Land Value Tax: Why wait longer?

Taxing imputed rents will create green prosperity

Land Value Tax (LVT) is a proposed replacement for existing UK Council Tax and other taxes. LVT would impose an annual property tax proportional to the current value of land. (There is no recurring annual property tax based on the current value of residential property in the UK – uniquely in the developed world). Such a tax reform has wide support but little has been said about its potential economic benefits, which are huge. Its most ardent proponents use divisive arguments which ignore the true benefits. They promote its supposed fairness, claiming that it would reduce property speculation, tax avoidance, and windfalls arising from the taxpayers’ financing of infrastructure such as new railways. It’s time to look at the positive benefits.

It is the lost prosperity – money, environmental, and welfare benefits that we are leaving on the table – that is more damaging than any supposed unfairness in continuing as we are. LVT’s supporters often portray it as promoting capital investment in building new homes. But LVT is not (fortunately) another building boom generator; instead it will cause the private sector construction industry to replace our whole extremely inefficient and unaffordable housing stock at the current rate of replacement without any subsidy, reducing CO2 emissions and the costs of transport,  schooling and utility services. The cost of living in town could fall by at least as much as it does when moving from country to town today – about £2600 per year per household. Apart from material prosperity there are benefits in terms of social equality (mixed neighbourhoods with high quality apartment buildings as well as cheaper housing), social mobility (mixed schools) and preservation of the natural environment.

No other country stands to gain as much as the UK from LVT, which is widely used elsewhere including throughout the US where it is levied and spent by local authorities, not by states.* The UK is one of the most crowded countries in Europe and yet has some of the least densely inhabited and inefficient suburbs. France has more than twice as much land per capita as the UK and yet Parisians use much less land than Londoners. The current UK trend is towards building at even lower density and lower efficiency [NB 2014 update: the relatively small amount of housebuilding since 2000 has been at nearly doubly the previous density – 45 dwellings/hectare]. LVT would address this issue by making landowners pay a tax based on the rent that the land would generate if it were developed to the full extent allowed by local planning policy.

LVT’s ‘land efficiency’ benefit should attract some cross-party support because successive governments have taken steps to rectify the low density of occupation of UK urban land. Labour in March 2000 introduced a new planning guideline obliging town planners to only permit higher density developments. The Coalition has cancelled this guideline and instead proposes to lift planning some planning restrictions which will encourage new housing.

Most of us would like a bit more living space. But it is clear that we are also prepared to trade some of that space for job satisfaction, disposable income, ease of getting children to school, commuting time and discomfort, and so on. We are also an aging population, and older people prefer being closer together and not having to maintain a garden. It must be borne in mind that if the household density were increased from the current 25 dwellings/hectare to Labour’s modest target minimum of 30 it would release more than 700 square feet of land per dwelling. If this were taken as a private attached garden the transport savings might not materialise, but there are other ways to use open space: balconies, terraces, allotments, or solar energy generation for example. The advantage of using a mechanism like LVT to promote these changes is that they would be demand-led and a wide variety of different configurations will appear.

How long would it take to achieve the full benefits of LVT? Even the currently depressed residential housing construction industry creates £46 bn of housing annually; if this were redirected towards the efficient use of land it could replace the entire UK urban housing stock in a lifetime. This would truly be ‘prosperity without growth’, reducing the cost of living and the carbon output compared to current rebuilding program. It also underlines that replacement will happen with or without LVT, but without it we will simply replicate or aggravate our current inefficient land use.

It would be possible to accelerate rebuilding by shortening the transition to LVT from the ten years commonly proposed. Some acceleration might be carbon-neutral because it would reduce environmentally destructive transport and other inefficiencies more quickly. The slower scenario lasting for a lifetime is only mentioned above to show that a mature economy can create wealth without top-line growth by correcting the structural inefficiencies tolerated during the years of expansion. Our inefficient housing is a relic of the flight from epidemic disease which ravaged the crowded cities in which the UK was pioneering the industrial revolution. We had not yet invented sanitation at that time; densely occupied cities are now healthy.

Finally LVT is often portrayed as ‘difficult’ but that view is inherited from an earlier less information-intensive age. ‘Big data’ is dramatically increasing our ability to implement such projects and is making them all the more beneficial for the additional information that they produce, which now forms part of our infrastructure. This will be seen at both the study and implementation stages. For studying the impact of LVT, databases exist covering land registry transactions, energy certificates, historical mobile phone tracking (for transport patterns), local government expenditure, geographical information systems identifying individual plots, and many other resources. During implementation it would even be feasible to identify any landowners who are big losers from the introduction of the tax, and fairly compensate them to enable faster tax reform. Nobody need lose out.

* US  local tax authorities impose ‘pure’ LVT on farm land, on vacant building land, and on the underdeveloped portion of land. On land already developed to ‘highest and best use’ they usually tax the buildings at the same rate as the land, which simplifies valuation. Some local tax authorities have a lower rate for buildings, to make the property tax closer to LVT, or aggressively increase depreciation of buildings which has the same effect.

The author is a management consultant and a commercially-published authority on the Victorian ‘sanitarian revolution’ which replaced Britain’s housing stock with healthy dwellings.

Version 3, 22 September 2013

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