Why an Annual Land Value Tax is an AWFUL Idea
A familiar premise to those of us who err on the side of libertarianism is the axiom that we should "tax wealth, not work". Other than anarcho-capitalists, we all believe that government needs some revenue in order to function.
One school of thought which appears to be gaining traction with liberally minded people is a land value tax, which would be levied at a percentage of the value of any land one might own on an annual basis. This is portrayed as a tax that would hit the rich hardest, but actually its advocates do not understand that it would likely affect the rich the least.
So who would it affect the most? Let's take a few examples and determine who would be most ill affected by a land value tax in the UK.
The value of the UK housing stock is approximately £3.75 trillion. In order to raise last year's tax revenue of £550 billion using a land tax alone, we would need to set a flat tax of 14.6% of land value per year. Yes, that's not a typo, the cost of this tax on residential property would be absolutely eyewatering.
So, let's consider the case of the private landlord. He owns ten houses, each of which is worth £100,000 a year. Eight of them are filled by tenants who were previously paying £1,000 a month rent (£12,000 x 8 = £96,000 rent). Now, the private landlord has a new bill for £146,000 a year, so he has to increase the rent prices on those eight people from £12,000 a year to £30,250 a year in order to maintain his profit margin.
Overnight, rent prices have been increased by 150% because of the new land value tax.
But these renters were previously paying tax. Assuming they're medium earner families of two, earning £25,000 each, they would previously have been paying £5,638 each in income tax & national insurance, or a total of £11,276. They would, on top of this, likely pay around £2,000 in fuel tax & VAT, for a total of £13,638. Under the land value tax, their total tax bill would be £18,250. It would not be addressed to them, but their outgoings which end up with the exchequer would increase by around £4,800 a year.
By contrast, the landlord's outgoings would not have increased at all.
Whom else would the land value tax negatively affect? Pensioners would be the obvious answer. Take a grandad on the state pension. He bought his council house, now worth £120,000, via the right to buy scheme, and now lives on the state pension of around £7,000 a year. His tax bill under the current scheme is simply VAT on his non-necessities. This is likely to be at or about £1,000 a year.
The land value tax would impose a tax upon him of £17,520 a year, or just over 250% of his income. Unless your goals in taxation are to make your grandad sell his home that he spent his whole life working to pay for, the land value tax is not a progressive way forward.
Some advocates of the land value tax would like to tax land which is not categorised as housing (much of which is owned by businesses, particularly farms). This may seem like it would reduce your grandad's tax bill, but obviously any tax on farmland would come straight back to us in food prices. Likewise, a tax on factory land would come back in product prices. These also tax work rather than wealth, which usurps the entire reason to propose a land value tax.
Even if housing was only 1/5 of the taxed land, your grandad would still pay more than 300% of his original tax bill, and nearly 40% of his income, in tax.
It may seem like the natural answer would simply be to give people a tax free allowance of land, but although this would help the pensioner in the above example, it would drive up the flat rate applied above the allowance (in order to bring in the same revenue), and would in fact hit the poorest of all (renters) hardest, because they own no land at all but would receive the full liability of the even higher main rate from their landlords, who own far more than the allowance.
The best way to tax wealth is a consumption tax, particularly a consumption tax on luxury goods. This could be applied to the purchase of high value individual properties, yachts, expensive cars etc. without affecting your grandad or the average earning renter. It would also be a tax of the most voluntary variety (nobody needs a yacht or Lamborghini, everybody needs a home) and as such one of the most compatible with libertarian ideals.
I ask anybody who thinks a simplistic land value tax is the answer to the UK's dilemna to think again. Taxing pensioners & renters in order to stick two fingers up to aristocrats is a simplistic and unworkable solution.
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March 31st, 2012 - 16:26
You have gone to some trouble to consider LVT and your article is well written and convincing. You start with a correct statement: Land Value Tax will be levied as a percentage of the annual rental value of the land.
Why, then, do you use as an example, ten houses worth £100,000 a year? LVT ignores all improvements. Certainly plots in Chelsea will have a much higher value than plots in Brentford due to location, but a plot worth £100,000 in Brentford will have a much lower value than a similar plot in Chelsea.
Furthermore LVT is the only tax that cannot be passed on – either in higher rents or prices of goods and services. The reason for this is that landlords are already charging the maximum rent and under LVT marginal land will be zero-rated. You say the tax would be addressed to the tenants. Not so. LVT would be levied on the landowner only. Any attempt to increase the rent will be self-defeating since this will increase the value of his holding.
What we need to realise is that the community creates land value. Every improvement in public facilities and infrastructure (paid for from taxation) increases the value of the surrounding land and provides the opportunity for landlords to increase the rent of factories, offices and accommodation. Under LVT this increased value will be returned to the community as a self-financing method of providing more infrastructure, not pocketed as unearned income by landlords.
