David Lloyd George and Winston Churchill.

A Land Value Tax for England. Fair, Efficient, Sustainable (4.1Mb pdf)

Over the past few months I have been undertaking research for Caroline Lucas MP into how a system of site value rating or land value taxation could work in England to replace the council tax and/or business rates. (1) Today we publish the report (link above) which looks at how such a system might work and what changes it would entail. Caroline Lucas has published a Land Value Tax Bill to mandate the Treasury to undertake research into the topic (Guardian report here). With the ongoing debate over a mansion tax, it is time to think more radically about the future of local government finance and property taxes. This report highlights the work of the Mirrlees Review which included the observation that,

“The economic case for a land value tax is simple, and almost undeniable. Why, then, do we not have one already? Why, indeed, is the possibility of such a tax barely part of the mainstream political debate, with proponents considered marginal and unconventional?”

Over the past two decades, a rapid expansion of private debt-based money, created by private banks, has led to a land bubble in the housing market. Not only has this had catastrophic consequences for countries such as Ireland and Spain but it has contributed to growing levels of inequality as illustrated in this frankly unbelievable graph.

This data was obtained from the Office of National Statistics by Faiza Shaheen of the New Economics Foundation and shows the upper bound of net property wealth for each 1% of the net property wealth distribution. The median value for household net property wealth is £90,000 (i.e. half of houseolds have less than this and half have more). To be in the top 10% requires net property wealth of over £314,500 whilst 32% of households have nothing. The top 1% of the population has net property wealth of up to £15,040,000.

A system of rating or taxation on land values would, over time, lead to far greater equality in the distribution of wealth and incomes, lower housing costs for 83% of households in England who will pay less in LVT than they currently pay in council tax, encourage investment in property, make land allocation more efficient and end land speculation.

LVT is practicable and is already implemented in New Zealand, Denmark, Sweden, Latvia and Australia. It could provide a fair, efficient and sustainable source of local government finance in England.

(1) an equivalent exercise was conducted for Scotland in 2010. The Scottish and English reports together with a range of references and literature are available under Hot Topics/LVT in the menu above.

Pictured above – a Danish kindergarten paid for in part by Danish property taxes on Scottish land.

The Scottish Government is consulting on the future of the the non-domestic rates (business rates) regime. The consultation closes this Friday 22 February 2013. Business rates are a land and property tax paid by the occupiers or owners of certain types of land and premises used for business. I have blogged before on the inadequacies of the business rates regime here, here and here.

My response can be downloaded as a pdf here and is reproduced below.

PROPERTY TAXES

The system of non-domestic rates is a land and property tax applied to (most) land and property that is used for business purposes. Like other land taxes (council tax, stamp duty land tax etc.) it should be designed on a set of principles that reflect what a land tax is supposed to achieve.The Scottish Government is currently in the process of reforming non-domestic rates, stamp duty land tax and has announced its intention to review the council tax.

All of these plans represent a fairly comprehensive programme of property tax reform. And yet none of these them appear to be informed by any clear set of principles that should underpin why and how land is assessed for taxation. The challenge for reform of property tax is to develop a system that is;

  • coherent, principled and fair
  • treats all land on an equal basis
  • eliminates inefficient allocation of land
  • eliminates speculative gains arising through unproductive activity
  • promotes affordable access to housing and other vital land-based assets.

In this context, it is disappointing to note that no account appears to have been taken of the significant review of the UK taxation system led by Professor James Mirrlees, a Scottish economist, Nobel prize winner and member of the Scottish Government’s Council of Economic Advisers.

The Mirrlees Review concluded that non-domestic rates should be abolished and replaced by a system of land value taxation. (1) The Review observed that,

The economic case for a land value tax is simple, and almost undeniable. Why, then, do we not have one already? Why, indeed, is the possibility of such a tax barely part of the mainstream political debate, with proponents considered marginal and unconventional?

This is such a powerful idea, and one that has been so comprehensively ignored by governments, that the case for a thorough official effort to design a workable system seems to us to be overwhelming.

The economic case for taxing land itself is very strong and there is a long history of arguments in favour of it. Taxing land ownership is equivalent to taxing an economic rent—to do so does not discourage any desirable activity. Land is not a produced input; its supply is fixed and cannot be affected by the introduction of a tax. With the same amount of land available, people would not be willing to pay any more for it than before, so (the present value of) a land value tax (LVT) would be reflected one-for-one in a lower price of land: the classic example of tax capitalisation.

