What is land value?
The annual rent or selling price of a plot of land. It arises naturally when people form a community and certain sites and locations become more convenient for business, shopping and housing than others. It is the ability of one site to command greater convenience and desirability than another due to its location. City centre sites with good transport facilities, such as Oxford Street, have a higher value (expressed in rent per square foot) than sites in Brentford High Street. A plot of land in Chelsea is worth many times more than the same sized plot in Southsea. An example of how land value is created by infrastructure improvements is the building of the Jubilee line extension that cost £3.5bn and produced a £13bn appreciation in commercial land values within 500m of the new stations.
How is land value created?
Land value is created by the community - by the collective social, economic and political activities and decisions of the community. Land value arises due to the benefits of the site and hence the demand for a particular location for living, working and leisure space. If the community decides to improve the convenience of an area by building a road or rail service, paid for out of public funds, the effect is to increase the value of all the surrounding land. Clearly this added value is created by the community and has nothing to do with any action by the landowners.
What is Land Value Taxation?
A system that returns to the community the value created by the community. It is a tax assessed on the value of a plot of land based on the optimum permitted planning use at any time. The tax would be based on the annual rental value of each site. To explain, the annual rental is the earning potential of the land and therefore the amount an individual would be prepared to pay for the exclusive use of the site for a period of time. This is fairer than assessing the tax on the capital value, or selling price because this valuation excludes any man-made improvements to the site such as houses, factories, drainage and crops. The valuer will ignore the size and condition of any development already placed on the site – it is only the land itself that will be valued as if it was a vacant site. In this way every plot of land can then be valued and a percentage rate applied to it in tax according to the need to raise finance for communal funds. The key to the success of LVT is that it is a graduated tax – highest where land is most valuable and desirable relative to other land and zero where land is deemed to be ‘marginal’. See below
Although we use the word ‘tax’, LVT is not really a tax in the normal meaning of the word. It is rather a contribution paid to society for the benefits received by the landowner for publicly funded community services and infrastructure developments, which contribute to the site’s value. "Taxes" can be either impositions (intended to control, prohibit and deter human activity), or a means of raising revenue by governments to fund debt, public services or infrastructure. LVT is not a deterrent, a burden or a penalty. It is actually a stimulus to ensure that all land is used to its maximum potential to encourage the production of wealth and thereby adding to the prosperity of the community.
In considering Land Value Taxation we have to be aware of the confusion between land, property and housing. We call houses ‘property’ – combining the value of the land with the value of the building. A ‘house price’ is actually however based on two factors – the land on which a house stands and the bricks and mortar that comprise the structure. From the moment a house is built it starts to deteriorate, as do all man-made things. This isn’t to say that improvements cannot be made and be reflected in its price. So an extension, or loft conversion or conservatory with patio will all make the house more valuable, but they of themselves will not increase the value of the plot of land.
What are the supposed benefits of LVT?
· It is just, because it returns to the community the increase in site value created by the community and in many cases funded by the community.
· It does not take anything earned by from individual effort or the product of labour.
· It is not based on ability to pay but on benefits arising from having the sole use of a site.
· It cannot be evaded, avoided, hidden in off shore trusts.
· It cannot be passed on by landowners in higher rents or by producers and retailers in higher prices.
· It is simple to collect. The assessment and administration are relatively easy. It will not require thousands of civil servants to run.
· As a progressive system, the tax falls heaviest where it is easiest to pay.
· It will ensure that vacant and under-used land is brought into best use.
· It will prevent land speculation leading to unnaturally high house prices.
· It will prevent urban sprawl due to land being deliberately held out of use.
· It will force owners of empty or derelict houses to make them habitable and available.
· It will stimulate economic activity, particularly at the margin, creating job opportunities and promoting wealth creation because marginal sites will pay no tax.
· Interest rates can be kept low. The Bank of England attempts to control land price and property inflation with a high base rate. LVT will allow the Bank to keep interest rates low for the benefit of the whole community – including landowners.
· It can replace existing unfair and inefficient taxes on production, wages, sales, exchange, as well as impositions such as Council Tax and Uniform Business Rate.
· It is not a burden on production like all current taxes that are passed on in higher prices resulting in lower wages and the need for the State to provide a myriad of benefits to mitigate poverty.
· Land Value Taxation accords with natural law and economic justice. It ensures that everyone keeps the wealth they create, and any extra due to location is given back to society. Nobody has unfair privileges, and everyone has an equal chance to succeed.
What is a marginal site?
Any plot of land that has the lowest value in an area. Land that can only just produce enough income to pay for the costs of labour and capital has no rental value because there is not the surplus of wealth with which to pay rent. A land value map is a 3-D pyramid shape. Sites with the most advantages (and therefore the most desirable) are at the apex, while those that are least favoured are at the corners. There are a large number of marginal sites in any conurbation, ranging from the plots occupied by shops at the far end of the high street to vacant plots at the edge of town. These sites would be valued but not taxed. One of the main benefits of LVT is that it encourages productivity and enterprise at the margin and the success of LVT depends on marginal sites being zero-rated.
