Introduction
Land Value Taxation (LVT) is a tax on the annual rental value of land. It was originally conceived as a national tax. The advantages claimed for it can only be fully realised if the tax is implemented nationally. The introduction of a completely new national tax, such as LVT, would be a major undertaking and a daunting challenge. In the past this has led advocates of LVT to set their sights lower and press for the introduction of LVT at the local level where property-based taxes are the rule rather than the exception.
In the United Kingdom, LVT in its local form is generally referred to as 'Site Value Rating' (SVR), and is put forward as a replacement for the unpopular council tax and business rates.
SVR, whilst better than no land value tax at all, cannot hope to have the transformative effect of a full blown, nationally-applied LVT. This is purely a matter of scale: the yield of SVR would be a fraction of the yield of LVT. The Coalition for Economic Justice believes that the benefits of SVR would therefore be a shadow of those available under LVT. This paper considers the benefits expected from nationally applied LVT, and contrasts those with the benefits of a local Site Value Rating.
Benefits of Nationally Applied 'Land Value Tax'
(a) Ideally the revenue raised by LVT would be accompanied by corresponding reductions in income tax and corporation tax. LVT would therefore increase the rewards of labour and the profits of enterprises, thus acting as a powerful stimulus to production. Thus LVT would not increase the total tax take but it would represent a significant shift in the incidence of taxation.
(b) Land values are community created. Taxing those values returns to Society what Society has created. It does not penalise effort and is fundamentally fair and equitable. That fairness, difficult to conceive of before the event, will be evident after it. The property a person lives in is as a good an indicator as any of that person’s means.
(c) The introduction of LVT should increase the economic attraction of the regions versus the South East. For the same level of output a business could expect to make more profit in a regional (i.e., low land value) location than in a central (South East) one. Similarly, a person moving from the South East to a job in one of the regions would typically expect to pay considerably less LVT. LVT would thus be a powerful force reversing regional decline and helping achieve an improved demographic balance for the country.
(d) Infrastructure development (e.g., on transport, health and education) leads to increased land values. National LVT would capture these community-created increases in property prices. This would act as an added incentive to Government to undertake infrastructure expenditure. Not only would such outlays secure the desired wider benefits for the economy; such expenditure would, on completion, lead directly and immediately to higher tax (LVT) revenue.
(e) The periodic booms and busts experienced by this country as well as the current economic crash have been caused in large part by the speculative and rapacious advance of property prices. LVT would remove much of the speculative appeal of property and thus moderate the inevitable ups and downs of the economic cycle.
(f) High property prices are sustained by a mountain of credit. With the speculative appeal of property undermined by LVT much of this credit mountain would be released and become available for financing value-creating economic activity.
Benefits of Locally Applied 'Site Value Rating'
(a) Landowners would contribute to the cost of local services in direct proportion to the financial benefit they receive from those services, i.e., the effect of those services on the value of their property.
(b) SVR would provide an incentive for landowners to put idle urban sites to good use, thus creating jobs and encouraging enterprise. A similar benefit arises with LVT (see paragraph 2(a) above) but with SVR it is very much smaller.
(c) SVR would replace council tax and business rates, thus simplifying the local taxation structure. There would be one local tax based on site values. Local democratic accountability would be maintained and perhaps enhanced.
(d) By using precepting, SVR could provide funding for all levels of local Government, including parish and town councils, districts, boroughs, unitary authorities, counties and Regional and National government in Wales, Scotland, Northern Ireland and London.
(e) At present council tax only supports a small proportion of local Government spending. The remainder comes from Government grants. If SVR rates were set so that the revenue was greater than that presently obtained from council tax the Government grants could be reduced and taxes on production reduced in parallel. This change would have the double advantage of encouraging production by shifting taxes off production whilst at the same time giving local government more independence.
On the negative side, it could be argued that SVR, like existing local taxes, discriminates against poorer communities. Prosperous localities with high land values usually require fewer social services and could operate with a low rate of SVR. However, poorer localities generally have lower land values and a greater need for well-funded social services. They would require a high rate of SVR. The Government’s equalisation scheme would therefore still be required.
If implemented, SVR would still have a significant positive impact. However, although SVR has much to commend it as a local tax, it would not produce the same benefits as LVT.
Conclusion
The Coalition for Economic Justice strongly believes that SVR is no substitute for LVT. As this brief analysis shows, SVR is considered as a poor second-best.
(c) Copyright , Coalition for Economic Justice, January 2011