30 May 2017

Land Value Tax is a great idea – but it’ll never happen


It’s lucky Boris got Foreign and not the Treasury: he has just described a rather good plan for Land Value Tax as “nonsensical”. Of course it’s not a perfect plan – it’s from the Labour Party manifesto after all. But LVT is one of these generally good ideas that no one ever actually does. There’s an awful lot to like about it – not least that it annoys all the right people while still holding true to decent economic principles.

Henry George was the great populariser of the idea, even though it wasn’t his originally. His point was that a goodly part of the value of a piece of land exists not because of anything that the owner has done to it, but because of what the other owners of the other bits around it have done. This is really just a development of David Ricardo’s observations upon rent.

There was, for example, a time when Mayfair was worth very little, since it was merely some fields a few miles outside London. Today, it’s worth significantly more, since everyone else has built London around it. There’s a certain justness in taxing the value created by all the other Londoners in order to pay for London.

The tax is thus upon the rental value of the land. And it’s the land unadorned. However you might want to tax mansions, or factories, the LVT is upon the value of the land itself, plus what permissions you’ve been granted to build upon it. So, planning permission changes the value of the land, changes the tax. Whether there’s a house there or not does not.

One reason to like this tax – as Milton Friedman pointed out – is that it’s the least distortionary tax there is. No one is making land any more, so we’re not going to reduce the supply of it by taxing it. That is true of everything else – tax apple consumption and people eat fewer apples, tax incomes and some work less, tax profits and people set up fewer businesses. But land is in fixed supply, so we’re not getting less as a result of gaining our necessary tax revenue from it.

It’s worth noting here that this doesn’t tax gardens – as the Tories are claiming. For you cannot build upon your garden, can you? If, however, you’ve planning permission to do so then the tax is due.

It’s also right that everyone should pay it. Yea even those horny handed sons of the soil, the farmers. Land that’s on top of some Dale is worth spit and so would pay near nothing, someone using Surrey to grow turnips probably should be encouraged to make better use of it.

For, yes, having to pay tax on the value of the land does indeed mean that people will have to allocate the land to a use which will producing a decent return on that value. This is why the OECD has insisted that “repeated taxation on property”, by which they mean the LVT, makes the economy more efficient, unlike all other taxes.

Everyone means the Government too. Just as we charge the Armed Forces to use the electromagnetic spectrum. Sure, they need it, but charging them for it would concentrate minds on quite how much they need of it. As with those acreages they have to play tanks on, or the value of that land in Whitehall where they do such important things for us all. Charging the true cost would help decide whether the work might be more efficiently done in Whitby. Or not done at all (whisper such heresy ever so gently).

Yes, I know, it rarely does any of us any good to go riffling through the Labour Party manifesto in search of decent economic ideas. And this time around there aren’t all that many good Tory ones either. But it is still true that land value taxation is a smashing idea – except for the fact that no one is ever going to implement it. For who would dare come between the English and that Great God of house prices?

Tim Worstall is senior fellow at the Adam Smith Institute