Saturday, January 13, 2007

Arguments for a Land Tax

Ashley Seager in Monday’s Economics Guardian noted that the last ten years has seen a huge property boom with house prices tripling and that quite modest properties are now priced beyond the reach of many first-time buyers and those on modest incomes. (He cites Fred Harrison’s Ricardo’s Law: House Prices and the Great Tax Clawback Scam and Martin Weale’s The Housing Market and Government Policy both published last year).

Seager points out that residential property is an unproductive asset, and that the “windfall” from rising house prices is unearned and untaxed:

“Consider this. The government builds a new school in an area. The school is a success. This pushes up the house prices in the area leading to a windfall, untaxed gain for home owners as a direct result of government spending. The teachers in the school, on their modest salaries, will probably not be able to buy a house close to the school”.

Harrison says that the extension of the Jubilee Line increased adjoining land values by around £3 billion. Since the extension was funded out of taxation, this involved a huge transfer of wealth from the taxpayers in general to a small number of lucky property owners.

Nor do rising house prices make society as a whole any wealthier: they simply “transfer resources from people who will own houses in the future to those who own them at present” (Seager). Rising house prices lead to a huge rise in debt, a drop in savings and the “crowding-out” of investment in more productive enterprises. They also impede labour mobility (given that house prices are much higher in some areas, such as the south-east).

Harrison highlights the regressive impact of rising house prices. In Seagar’s summary:

“It works as follows. Someone in the bottom 20% of the income spectrum pays about £250,000 in taxes in their lifetime. Someone in the top 20% pays £1.2m in taxes. But those at the top will own property and see their total tax liability wiped out in just a couple of years by rising property values. This does not happen to the bottom 20% because they are renters”.

The Blair’s London house has risen by £1m in value in the past year alone (presumably they also made a tidy profit on their various Bristol properties). That £1m will be a “huge chunk” of the Blair’s “total lifetime tax payments”. Thus: “…the rich get a ride on the backs of the poor”.

Harrison and Weale both advocate a land tax. (This proposal has a venerable history: it was favoured by Lloyd-George and Churchill, and actually introduced by the second Labour Government, but the so-called National Government repealed the Act before it could come into effect). Weale favours a tax on residential property of 1% of its value each year, replacing council tax. This would tend to depress house prices since prospective buyers would “factor an annual tax of the value of the land under the house into calculations of what they would be prepared to pay for it”.

The proposal is not about raising more tax revenue: “The revenue from a land value tax would be used, for example, to scrap stamp duty and/or council tax or to reduce income tax or VAT, which is highly regressive”. Seager also argues that a land tax would encourage the productive use of land. He refers to the 13-hectacre Battersea Power Station site, which has been derelict since 1982: “It was sold last year for £400 million by a developer who bought it for £10 million in 1993. A yearly tax on its value would have focused owners’ minds on making better use of it”.

Politaholic is not an economist but these arguments sound pretty convincing to me. A quick Internet search reveals that there is a Labour Land Campaign, and that they favour Land Value Taxation. But the trouble, I suspect, is politics. Middle England – the arbiters of everything these days – worship rising house prices (many have no other topic of conversation) and Middle England is, in turn, worshipped by New Labour. They would squeal blue murder at the prospect of a land tax. And a Land Tax is not the sort of thing that can be done by “stealth”. Still, I am inclined to wish Labour’s Land Value Campaign good luck.


Anonymous Praguetory said...

There are right wingers such as I very much in favour of it, too. It is the most efficient way to solve the housing crisis and rebalances the tax system. However, if labour introduced without scrapping other property taxes, I would oppose it on for obvious reasons. I've had three very well-commented threads on this theme to date.

8:34 pm  

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