This practical fix shows why the chancellor should introduce a land value tax

Ever since the 19^th century, economists and social philosophers have advocated for a land value tax (LVT) as the fairest and most progressive form of taxation possible. With land in fixed supply, monopolist owner-occupiers pay no tax on the imputed economic rents they enjoy, but benefit from the asset price growth brought about through improvements to local infrastructure and amenities, which are paid for by others.

Residential land accounts for over 75 per cent of the UK’s total land value and represents over 40 per cent of the UK’s total net worth. Volatility in the economy, as well as many of the problems within the housing sector, are partially attributable to unsustainable rises in land values. An LVT could remedy these problems, as well as lead to a more equitable society overall.

Yet repeated attempts to introduce LVT in the UK have failed, originally due to a combination of landowner resistance and insufficient data, and more recently because of the impossibility in practice of replacing Council Tax with the much fairer system that LVT represents.

Now, with the Budget approaching, economic effects of Covid-19 forcing the government to look for ways of increasing tax revenues, and calls from across society for the introduction of some form of wealth tax, this is an ideal time to look again at LVT.

So how could it be introduced in practice?

All recent proponents of a residential LVT have started from the premise that it would replace Council Tax. After all, we would surely just be replacing one form of property tax with another. This will never work, for the simple reason that the Council Tax Bands and rates are so out of date at the higher end of property values, they bear no relationship to the market value of today’s homes. How can a Council Tax of £2,474 per annum on a £30m house in Kensington, compared to £2,398 per annum on, say, a £500,000 house in Solihull, be considered as a proportionate property tax? Council Tax has become a (very flawed) system of charging home occupiers for Local Authority services.

But to replace the overall £33bn of Council Tax due for England in 2020-21 would require an LVT rate of around 0.9 per cent. While land values vary widely as a percentage of property market values across the country, 66 per cent is a reasonable guide. At 0.9 per cent this would imply LVT on the Kensington house of around £180,000 a year (and approximately £3,000 a year on the house in Solihull). And at Local Authority level, Kensington and Chelsea could expect their annual receipts to rise from £106m to £787m, whereas Birmingham’s would fall from £362m to £115m. Such dramatic shifts are clearly unacceptable.

A further problem is that Council Tax is payable by the occupiers of a property (who may be tenants), whereas LVT is charged only to the owners.

So, an obvious solution is not to replace Council Tax, leave it as it is, and introduce LVT as a new tax, starting at a very low rate. If LVT was introduced at, say, 0.05 per cent per annum, rising at this rate over four years to 0.2 per cent, the initial additional burden on the Kensington house would be £10,000 pa, rising to £40,000 pa; and for the Solihull house, initially £165 pa rising to £660 pa after four years.

These low rates would apply to owner-occupiers and “small scale” landlords. Other categories of owner such as: non-resident, corporate, large-scale landlords, owners of long-term empty dwellings, and holiday homes in certain designated areas, could expect to pay significantly higher rates of LVT, starting at say 0.5 per cent pa and rising to perhaps as much as 3-4 per cent in some cases.

Two accompanying tax reforms would make sense: reduce Stamp Duty Land Tax on purchases of principal primary residences (PPRs) to a flat 1 per cent, which studies have shown would significantly free up the housing market, at a cost to the Exchequer of around £320m pa. By comparison, LVT at a uniform rate of 0.05 per cent across England would raise approximately £1.6bn pa, and with the higher rates advocated above, total LVT receipts would be much greater. Secondly, introduce Capital Gains Tax at around 10 per cent on all PPR disposals.

This package of reforms would achieve multiple economic and social objectives: a gradual redistribution of locked in “land wealth” to the wider population; near eradication of the housing market as a form of speculation; and strong incentives to maximise efficient use of all the country’s housing stock.

All the necessary land and property ownership data exists today within one or another government agency. Market prices are readily available to complete the picture. Several (developed) economies have successfully operated LVT for a number of years.

There are of course various complications and issues that would need to be resolved (these are discussed in a fuller online version of this article), but the chancellor could do a lot worse than put LVT back onto the agenda in his autumn Budget.