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Sunday, June 03, 2012

Land Value Tax

  I owe some of this to Mark Wadsworth whose intensity on the subject matches mine on space development and a bit to Robert Heinlein Mark first
I’m an economist not a politician, and I can only repeat what all the great economists have said down the centuries – taxes on land values are the least bad taxes because they do not depress or distort economic activity, i.e. wealth creation. Land Value Tax is easy to assess, cheap to collect and impossible to evade.
Not only that, LVT is an entirely voluntary tax – you decide how much you are willing to pay and you choose a house or a flat within that price range. Only instead of handing over all the rent or purchase price to the current owner, the location value would go to the government.
But with my politician’s hat on, I am perfectly aware that the oldest counter argument in the book is that ‘poor widows who want to stay in the family home won’t be able to pay it and will be forced to sell up’, and, to be fair, under current rules, most pensioners pay very little in income tax, so I see no harm in exempting pensioners’ main residences from Land Value Tax.
   Basically a tax on the value of the buildings on land provides a disincentive to build or improve the buildings. All taxes on wealth creation, including income, give disincentives to creating wealth/earring income. A tax on the inherent value of land, which largely cannot be changed* by the owner does not disincentivise him from wealth creation. Indeed it does the opposite. Currently if you own land you can do absolutely nothing with it and you won't have to pay any taxes. This gives anybody who owns some in the centre of London the whip hand in renting it out. In the Highlands it also gives the whip hand to owners of massive estates, or islands, who can and do prevent the building of new houses around villages and stifle communities.

* OK land value can be enhanced by draining swamps or by having roads or other infrastructure built going past them. The latter is a lucky accident for the owner. Anybody who can get permission from our eco obsessed government to improve their own land by draining it or otherwise improving it deserves all the credit they get and should be allowed to sell all the flying pigs that land there too.

   The Heinlein bit is from Number of the Beast, where he describes the best of all possible worlds - literally since the protagonists chose it from an infinity of alternate worlds. I have quoted it before.
This state derives most of its revenue from real estate taxes. It is a uniform rate set annually, with no property exempted, not even churches, hospitals, or schools-or roads; the best roads are toll roads. The surprise lies in this: The owner appraises his own property.
There is a sting in the tail: Anyone can buy property against the owner's wishes at the appraisal the owner placed on it. The owner can hang on only by raising his appraisal at once to a figure so high that no buyer wants it- and pay three years back taxes at his new appraisal.
   Ideally the purchaser would also have to pay the replacement value of any non-movable property (buildings) on the site, otherwise it would be a tax on land values plus building values - though that is still an improvement on the present situation.

    The advantage of this open semi-compulsory purchase system is that it ends land being the least mobile and thus most monopolistic part of the economic system. The 3 conventional factors in production economists care about are Land, Labour & Capital & much of the social antagonism created by the free market is that Capital can largely move wherever it wants, Labour is generally less mobile though sometimes people do go "on your bike" and Land is wholly imobile. This distorts negotiations between the holders of each.

    It would also be necessary to exclude any property for which planning permission has been refused within the last, say, 10 years or is in the Green Belt since the low value of such property is entirely due to government refusal. We would not want friends of councillors to become rich purely by buying up land that the current owners are refused permission to develop and then getting permission to develop it from their friends - though in fact this happens all the time in the current world.

    I would also suggest that the tax come in slowly. For properties already paying rates it could be brought in immediately and the rates reduced by the same to keep it revenue neutral. But for land not built on it should come in at an initial rate of, say 0.1% and rise annually by not more than 10% which would take 23 years to reach 1% annually. This gives a generation for landowners to adjust
   
    But I don't think there can be any dispute that this would grease the wheels of the economy (ie reduce frictional losses). If a growing economy is desirable & though most politicians secretly and the Greens openly don't want one, I do, then it is a reform that should be put in place unless there are very strong arguments against.

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Comments:
Thanks for the mention.

The purist would say that LVT is "A tax on the rental value of locations, which cannot be changed" because of course an owner can improve the quality of the soil, he can drain swamps or dig canals and harbour basins, he can build and maintain buildings etc, but he cannot move the location.
 
In practice, this would most likely result in the vast majority of the tradeable land coming into the hands of those who had most capital to begin with.

How would you see this affecting non-commercial land ownership?
 
Doing a radical change like that would have to go with a 90% reduction in government and civil service. Then people could decide if they wanted to support others as well as themselves.
 
Anon: "How would you see this affecting non-commercial land ownership?"

Not much. Instead of everybody fighting to own little bits or paying rent or a mortgage to other private individuals, all land rents (after deducting running costs) would be pooled and dished out pro rata as a Citizen's Dividend, so every household can occupy an average plot for that size of household at a net cost of £zero.
 
Regarding the "little old lady" who can't pay her tax on the location (qustionable, but let it lie), she merely should have the option to petition that any taxes due be applied to the eventual sale or transfer of the property. That way the community gets its due
and the waiting speculators don't get their ill-gotten gains. This approach to legislation should be fairly easy to sell to a council.eyngsa
 
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