Owners of land on the day such a tax is announced would suffer a windfall loss as the value of their asset was reduced. But this windfall loss is the only effect of the tax: the incentive to buy, develop, or use land would not change. Economic activity that was previously worthwhile remains worthwhile. Moreover, a tax on land value would also capture the benefits accruing to landowners from external developments rather than their own efforts.

The Review concluded by recommending that,

“There is a strong case for introducing a land value tax. In the foreseeable future, this is likely to mean focusing on finding ways to replace the economically damaging business rates system with a land value tax.” (my emphasis).

In an analysis of land value taxation for the Scottish Green Party, I noted that businesses are currently disproportionately taxed on the land and property that they own and/or occupy. Under a system of LVT, business premises would enjoy a 63% reduction in their tax bill with the burden more evenly shared among all those who own land and property. (2)

I therefore suggest that the Scottish Government do two things.

1. Set this review of non-domestic rating in the context of a wider review of land and property taxation.

2. Adopt the recommendations of the Mirrlees Review and replace non-domestic rates (and I would argue Council tax too) with a system of land value taxation.

RELIEFS AND EXEMPTIONS

Notwithstanding the above, if the system of non-domestic rates is to continue, then there needs to be reform of the reliefs and exemptions. Two in particular stand out.

The first is agricultural land. It is unreasonable and unfair that some of the wealthiest owners of land in the UK such as the Duke of Westminster, Duke of Buccleuch and Sheik Mohammed bin Rashid al Maktoum (the ruler of Dubai) pay no business rates on the land they own whilst local shopkeepers, publicans, ambulance stations, fire stations and business premises have to pay 45p in the pound of the rental value of their business premises.

It is further irony that some owners of sporting estates and agricultural or forestry land do pay local taxes. There are around 290,000 acres of land in Scotland owned by citizens of Denmark. This land is subject to Danish property tax at 1% on the value up to DKK 3,040,000 and 3% of the value exceeding this amount. At a rough estimation this should yield the Danish tax authorities around £1.5 milion per year to pay for kindergartens and health centres for Danish citizens. Yet these landowners pay no tax to any Scottish authority to help to pay for public services. (3)

The second is empty industrial buildings. On 28 November 2011, the former co-op building at 120-130 Morrison Street caught fire and resulted in the largest blaze in Glasgow for many years with over 100 firefighters and 16 fire appliances in attendance. The building is owned by Straben Developments Ltd of Belfast who bought it in 2007 for £4.2 million. As an empty industrical building its rateable value is £300,000 but it receives full relief on business rates. This has saved the owner aroudn £675,000 in tax over the past 5 years. And yet the owner still expects Strathclyde Fire and Rescue to put out the fire, Strathclyde Police to police the incident, the Scottish Courts to provide the means to resolve any disputes arising and Glasgow City Council to absorb the costs and inconvenience of having an empty derelict site in the heart of the City. (4)

The system of non-domestic rates is a land tax on non-domestic land and property. It should thus apply to all non-domestic land and property including sporting, agricultural, forestry and empty industrial property.

WHO PAYS?

Non-domestic rates is explicitly a land and property tax. It is therefore open to question why it should be paid by the occupiers of business premises at the rate of 45% of the rental value in addition to the 100% rental value they pay to the landlord. Whilst non-domestic rates contributes towards the costs of local services, it is essentially a national property tax.

The consequence of good local services and amenities is higher land values and thus higher rents. The occupier pays the costs of this in higher rents and higher business rates but the landlord receives all the benefit in higher rents and higher capital value of their property.

Non-domestic rates should be paid by the owner and not the occupier.

(1) Quotes taken from Mirrlees Review Tax by Design, Chapter 16 The taxation of land and property

(2) A Land Value Tax for Scotland, 2011.

(3) The Danish tax authority SKAT report that property tax paid by Danish owned property in the UK in 2011 totalled DKK 5.5 million (£635,000). Since my estimate for the tax due on Scottish land is £1.5 million there is probably quite a bit of tax still to be collected. SKAT is running a campaign to identify Danish owned land in foreign countries and encourage Danish taxpayers to declare what they own.

(4) See further information in previous blogs here and here.

