Taxation according to means is an essential characteristic of any fair tax system. Where this happens the tax is described as ‘progressive’. With LVT the tax burden is imposed according to relative prosperity as measured by land values.
The word ‘relative’ is important here for the practicability of LVT depends on land value differentials. The theory is that these differentials distinguish between areas of high and low prosperity, which are then taxed accordingly.
The difference between ‘Land value’ and ‘site value’ as used here, is a matter of scale. Land value is the term used when applied to a large geographical area, within which there are many sites. Land value is therefore an expression of the aggregate of all the site values within the area under consideration. Land value indicates the general level of prosperity of an area. One may have specific high value sites within an area of general low prosperity and low value sites within an area of general high prosperity.
The implementation of LVT would require a new national property valuation as a first step. Current council taxes, in England, are still based on a valuation carried out in 1991. This would have to be up-dated and the distinction made between site values and building values. To avoid disruption or any sudden shock it is generally advocated that LVT should be introduced gradually over a period of time in which the burden of tax is moved away from building value onto the site value. LVT could be introduced at a local level gradually replacing other taxes such as Council Tax and Business Rates. Such a system has operated successfully in several cities in Pennsylvania USA, where it is described as the ‘Split Rate’, in which on any site the land and buildings are valued and taxed in different proportions, so that over a period of time the proportion on buildings may be reduced and the proportion on land increased by the same amount. (1)
The consequence of full LVT on the land value only, would mean that unearned revenue due to the simple ownership of land would be eliminated, and land speculation would be rendered unprofitable. However the ownership and renting of buildings on the same land would be unaffected. Moreover any improvements or new building on the site would not be penalised through additional tax, as is the case at present.