It is most important to understand that LVT will not be an additional tax. Taxes on wages, production, sales and savings will be reduced, with the intention to abolish them once the system is established. Increased take home pay will generate more demand and encourage supply – the basis for economic growth.
As LVT is levied on all land it will encourage landlords to bring vacant and under-used sites into production – helping to solve the housing crisis and reducing unemployment as more land comes into production for wealth production.
In summary, LVT is the best and fairest way to collect public revenue. It is cheap to collect, impossible to evade, it discourages land speculation and provides the incentive to work.
There are plenty of web sites that provide comprehensive details of the principles and benefits of LVT and, with respect, perhaps it is you who should think again!
March 31st, 2012 - 17:30
I didn’t say ten houses worth £100k a year, I said 10 houses worth £100k. I don’t believe it is rare for people who rent out properties to own a million pounds worth of property so I used that as an example.
This landlord, buy-to-rent, property mogul is going to look to earn a certain profit margin (return on investment). If he’s worked out that he needs to make £600 a month in profit from each house, then he’s going to have to pass the tax on in order to retain the same profit margin.
This will not increase the value of the land. The value of the land is not based on rental income but on return on investment. People expect an investment in land and housing to be profitable, and they will base their investments on (and as such, the land value will closely follow) the profitability of rented accomodation.
Farming would become a dead investment under these proposals, because farmers own high value land which returns a fairly low ROI. It would be cheaper for consumers to simply import food and we would see the end of fresh, British produce.
Your arguments do not stack up. The LVT *will* be passed onto the consumer, the land values will *not* increase (assuming they’re based on how much somebody is willing to pay for the land) and it destroy one of the major incentives to work: paying off your mortgage, because you’ll just have to sell the house later on down the line.
The LVT is certainly a good proposal if your goal is to end social mobility, end British farming and drive rent prices through the roof. For everybody else, it’s an awful suggestion.
April 1st, 2012 - 16:19
Your analysis suggests that you have not, (a) gone to the trouble of trying to find out what this is about, or (b) grasped the underlying economics or (c) though through how the implementation of a land value tax would play out.
LVT is not a tax on wealth. It is the collection of part of the annual rental value of land for use as public revenue land. Now the primary value of land is its rental value. The selling price of land is a derivative value dependent on interest rates and market expectations. There is a tendency during the course of the economic cycle for prices to rise, driving down the rate of return to the point of instability as a bubble develops which then collapses with catastrophic knock-on effects, as happened around 2008.
Second, the suggestion that landlords can reclaim the rent is contrary to all accepted theory on the subject, and indeed to common sense. Your buy-to-let landlord is already charging as much rent as he possibly can. That is what landlords do. They work out what they can pay for their investments on the basis of what they can get. The introduction of LVT would not enable landlords to obtain more, would it?
There is substantial under-occupation and under-development, and an overhang of around 300,000 planning consents. If LVT replaced Council Tax and UBR, which is what is initially proposed, then many landlords would be faced with a bill which they had not previously had to pay. These vacant and under-used properties would be brought onto the market, which would be more competitive than it is at the moment. Far from passing on the higher tax, landlords would have to absorb it as they could not take the risk of having empty properties and an ongoing expense. The LVT would have exactly the opposite effect to what you are suggesting.
Now let us turn to Grandpa. If a former council house worth £120k, then its land rental value must very low since the selling price of the house is little more than its fire insurance value ie the site is worth next to nothing. And he pays more tax than you think, because it is customers who pay the tax nominally paid by all the employees whose labour they have used whenever they buy anything at all. It is YOU the customer who pays all the tax paid by all the people who work for Tescos. Where else do you think it comes from?
You have not made clear what you mean by “wealth”, but any coherent definition must exclude land and slaves but includes only that which is the product of human labour. The aim of LVT is not to tax any of the products of human labour and it is an undesirable and unwise thing to do.
April 1st, 2012 - 19:57
I make my final points.
What determines land value? You say the value of the land is based on return on investment. I suggest that the value of land is based on location. Land value is largely a function of its location, and its market price is due to the local and even regional vitality of the economy. If, as you think, land value is based on return on investment how do you explain the value of a vacant plot of land that clearly has had no investment? A speculator can buy land and hold it out of use for 20 years. The value multiplies many times without any investment. What has the landowner done or contributed to society to claim the increase in value? Answer – nothing. LVT will ensure that the increase in value is returned to the community who create the value.
