Paul Parkinson explains the rationale behind a hot tax topic and evaluates its effectiveness.
What is it?
As a concept it is an annual levy, raised from the owners of freehold land, based on an “assumed rental value” as if it were in an unimproved state but with optimum use granted under planning regulations for its appropriate classification.
Is it “fair”?
Imagine 2 adjacent plots of freehold land, both identical in size; plot A contains one house owner-occupied by a single family whereas plot B contains a block of flats all owner-occupied by a number of families with shared freehold. The Land Value Tax on both plots will be identical despite that being fundamentally disproportionate to the relative demands they will almost inevitably have on Public Infrastructure & Services; it is clearly “unfair” in that regard.
How easy is it to calculate?
Land Value Tax, in theory, assumes a standard levy for each defined class of land irrespective of where in the country it is. I suspect that will not be the intention of its supporters who would probably want instead, in practice, regional market-price values used as basis points. You do not need the Wisdom of Solomon to foresee that the relevance and strength of all competing factors affecting the value of the land will inevitably be open to subjective interpretation and the only winners of any appeal system in the valuation process will be, just like in the fictitious court case of Jarndyce vs. Jarndyce, the lawyers!
Is it worth powder & shot?
50% of the total land mass of the UK falls within the category of agricultural, the average price of which, according to the RICS 2012 survey, is £6,700 per acre in England & Wales with a rental yield of approximately 2% p.a. One could therefore confidently assert that Land Value Tax would raise very little total revenue on rural land compared to the considerable costs of assessment, collection and monitoring of transgressions.
Keeping up with the Joneses
Some devotees of Land Value Tax wish to set it up so that it levies more on landowners who are perceived to benefit from increases in land values directly attributable to government expenditure in their locality. Even if we accept the premise of imposing some form of betterment-capture, one can readily foresee the perverse situation where residents in deprived neighbourhoods actively campaign against any regeneration of their locality because they couldn’t afford to pay the increased annual Land Value Tax levy applying to the land on which the terraced houses or flats they own are situated; the area surrounding the London Olympic site springs to mind as a prime example of this.
UK’s single largest owner of land
When Adam Smith theorised about Land Value Tax in the 18th Century, the State owned very little whereas, currently, it controls a fairly considerable 20% of the total UK land mass ranging from infrastructure like roads and parks through to the Crown Estate and Ministry of Defence assets. Will the UK’s single largest landowner qualify for an exemption from Land Value?
Some are more equal than others
Will ordinary citizens on low incomes qualify for a Land Value Tax exemption, or will an expensive welfare system be required to counter its effects on them? Currently charities and pension schemes qualify for some remission from a number of taxes: would they qualify for remission from Land Value Tax in relation to the land they hold as part of their investment portfolios? These represent 20% of the total UK land mass, comprising anything from conservation projects by the National Trust & RSPB right through to shopping centres and leisure facilities.
Could you afford it?
Can the 10% of the total UK Land mass that is usable for residential purposes realistically be the main (if not the sole) revenue generator for government expenditure? If, simplistically, you divide the £720 billion annual Government budget by 6 million acres, that results in a quite frankly knee-trembling average figure of £120,000 p.a. per acre. Even if you instead apply a flat per-home figure by dividing £720 billion p.a. by 25 million, this only reduces the “average” Land Value Tax demand to a still eye-watering £28,800 p.a. per home which is higher than the amount of Tax (both Direct + Indirect) paid each year by 90% of all households. So the answer to the question posed would appear to be NO.
I remain sceptical that it is possible for a Land Value Tax to raise sufficient money without hurting the majority of people who own or rent their modest family homes therefore, in conclusion, I see little merit to introducing a Land Value Tax. No-one knows for sure what impact it would have on the UK housing market; if it causes a price increase then that will make property even more unaffordable, if it causes a price drop across the board then there could be a systemic risk to the solvency of the banks, building societies, insurance companies and pension providers.
Paul is a Lake-District fell-walking law graduate with a keen interest in analysing the political and economic impact which government policies have in practice on ordinary people. He tweets as @pjpcfp