What is Site Value Rating?
Site Value Rating, Location Benefit Levy, Community Ground Rent, and the Single Tax are the same as LVT. The Single Tax was a popular name coined by Henry George in his book Progress & Poverty (1857). Site Value Rating was the term used when the word ‘rating’ was used because until the Poll Tax in 1990 all houses were rated and taxed on their value. This meant that if you built an extension or improved the bathroom you paid a higher rate, whereas landlords who allowed their houses to deteriorate were rewarded with a lower assessment. Location Benefit Levy is a recent term that avoids the word ‘tax’ because tax is so unpopular. LVT is not really a tax in the classical sense – as it returns to the community the value in land created by the community.
Some developments are a public nuisance. What happens then?
LVT is not a penal system. Any site disadvantaged by a new development would be automatically compensated without any complicated appeal system. For example, a new railway line may adversely affect adjacent houses and thereby reduce their land value. As a consequence the sites affected would pay less tax.
Yes – very successfully! It is used by around 20 cities in the USA (New London, PA, adopted LVT in June 2009) and has been in operation in Denmark, Estonia, Hong Kong, Singapore, Australia, New Zealand, South Africa and Canada. The Hong Kong airport and two tier Kowloon Bridge development was built entirely our of returns from increased land values, made easier by the fact that the Hong Kong government retained ownership of all land and were able to lease it on relatively short leases. This is how Hong Kong was able to maintain high levels of public investment alongside very low levels of personal taxation while under British rule. LVT transformed Taiwan from a backward medieval economy to a thriving Asian ‘tiger’.
The textbook example of the success of LVT is Harrisburg, Pennsylvania where a near derelict ‘rust belt’ city was transformed to a thriving economy.
Why can’t LVT be passed on by the landowner to the tenant like every other tax?
LVT is the only tax that cannot be passed on. There are five main reasons:
In addition, landlords are very sensitive to the market. They know exactly what a tenant can afford to pay. The last thing a landlord wants is for a tenant to go out of business or vacate to another site. The zero rated marginal site will ensure that the tax is not passed on.
If LVT is so beneficial – why has it not been introduced previously?
Vested interest and a belief that land can be private property. Landowners of large estates have always opposed LVT in every way possible. The Liberal budget of 1909 began the process by asking for a valuation of all land, but the House of Lords refused to pass the budget, leading to the threat to create enough peers to pass it. After the Second World War there was strong support for land value taxation within the Labour Party, and the Independent
Labour Member of Parliament for Burslem, Andrew MacLaren, was a consistent and vocal advocate. The 1931 Labour budget introduced by Philip Snowden included a land value tax, but before it came into force it was repealed by the Conservative-dominated National Government. An attempt at introducing site value taxation in the administrative County of London was made by the local authority under the leadership of Herbert Morrison in the 1938–9 Parliament, called the London Rating (Site Values) Bill. Although it failed, it sets out detailed legislation for the implementation of a system of land value taxation using annual value assessment. After 1945, the Labour Party adopted the policy, against the opposition of a substantial body of MPs, of attempting to collect "development value": the increase in land price arising from planning consent. This was one of the provisions of the Town and Country Planning Act 1947. Not only were landowners able to avoid the tax by not developing their sites, the impact of this tax was to reduce home building and jobs, increase land prices and was generally harmful to the economy. It was repealed when the Labour government lost power in 1951. The irony is that LVT will benefit all landowners and despite the abolition of Council Tax and reduction of income tax many homeowners will fight LVT because they think it is a tax on their garden!
“The value of land rises as population grows and national necessities increase, not in proportion to the application of capital and labour, but through the development of the community itself. You have a form of value, therefore, which is conveniently called ‘site value,’ entirely independent of buildings and improvements and of other things which non-owners and occupiers have done to increase its value – a source of value created by the community, which the community is entitled to appropriate to itself.”
Every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land, to increase the real wealth of the landlord, his power of purchasing the labour, or the produce of the labour of other people.
Adam Smith, Wealth of Nations, 1776
"Show me that you have produced the air, and I will grant you the exclusive right to breathe it, or sell it. Show me that you have produced half an acre of land, and I will grant you the exclusive right to put a fence round it and to charge your fellows whatever rent you can extort from them for the use of it."
From the 12th to the 17th centuries Land Tax was one of the many ways in which money was raised from the population. There were Lay Subsidies, a tax levied on things such as goods and crops, and sometimes on land and buildings. There was a minimum value before taxation. In the 16th and 17th centuries there was a variety of taxes on land, buildings, goods and wages. There were poll taxes in the 14th, 17th and 18th centuries. From 1662 to 1688 there was a Hearth Tax, a Window Tax from 1696 to 1851, and taxes on servants, horses, dogs, sheep, carriages, silver plate, game, coats of arms, uninhabited houses and even hair powder were all taxed at one time or another. In 1798 the tax became a fixed annual charge and many people purchased an exemption from paying it. Income tax began in 1799.
Article by Michael Hawes, a School of Economic Science economist based in Lincoln
Further Resources >