On the day that George Osborne is due to deliver his 2012 Autumn statement, I thought it might be worth reminding ourselves of what he thought of the Irish economy in 2006 when, on 23 February he gave a speech to the University College Dublin’s Michael Smurfit School of Business. What follows is a reproduction of an article by Osborne published in The Times on the same day. Ignoring the role of banks, private debt and land speculation, he paints a rosy picture of the Celtic tiger and how the Uk should emulate its success. 

A generation ago, the very idea that a British politician would go to Ireland to see how to run an economy would have been laughable. The Irish Republic was seen as Britain’s poor and troubled country cousin, a rural backwater on the edge of Europe. Today things are different. Ireland stands as a shining example of the art of the possible in long-term economic policymaking, and that is why I am in Dublin: to listen and to learn. After centuries of lower incomes, Irish average incomes are now 20 per cent higher than in the UK. After being held back for decades, the productivity of Irish companies — the yardstick of economic performance — has grown three times as quickly as ours over the past ten years. Young Irish families once emigrated in their millions to seek a better life overseas; these days it is young people across Europe who come to Ireland to find good jobs. Dublin’s main evening newspaper even carries a Polish-language supplement.

Ireland is no longer on the edge of Europe but is instead an Atlantic bridge. High-tech companies such as Intel, Oracle and Apple have chosen to base their European operations there. I will be asking Google executives today why they set up in Dublin, not London. It is the kind of question I wish the Chancellor of the Exchequer was asking.

What has caused this Irish miracle, and how can we in Britain emulate it? Three lessons stand out. First, Ireland’s education system is world-class. On various different rankings it is placed either third or fourth in the world. By contrast, Britain is ranked 33rd and our poor education performance is repeatedly identified by organisations such as the OECD as our greatest weakness. It is not difficult to see why. Staying ahead in a global economy will mean staying at the cutting edge of technological innovation, and using that to boost our productivity. To do that you need the best-educated workforce possible. It is telling that even limited education reform is proving such a struggle for the Prime Minister.

Secondly, the Irish understand that staying ahead in innovation requires world class research and development. Using the best R&D, businesses can grow and make the most of the huge opportunities that exist in the world. That is why it is shocking that the level of R&D spending actually fell in Britain last year. Ireland’s intellectual property laws give incentives for companies to innovate, and the tax system gives huge incentives to turn R&D into the finished article. No tax is paid on revenue from intellectual property where the underlying R&D work was carried out in Ireland. While the Treasury here fiddles with its complex R&D tax credit system, I want to examine whether we could not adopt elements of Ireland’s simple and effective approach.

Thirdly, in a world where cheap, rapid communication means that investment decisions are made on a global basis, capital will go wherever investment is most attractive. Ireland’s business tax rates are only 12.5 per cent, while Britain’s are becoming among the highest in the developed world.

Economic stability must come before promises of tax cuts. If, over time, you reduce the share of national income taken by the State, then you can share the proceeds of growth between investment in public services and sustainably lower taxes. In Britain, the Left have us stuck debating a false choice. They suggest you have to choose between lower taxes and public services. Yet in Ireland they have doubled spending on public services in the past decade while reducing taxes and shrinking the State’s share of national income. So not only does Ireland now have lower business and income taxes than the UK, there are also twice as many hospital beds per head of population.

World-class education, high rates of innovation and an attractive climate for investment: these are all elements that have helped to raise productivity in Ireland. It is not the only advanced economy to have achieved this uplift. Last week in Washington the new Chairman of the Federal Reserve, Ben Bernanke, told me about the impact that the sustained increase in productivity growth had made in generating prosperity in the US. By contrast, in Britain productivity growth has fallen in recent years and is far behind the likes of the US and Ireland. Indeed, it is one fifth the rate it was when Gordon Brown walked into the Treasury. Poor skill levels, rising taxes, bureaucratic planning controls and chronic overregulation are high on the list of culprits. Britain is being left behind.

Faced with the extraordinary rise of economies such as China, India and Brazil, many European governments seem to have accepted that long-term decline is inevitable. I detect a similar pessimism here. How on earth, people ask, will we ever compete in such a fiercely competitive world? The Chancellor’s answer is to put up the shutters and stick on a path of ever-higher taxation and an ever- growing State. But you cannot shut out the future.

The new global economy poses real long-term challenges to Britain, but also real opportunities for us to prosper and succeed. In Ireland they understand this. They have freed their markets, developed the skills of their workforce, encouraged enterprise and innovation and created a dynamic economy. They have much to teach us, if only we are willing to learn.