abolished and an annual LVT was applied to every site, the amount collected could be increased or revenue-neutral depending on the government of the day.
However, it is equally important that LVT is applied in a fair and reasonable manner for all residential owner-occupiers. Therefore, if an owner-occupier is faced with the situation posed in the question above, common justice says that such an application made without the owner’s consent, should be refused unless the application is related to a compulsory purchase order (CPO) made by a public body.
To only apply LVT to those sites that are kept out of use would be a lost opportunity to capture at least part of land wealth – which is unearned income for landowners – and would leave the property taxes collected more complex and unequal than need be. By applying LVT to the economic rental value of every site through LVT, the system is simple, transparent, unavoidable and fair.