LVT cannot be passed on: The key to the success of LVT is the zero rate on marginal sites. This will ensure there will always be sites available at a lower rent. If landowners attempt to pass the tax on, tenants will have the option to re-locate to less valuable sites.
Landlords are very sensitive to the market. They know exactly what a tenant can afford to pay. The last thing a landowner wants is for a tenant to go out of business or vacate to another site. The zero rated marginal sites will ensure that the tax is not passed on!
Because vacant sites will be forced into use to achieve their full potential in order to pay the tax, landlords will compete with each other, eager to encourage tenants onto their sites. The result? Rents will fall to the lowest a landowner can accept in order to pay the levy and get a fair return on his capital investment in the building.
April 2nd, 2012 - 00:06
Why should people not have a luxury yacht if they have earned, by their work, sufficient to pay for it? As a libertarian, you must surely realise that one man’s luxury is another’s necessity, and who is to judge? A politiican or official?
If you impose a heavy tax on so-called luxuries, then the main victims are the craftsmen who produce the luxuries. In 1797, some idiot politician decided that clocks were a luxury and imposed a tax on them, which was repealed the following year, but not before the Clerkenwell clock industry was ruined.
Be careful what you wish for.
April 2nd, 2012 - 11:48
An interesting post but I’m afraid you’ve got a lot of information wrong. As above, a £100k house is probably witting on £40k or less of land value (building cost of £60k). Even at your the rate of 14.6% (which is very wide of the mark for various reasons), the LVT bill would be £5840. As per your figures, a budget of £550bn requires an average tax per household of £21,154 (divide by 26 million households). So a HUGE win for your example family. Income tax and NI are a small portion of the average household’s tax bill.
Pensioners can easily be accommodated by allowing them to defer their LVT bill until death or sale.
I urge you to read up more on the concept. It is radical but it makes so much sense. If you’d like to see what economies look like when a significant amount of taxation is raised from residential property, look at Hong Kong. Top rate of income tax is 17%!
April 2nd, 2012 - 12:17
“This landlord, buy-to-rent, property mogul is going to look to earn a certain profit margin (return on investment). If he’s worked out that he needs to make £600 a month in profit from each house, then he’s going to have to pass the tax on in order to retain the same profit margin.”
Somebody might want to make a certain profit, that doesn’t automatically mean that they can.
Take LVT out of the equation for a minute. Let’s just assume that, for no external reason, the landlord decides that he wants his profit margin to be £800. I would hope you can see that he couldn’t just up the rent by £200 and be certain that he would get tenants. If he could, you’d have to ask why he hadn’t been charging the higher rent already. The burden of LVT cannot be passed on to renters for the simple reason that the landlord will already tend to be charging the full market rent.
The reason your argument is invalid is that you are conflating a wish to do something and an ability to do something, when there is often a huge gulf between the two.
April 2nd, 2012 - 13:29
“The value of the UK housing stock is approximately £3.75 trillion.”
That number itself is debateable (I recently saw a figure of £5.5tr), but part of the problem of your analysis is that for some reason you think taxing land used by business is taxing work. The easy way to show this is false is to point out that a tax on business land would be chargeable whether there was any actual work going on or not. Thus, tax incidence cannot be on the work itself. Indeed, as long as the land used doesn’t change, the value of the work performed on the site can go arbitrarily high, and the tax charged doesn’t change. This is why LVT increases production (and thus employment).
Not charging LVT on business premises is actually a subsidy to idle factories/shops.
“Yes, that’s not a typo, the cost of this tax on residential property would be absolutely eyewatering.”
…and the taxation laid on production is somehow *not*?
“Now, the private landlord has a new bill for £146,000 a year, so he has to increase the rent prices on those eight people from £12,000 a year to £30,250 a year in order to maintain his profit margin.”
This is a common way to think about rent pricing (and landlords would probably try it in the short term), but ultimately it’s wrong (and they would fail). At the end of the day, rental income can only be what the tenants are able and willing to pay. The average rent can only go up as much as the average amount of personal tax saved (and there’s no guarantee it would go up that high). Any further land tax is borne by the landlord.
“This may seem like it would reduce your grandad’s tax bill, but obviously any tax on farmland would come straight back to us in food prices. Likewise, a tax on factory land would come back in product prices. ”
No, because production costs are more than just land rents, and the components that have elastic supply are the ones that are untaxed under LVT so they increase supply to fill the space (more capital equipment, more workers, more output). In any case, a sizeable amount of farmland value is actually subsidy, so get rid of that first, *then* worry about taxing it, you’ll find there’s not an awful lot to tax.
April 2nd, 2012 - 17:13
Briefly want to reply to one point, the argument that ‘landlords are already charging as much as they can’ has been trotted out time and time again and is in ignorance of the facts.
