A Better Way to Tax Land and Property

Image: Cristian Bortes

The value of land primarily reflects its location. It may be farmed to produce food, or be left to nature, but the most valuable plots of land in the world are usually located where there are lots of people. After all, who would build a skyscraper or a hotel in the wilderness? The fact is, as the 19th century political economist Henry George argued, that the owners of land receive unearned income due to the activities of the community, rather than their own efforts. Therefore, it would be fair to redistribute some of the rents they receive to the community that gives the land its value in the first place.

In Britain, the total value of property wealth is approximately £3.5tn, while total financial wealth totals about £1.2tn, therefore land and property are an important asset to tax. In Britain, like most countries, these assets are taxed in an inefficient, and sometimes unfair, way. This article will briefly outline a better way of doing things.

The Economic Case for LVT

This isn’t just about fairness – a land-value tax would be highly economically efficient. Most taxes distort economic activity. Think of corporation tax, which either discourages investment or incentivises tax evasion or avoidance, neither of which are desirable outcomes. Yet land is different. The supply is fixed, so taxing it won’t mean there is any less land available. Ownership is visible, making it highly difficult to ether evade or avoid a land-value tax.

A tax on land is the equivalent to taxing economic rents – one can think of it as similar to taxing oil revenues – therefore it will not discourage any desirable activity. Practically, a land-value tax would be levied annually as a small percentage of the value of land, let’s say 1-3% for argument’s sake, although it would obviously be subject to the type of land, rental revenues, etc. As an annual tax, rather than being charged at the point of planning permission being granted, it would not reduce the incentive to develop an area of land in the hope that the policy would be reversed.

Introduce Capital Gains Tax for owner-occupied property

Currently in the UK, a Capital Gains Tax (CGT) is levied on the gains from the sale of any asset above £6000, but excludes residential property. The exclusion of residential property means that a person who buys a house for £200,000 and then, without any renovation to increase the value of the property, sells it ten years later for £300,000 would be exempt from any CGT. This seems unfair because that person has made a profit due to the increase in their house price which occurred due to other factors that made it a more desirable property: perhaps the government invested in making a local school perform better; maybe there was a high speed rail line built nearby.

The point is that the increase in value emanates from society as a whole, yet the property owners are the sole beneficiaries. Bearing all this in mind, would it not be fair to ask for some of that £100,000 profit made? Or are we prepared to give homeowners – who tend to be better off than average – a free lunch simply because of an arbitrary bias towards homeownership?

It’s time to abolish Stamp Duty

Stamp duty has a long history in the UK, having been first introduced in 1694 to pay for the war with France (perhaps its longevity is partly due to the fact that, until recently, there’s always a war with France to pay for). It stems from a time when there were few other alternative taxes that would be easily implemented, and property transactions were easy to identify and measure, and hence very conducive to taxation. Stamp duty is a transaction tax – buyers must pay a certain percentage of the value of their property to HMRC – and therefore it diminishes the incentive to buy new property.

Recent research by the UK Spatial Economics Research Centre, a think-tank, finds that a higher stamp duty rate has “a strong negative impact on housing-related and short distance moves but does not adversely affect job-induced or long distance mobility”. In other words, while stamp duty doesn’t deter those moving for work or to relocate far afield, it does constrict the housing market.

Slow turnover in the second-hand housing market – today only half as many properties change hands today as in the late 1980s – contributes to Britain’s chronic housing shortage. This slowdown is at least partly due to the steep rise in stamp duty over the long term, which has further strengthened the disincentive for people move. Allocating housing more efficiently, particularly by encouraging older couples to downsize once their children leave home, would free up a lot of spare bedrooms. In fact, The Economist estimates that there are around 16m of these spare bedrooms in the UK, so freeing up the housing market may be a meaningful part of the solution to the current housing shortage.

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