Land Value Tax – a policy from the past

A number of commentators and lobby groups have argued that the answer to house prices, housing problems and also a fairer system of tax revenue is to introduce a Land Value Tax.  This policy was first put forward by Henry George in ‘Progress and Poverty’ published in 1879 in the United States. More recent advocates include the Resolution Foundation, the IPPR and Bright Blue think tanks, Professor John Muellbauer for the OECD, and Martin Wolf in the Financial Times.

 

Context

The original idea was developed in a period when land was owned by a small minority of landowners who lived in opulence compared to most people.  Land was a significant part of the productive economy although that many landowners benefited from industrial activity including rights to mine minerals, which enabled them to offset the impact of downturns in agricultural prices. 

 

It was also a period when many of the factors, which are now recognised as playing important roles in economic activity, were unknown.  What appeared as obvious and rational in that era has now been largely superseded. 

 

The world has moved on.  We have learnt that the economy is more complex than people in the 19th century realised. This is particularly true when we look at housing. The factors which influence house prices are varied and cannot be distilled into a simple idea.  Yet land value tax lingers on, making regular appearances in the news and as a policy prescription, recycled and regurgitated as if we still lived in 1879. It is a zombie concept, long dead but constantly resurrected. 

 

Rationale for LVT

A range of perceived benefits have been highlighted by supporters of LVT.  These are set out below with responses.

 

The main thrust of the argument is that landowners, including homeowners, gain through the increased value of property, which it is asserted is the land underneath the property, through the efforts of others.

 

Property prices increase due to the process of an increase in land values

Property prices increases can be largely attributed to their function as assets where low interest rates push up asset values; increased earnings; competition for housing from non-residential uses.

 

The benefits accruing to land owners are captured which enables projects to be funded

An example used is that of the Jubilee Line Extension which resulted in an uplift in property values estimated between £9.75 and £13.5 billion. [The project cost £3.5 billion]. 

 

But who benefited from the uplift? If a resident moved to an area with lower house prices and pocketed the difference in house values, they would gain somewhat. But most residents live and work in the area. Their earnings would be no higher but they would be expected to pay higher taxes.  Some of the uplift might have arisen from higher earners moving to take advantage of the new line. They would rightly be paying for that privilege when they purchased a property. . 

 

A poorly functioning property market has led to a shortage of homes

This is factually incorrect as for one thing there is not a shortage of dwellings. The market functions but is skewed towards those with higher earnings and purchase property for non-residential purposes.

 

Economic benefits – stimulating employment and investment, create affordable housing and ensure the use of unused land

Very dubious assertions.  Investment and employment is created under current conditions, so the idea that stimulation is required is incorrect. 

What is defined as unused land – presumably that which has not been developed.  Do we really want to develop all green spaces in an urban area?

There also is a misconception that developers hold on to land, known as land banking, to bid up prices.  The reality is that developers only build that which they can dispose of and the land banks exist to ensure a ready supply of land for the developer to develop in the future.  It would not be appropriate for developers to develop all the land that they hold. 

 

Operation

Replacing council tax

The aim would be to replace the existing council tax with the LVT. It is suggested this would be a fairer system. But council tax is there to fund local services. Both council tax and LVT take no account of earnings and are regressive.

 

Values based on the value of the land under the property.

This assumes that the land value can be calculated simply by subtracting the building costs of the property from the total value of the property.  If a house is valued at £300,000 and the building costs are £150,000 then the value of the land is assumed to be £150,000.  This simplistic approach ignores the point that in essence there are three elements which together add up to the total value of a property: - the land, the building and last but not least the location/use value.  

 

Location/use value. This element arises due to factors such as location, the intended use of the site, the resources of a purchaser, general earnings levels and changes in the desirability of an area. If a purchaser considers that they can use the site for a more profitable use they will pay more.  This element also will reflect the accumulation of value over time, the impact of previous demand etc.

 

A purchaser may want to use a property as a holiday let calculating that the income stream will provide a good profit. They would be able to both outbid someone seeking to live in the property and have a sufficient income to offset any LVT.

 

Highest and best use (HABU) of a site, that being the use upon which valuation should be based.

What is the highest and best use? Should all land in an urban area be regarded as suitable for development?

So what qualifies as the Highest and Best Use? Luxury housing, holiday lets?

 

Hope value (that which arises from the expectation of future change of use) would be taxed, on the basis that a purchaser who bought land at a higher price would be paying more tax.

People might pay more for a patch of land for a variety of reasons.

 

Planning rights.  Local authorities could submit applications for land  they think has a higher and better use in order to gain revenue. Private developers could do the same where they consider land should be developed.

There are a number of issues with this. It gives an incentive to Local authorities simply to gain revenue. Why should private developers have this right?  They could well see an area of land suitable for luxury housing with a chance to develop it. 

 

The gaps

Land is in short supply

Land is in short supply, there are competing demands for land use and land/property prices reflect this. Market rates for land should reflect the reality that it is in short supply and should not be developed for the sake of it.  Market prices for dwellings and land should reflect that.  Attempting to reduce values using LVT would create a false impression that land is plentiful and cheap.

 

It is often the case that market prices are too high due to the use to which dwellings are put – second homes or holiday lets and the problem of dwellings also being assets. The solution here is to create appropriate policies to deal with these issues.

 

Replacing other property taxes

Council tax is levied to provide revenue to local authorities for the provision of services.  It is a regressive system in need of replacing.  The ideal solution would be to introduce charges based on income.  This would be progressive and fairer. Households on low incomes would pay little whereas those on high incomes would pay more. Currently, a household with one earner and one non-earner pay the same as a household with two high income earners.  LVT would have the same defect.

 

The housing market

The housing market operates in such a way that high value properties are prioritised over local housing need.  It also allows for dwellings to be used for non-residential uses, such as second homes, holiday lets, investment properties and buy to let properties.  High earners have a greater ability to bid up house prices than most people.  LVT does not address these issues.

 

Earnings

Increases in earnings push up house prices and those on higher earnings have a greater impact on prices.  A tax designed to reduce house prices would be beneficial to high earners who would find it even easier to purchase property.  LVT conveniently ignores the influence of earnings on house prices.

Regressive taxation

So if as is often the case, house values rise, due to a variety of factors beyond the control or influence of the owner, taxes on the increase would rise regardless of the income of the owner. Fine for those on high incomes, a problem for everyone else.

 

Houses as assets

Evidence from a Bank of England paper indicates that there is an interaction between interest rates and house values.  Lower interest rates result in asset values including houses rising.  One negative side effect of quantitative easing was to push up house prices. 

 

Bank lending

A number of banks in Ireland and the UK were involved in lending regarding property deals, presumably on the basis that they considered that house prices would continue to increase.  The 2008 resulted in considerable losses.

 

Foreign investors

Evidence suggests that foreign investors impact house prices by pushing them up.

“Average house prices in England and Wales in 2014 would have been about 19% lower in the absence of foreign investment (at approximately £174,000, compared with an actual average of about £215,000).”

https://res.org.uk/mediabriefing/foreign-investment-raises-uk-house-prices/

 

Conclusion

Land Value Tax is a policy well past its sell by date, yet it keeps being resurrected.  It is based on incorrect assumptions about the housing market and how the economy operates. Its appeal is that appears to offer a simple solution to a complex issue.  In reality, there is no one ‘magic bullet’ but a range of policy options, which would be required to resolve housing issues.  A fundamental problem is that land is a scarce commodity and in the UK which has a high population property prices will be higher.