If the cost of maintaining the land for ALL LANDLORDS increases by 500%, there will be an incentive for each landlord to raise rental prices. The closest example I can find is when VAT is increased. Shops don’t just keep their prices the same because ‘they’re charging as much as they can’, they raise the prices because the reason they sell the product is to *make money*.
April 2nd, 2012 - 20:01
When VAT increases, yes the initial reaction is to simply up the price, but how do buyers respond? They stop buying. That’s why the price wasn’t at the pre-VAT-rise price already, they were balancing price against the number of customers that would pay it. The VAT rise changes the profit-maximising price, so the seller tries to discover it, but it typically means less customers, thus the seller must reduce the scale of their operations, and that’s where the correlation with land rents ends. (It’s also one reason why VAT is a rubbish tax, btw)
The landlord cannot alter volumes to respond to LVT. The house is either let or it is void, and in both cases the tax is still payable. The profit maximising price is the highest price that a single tenancy bid is willing and able to pay (leaving it void certainly isn’t going to beat a paying tenant in terms of profit). Exactly where else is he meant to get this money? Wishing to keep his margin as it was won’t make it so.
April 2nd, 2012 - 20:53
“Briefly want to reply to one point, the argument that ‘landlords are already charging as much as they can’ has been trotted out time and time again and is in ignorance of the facts.”
I’m afraid it isn’t. It’s basic supply and demand.
“If the cost of maintaining the land for ALL LANDLORDS increases by 500%, there will be an incentive for each landlord to raise rental prices.”
So, without the increase in cost of holding the land, why wouldn’t they have the same incentive to increase the rental price? Why would they voluntarily accept less than the available market rent?
“The closest example I can find is when VAT is increased. Shops don’t just keep their prices the same because ‘they’re charging as much as they can’, they raise the prices because the reason they sell the product is to *make money*.”
The key difference is that shops are selling goods which are not in fixed supply. If they increase the price, they will tend to sell less, but they will also buy less and less will be produced as a result.
Land is in fixed supply, so if the rent charged is above the market rate, there will be landlords with no tenants, due to the reduced demand. As they are in business to make money, they will logically undercut the other landlords to get tenants, a process which will continue until the rents fall back to the market rate.
April 2nd, 2012 - 21:20
“Briefly want to reply to one point, the argument that ‘landlords are already charging as much as they can’ has been trotted out time and time again and is in ignorance of the facts.
If the cost of maintaining the land for ALL LANDLORDS increases by 500%, there will be an incentive for each landlord to raise rental prices.”
This statement and others you have made suggests that you are not clear what land value IS, and what LVT is intended to tax.
Land value is the surplus after ALL INPUT COSTS HAVE BEEN MET. It may be a value paid over to a landlord or it may be a value retained by an owner occupier. If a tax is levied on land rental value, there is nobody the landlord can pass it on to.
The closest example I can find is when VAT is increased. Shops don’t just keep their prices the same because ‘they’re charging as much as they can’, they raise the prices because the reason they sell the product is to *make money*. The effect of VAT is completely different. Landlords may try to pass the LVT on in higher rents but there is only so much rent that a tenant can pay, and if the property remains vacant the LVT is nevertheless payable. If an increase in VAT results in lower sales, then the amount of VAT payable is also reduced.
Rents are not built into the prices of things, otherwise prices would be higher in areas where rents are high, whereas in reality they tend to be lower, because volumes of sales are higher in areas of high land value and businesses can afford to pay higher rents.
Rent is a residual value. Any property owner who fails to appreciate this will end up in trouble sooner or later.
April 2nd, 2012 - 21:34
I think Paul’s two comments give a very good answer to why landlords are charging the maximum. I will try and show the difference between VAT and LVT.
You say ‘If the cost of maintaining the land for ALL LANDLORDS increases by 500%, there will be an incentive for each landlord to raise rental prices.’ But you’ve missed the point! VAT is levied on all sites regardless of their rental value, turnover or profit. But LVT is a graduated charge – highest in town centres, lower in the suburbs and lowest on farmland. And marginal sites will be zero-rated.
Although the same % levy will be applied to all sites we have to remember that the annual rental value is not the same on all sites. Rent is higher in Oxford Street than it is on Brentford High Street, for example. Imagine a pyramid where central sites are the most valuable and the value (and therefore the levy to be paid) decreases towards the base.
If landlords do attempt to pass on the LVT to tenants then tenants will look to moving where the rent + LVT is lower.
Finally there is the kilo of sugar example. If Harrods tries to pass on the LVT on the goods it sells then the Deli round the corner with a lower LVT will be able to sell sugar cheaper. VAT is universal – LVT is applied on a graduated scale according to the annual rental value of the site.