Land Value Tax in England? No thanks.
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It is perhaps surprising that something as obscure as a percentage tax on the value of land could have fans. But the internet is a wonderful and varied place and the people on it who love land value tax really love land value tax. These people are so persistent about it, and some of them sufficiently self-aware of how awkward this looks, that the meme “a land value tax solves this” as a reply to pretty much any government policy idea is used both seriously and sarcastically, often at the same time.
I’ve read the blog posts, I’ve read the tweet threads, and I’ve listened to the podcasts.
Advocates for LVT in Britain are found across the political spectrum from The New Economics Foundation on the left to The Adam Smith Institute on the right. Organisations like the IFS fill out the middle.
Their persistence seems to be paying off.
In recent months, in policy discussions and in the media, the idea seems to have captivated more people. Advocacy for an LVT as part of a suite of measures to make the UK’s tax systems both fairer and more efficient has intensified. In many of those arguments it is claimed that, with minor disagreements in the details, the policy enjoys near-universal agreement among economists.
I disagree.
Of course the economic case for LVT has some strong points. It taxes land, not property or work. It is thus hard to avoid, incentivises better use of the near-finite resource of land, especially via the densification of cities, and does not discourage work. It reduces land values and tips the balance in favour of investing savings in company growth rather than land accumulation. In some formulations it simplifies the tax system and thus delivers direct efficiency savings. And of course the revenue it raises could be used to cut other taxes such as stamp duty land tax, a very badly designed tax.
But LVT in every formulation that I’ve seen in the UK either implicitly or explicitly has two interacting flaws that outweigh these strengths. There are at least a few good economists who agree with me that this makes it a bad idea for Britain, and I suspect that there are quite a few more of us than that.
The two interacting fatal flaws of LVT proposals in Britain are the valuation problem and the centralisation problem.
1. The valuation problem.
The valuation problem with a land value tax is easy to explain. Outside of agriculture, land in Britain is almost never bought or sold separately from the properties that are built on it. When we buy freehold homes and offices we do so in combined transactions within a very active market.
This means that we have excellent data on the value of freehold homes and their plots and very good data on the value of freehold commercial properties and their plots. Brilliant websites like Zoopla and rightmove surface this data for us and make visible the types of modelling that turn frequent transactions of similar nearby properties into a constantly updating estimate of the value of all properties.
No such market and thus no such data exists for land values. Instead, and despite admirable efforts of libertarians to design alternatives such as property owners self-valuing their land under a commitment to sell at that price if asked, the valuation must realistically be done by or on behalf of a government. To do this, that government must build or endorse a complicated model for evaluation which in some way aims to value the property in isolation from the plot it sits on and deduce the value of the land from the combined price which is well-valued by a market. And in England at least, and for every proposal I have ever read regarding England, that government would be the UK government.
Which brings us to the second problem.
2. The centralisation problem.
The UK, and especially England, has the most centralised government in the rich world. The frequency at which food waste must be collected from every household in England is set by UK law. A national chewing gum levy fund is available for local government to bid into so that they can clean their streets. National pothole funds let them fix roads and chess board funds let them put chess boards in parks.
I think this is a great national weakness, and I do not wish to deepen it.
Almost every tax that once existed for local government to fund these competences and their historically much more expansive competences and freedoms has been banned by the UK government. They are left with only council tax, itself heavily restricted, as a major source of income for local government which they can vary.
For all its flaws, and they are many and deep for sure, Council Tax remains the last real link between an elected local government providing services and raising taxes on its population to fund them. And in almost every case where a land value tax is proposed, it is proposed to apply nationally, usually in the name of “fairness”, and remove this final local link between taxation, democracy, and spending.
When Paul Johnson writes in The Times of council tax that “Northerners in effect pay a higher rate of tax on their property than do southerners. The tax on a multimillion-pound mansion in Westminster is roughly the same as that on a three-bed semi in Blackpool” he must be arguing for a national system as only a national system would end this.
When Dan Neidle in The Financial Times argues for “a modest, broad-based land value tax assessed on site value, not buildings” we can be reasonably sure that he is imagining a single national rate because in another piece in The Times David Smith recounts that Dan is the originator of a comparison between the council tax paid by a three-bed semi in Blackpool and Buckingham Palace.
While the examples in those pieces and many others are exaggerations to make a point, it is important to make the initially jarring argument that a three-bed semi-detached home in Blackpool worth £150,000 probably should pay about the same local tax as a three-bed home in Ealing worth £750,000. These homes are likely to be inhabited by similar households using similar local services that cost a similar amount to provide. That the effective rate of tax in Blackpool would be five times as high will set off British concerns about fairness, but they should not. Dignity and pride should outweigh that concern.
The UK is a very generous effective fiscal transfer union. There is no way that taxes raised in Blackpool could pay for the NHS that its population receives at close to the same standard as in the rest of England. We should be very proud that taxes raised in more prosperous and wealthy parts of the country pay for the NHS in regions with weaker economies like mine in West Yorkshire and across North England.
But for a tax system as a whole to be progressive does not require that every single tax is progressive. I argue strongly that the people of Blackpool, or perhaps the people of Lancashire as boundaries are redrawn, should pay for their own local services through local taxation as decided through the election of local councillors who sit on local councils. There is a sense of pride to be earned in working hard, paying taxes, and paying for common goods in the places we live and I do not think that should be denied to Blackpool, Leeds, or anywhere else. And if a property tax by some name is to be the way that they are allowed to raise that tax, the rate will have to be far higher in Blackpool than in Ealing or Westminster. Shifting the costs of social care away from local government to national government may be required to allow this.
Solving the problems
The problems I have described with a land value tax are not insurmountable. In the USA my concerns about centralisation do not exist since there are no federal property or land taxes.
In Austin, Texas the startup valuebase are doing excellent work to solve the valuation problem with data and open algorithms. While their founder advocates strongly for a land value tax, their customers in local governments in the USA seem overwhelmingly to be sticking with the simplicity of property taxes. Some of this preference may be the result of state laws de facto prohibiting land value taxes but I suspect it is mostly that these local governments have decided that the theoretical advantages of LVT over property taxes are outweighed by the extra complication and subjectivity of valuation at a greater distance from market data.
In the UK, the most developed plan for solving the centralisation problem associated with calls for a national land value tax that I’ve found is by Tim Leunig for UK Onward. In his paper A Fairer Property Tax he proposes a method that would allow local variation of property tax based on updated valuations to fund local government and retain the link between local government democracy, taxation, and spending. On top of this he proposes layering a replacement for stamp duty as a nationally collected tax. His proposals do indeed ensure that “a terraced house in Burnley does not pay more than a mansion in Kensington” but this is only true when both the national and local portions of the proposed tax, interacting with a set of caps and thresholds, are considered.
It is notable that having thought about this more than most others Tim comes down on the side of taxing property values, not land values.
I’ll end with the one case in which I can imagine a land value tax being better than a property tax in England. If the decision were devolved to local government on which to charge and at what rate to charge I can see little problem with a land value tax. My strong suspicion is that given such freedom local governments in England would choose similarly to local governments in the USA and choose to charge property taxes. The simplicity of property valuation makes it much more accessible to democratic debate than abstract land values and the economic value of that increased democracy is, I suspect, almost always higher than the economic value of a theoretically more efficient tax system.