All tax revenues, whether in money or goods, have to derive ultimately from existing wealth or the wealth creation process. Taxing individuals or organisations that have little or no wealth is not only unjust but unproductive. It is commonly accepted that wealth is represented by the ownership of goods, property or the means of production. The wealth creation process is represented by work, manufacture and trade.
In the process of (material) wealth creation the following principal stages may be identified – in the sequence as they arise in the diagrams of item 2.01:
- Work on Land: This is the essential first step of any material production; land being defined as any natural resource.
- Division of Labour (specialisation) This increases the effectiveness of any labour, and the range and quality of produce.
- Education and Skill: This input increases the efficiency of specialisation.
- Investment (of capital): This enables greater enterprise towards more ambitious wealth creation, and naturally brings into play banking, saving and shareholding.
All of these contribute to wealth creation, and, as noted in item 1.03, where taxation is concerned, it is better to inhibit them as little as possible, hence the preference expressed here for taxing the end result, which is wealth (1). So how can we justify taxing land, which is not in itself wealth? We have to constantly remember that the proposition is not about imposing a tax on land but on land values, which are purely an indicator of the beneficial ownership of one of the essential elements of wealth creation. One has to understand that land, as with money, is not wealth, but also that wealth may exist without money, but not without land . Land therefore is more essential than money, but both can be readily exchanged for wealth at any time where there is a demand, and in the case of land it is the demand that creates the value. As the demand increases the value increases without any input of labour. For this reason land is classified with existing wealth where the two distinctions of item 1.03 are identified. If all land had the same uniform value there would be no basis for a land value tax. In such a situation a land tax would be little better than a poll tax, where the measure is on the number of acres rather than the number of heads. The term ‘land tax’ is often used rather loosely, but it is an incomplete title for the land value tax. Furthermore it is not simply a matter of the land value, but the land value differentials (as explained in item 2.01). To be absolutely precise it should be described as a land value differential tax, but this all begins to get a little cumbersome. The land value tax title has been around for over a hundred years and most economists know what LVT means. This account is aimed at those who don’t understand, economists or otherwise.
A fair principle that most would accept is that the wealthy should pay more than the less wealthy, recognising in effect that the wealthy have more ability to pay than the less wealthy. (The issue of ‘ability to pay’ is something that will recur several times in these pages). The difficulty, as with many progressive taxes, lies in how to measure this ability. Land values provide a very clear distinction in that they are directly related to prosperity, and therefore the general level of wealth within an area, especially in an urban situation; land values in rural situations are slight by comparison. They provide a clear gradation that is directly related to the capacity for wealth creation and also to the ownership of that capacity. They indicate how the benefit of such ownership might be measured in accordance with location. This benefit has traditionally been collected directly or indirectly by the landlord as the economic rent. LVT would enable the community to take ownership of this rent, albeit the ownership of the actual land may continue in private hands. LVT is not about nationalising land, it is about nationalising the economic rent of land. The tax would be imposed in proportion to the location surplus values for each site, ie. the values that register above the margin of production. Those below the margin would not be taxed; whatever product they achieved they would keep.
The tax may also be described as a levy that society imposes for the exclusive occupation and use of a site. The use to which the site is put may or may not be for wealth creation purposes. For instance where a site is occupied for a purely residential purpose, the levy is still payable according to the value of the site. Also the owners of vacant sites would pay the tax whether occupied or not. This would discourage the deliberate holding out of use of sites for speculative purposes. As with most property taxes, there would need to be an appeals system. With LVT, valuations could always be challenged, but these would be more likely on the high value sites rather than near the margin, where the tax burden would be less.
LVT should be introduced gradually without any sudden shock; perhaps over a transition period of ten years or more (see below), in which other unsuitable taxes could be reduced or eliminated; those for instance which are impediments to wealth creation. LVT is proposed as a replacement tax, not an additional tax. The overall tax take from all taxes would remain the same although, because LVT is an efficient tax, considerable savings could be made, so reducing the overall tax requirement. Most taxes have an economic or social effect; taxes on a commodity will afect the production and purchase of of the commodity; taxes on trade will inhibit trading. Certain taxes are designed deliberately to affect social behaviour rather than to simply raise revenue, eco-taxes and the so-called sin-taxes for example. Taxes tend to have a negative effect on economic activity, what economists describe as a deadweight loss, where the imposition of the tax may negatively affects its efficiency in raising revenue – even to the point where the burden is so great that the activity ceases. LVT is a tax which has no deadweight loss. The imposition of a tax on land values may well case a reduction of values by bringing land, held out of use for speculative purposes onto the market, but it would not otherwise increase the supply, which is fixed. The overall supply of land would neither increase nor decrease, and though the value might alter, it would be visible to everyone, and could not be obscured. LVT would cause a shift in the burden of taxation away from the margin towards the centre; away from less prosperous areas onto the more prosperous, as measured by location values. Thus it would satisfy the requirement that taxes should be paid in accordance to the ability to pay.
In an established system of LVT one might envisage the principal source of revenue coming from LVT, alongside other useful taxes, which are retained. The overall tax take would vary according to government requirements, which could be reduced due to efficiencies. Where this occurred, any reduction in LVT should be measured ‘from the top down’, that is to say with a graduated percentage reduction inversely proportional to site value. This would effectively raise the level of the margin and have the effect of taking more marginal sites out of tax altogether.
A Transition Period
A transition period would be essential. Many of the objections raised against LVT are based on the assumption that it would be introduced overnight (as happens quite often when, with a change of government, the new administration abolishes some existing system and introduces its own ‘improvements’). Any change to LVT would have to be gradual, careful and designed to cause the least disruption to those affected. (see item 3.06, Winners and Losers). A transition period of at least 10 years is suggested (2). One of the problems with a longer period is in dealing with the impatience of politicians, who believe they have only 5 years to achieve their purposes, so education is important, not just for politicians, but for the voting public in understanding the basic principles of LVT, and why it would take time to repair centuries of injustice. A lesson could be learnt from the botched introduction of the government’s 2010 Universal Credit scheme, which had general cross-party agreement as a good idea in principle, but the implementation was not properly thought through and caused much unnecessary hardship and unreasonably brought the whole idea into disrepute.
(1) See item 3.17 for definitions of wealth
(2). In Australia in 2012 the Australian Capital Territories (Canberra) introduced LVT to replace Stamp Duty over a 20 year period.