1. Diagrammatic explanation of LVT.
2. Application of LVT.
3. Advantages of LVT.
4. Early history.
5. 20th Century history.
1. Diagrammatic explanation of LVT.
2. Application of LVT.
3. Advantages of LVT.
4. Early history.
5. 20th Century history.
The best way of explaining LVT is through a series of diagrams showing how land values arise from the first settlement of virgin territory through its evolution to a large community, and the best example of this is the settlement and development of North America.
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.
A fair principle that most would accept is that the wealthy should pay more than the less wealthy. The difficulty (with all progressive taxes) lies in how to measure this distinction.
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. They provide a clear gradation that is directly related to the capacity for wealth creation and also to the ownership of that capacity. They also indicate how the different benefits of such ownership might be measured. This benefit has traditionally been collected as the economic rent (described in part 1). LVT would enable the community to take ownership of this rent, albeit the ownership of the actual land may continue in private hands.
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 at 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. 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 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 slight.
LVT should be introduced gradually without any sudden shock; perhaps over a period of ten years or more, 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. 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 hopefully 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 great deal of taxpayers money is currently spent on regional assistance schemes aimed at depressed areas, in order to encourage economic activity and a revival in fortunes for the populace in those areas. A National land value tax would automatically address this problem. It would provide a re-distribution of wealth through the general easing of taxes on less prosperous areas, with low land values, the burden being transferred to the more prosperous areas. It would also eliminate the demeaning dependence certain areas have on government hand outs, which naturally keep them within the government’s power. Contrary to their claims about devolving power, all governments are inclined to retain the real power to themselves by maintaining control of the purse strings.
Devolution and Local Taxes
Few governments advocate the most important factor in devolution to the regions; the power to raise revenue, (1). LVT, if applied at the local level, would be an ideal means for giving local authorities real power. Raising revenue for local government has become an intractable problem over the years. The various methods tried, Local Rates, the Community Charge and Council Tax have all proved unsatisfactory. A local Income Tax has also been proposed as a solution. However there appears to be a general consensus that any local tax should relate in some way to property and be graduated according to the rentable value of the property. Previous systems have attempted this in different ways, but none has ever directly taken into account the most important factor; the value of the site upon which the property stands.
The value of a property has two parts; the value of the building, the bricks and mortar, and the value of the site. A tax on the site value only would resolve many problems. It would remove the current penalty against new building or making improvements. It would encourage the productive use of vacant and ‘brownfield’ sites and it would provide a natural system of gradation. It would also dampen down the escalation of property prices and speculation based on constantly increasing location values.
(1) This is now being re-considered in Wales: http://www.bbc.co.uk/news/uk-wales-politics-24763988
Tax evasion and avoidance
The government relies heavily on income tax to raise revenue, but one of its great weaknesses is that it is easily subject to evasion by unscrupulous operators. This costs the exchequer countless billions in lost revenue, which of course has to be made good by the honest taxpayer. There is also a thriving legal tax avoidance industry in which highly paid lawyers and accountants devote their time advising us how to be ‘tax efficient’; in other words how to avoid paying our taxes. All of this depends on the obscurity and ambiguity of the existing tax systems. LVT is a system that is clear and obvious to all and would eliminate this unproductive activity, which represents an enormous waste of a human resource that could otherwise be employed to some useful purpose.
Tax in whatever form, has never been popular. It is usually seen as an evil; an unwelcome burden to be borne with resentment and avoided wherever possible. But in an enlightened society the payment of tax would be seen not only as a good, but also as a privilege; in being able to contribute to the well-being of society. It isn’t tax that is the problem; it is the type of tax and the means by which it is applied.
Economists generally agree that a land value tax would be efficient in that there would be no ‘deadweight loss’ A deadweight loss is where the imposition of a tax has a deleterious effect on the taxable source itself or the effectiveness of collection. Most taxes suffer from this defect; income tax is a discouragement to work, VAT is a discouragement to trade, and so on. LVT would have no negative effect for land supply is fixed and cannot be evaded.
LVT has never been introduced in Britain, although the idea has been discussed at government level and on several occasions almost been implemented.
An early history may be briefly summarized chronologically in the following events and publications:
1662: Publication of ‘The Treatise on Taxes and Contributions’ By William Petty (1623-87), Economist, Scientist and Philosopher, in which he mentions ‘Land Taxe’ as a means of raising revenue.
In 1692, amongst a package of other taxes on personal estate, movable goods and income from public office, a ‘Land Tax’ was introduced (which astonishingly endured until 1963). Initially this tax was based on annual rental values, but after the first valuation no more were carried out. From 1698, quotas based on acreages at the 1692 values, were established for each county, and remained fixed thereafter. Consequently the amount collected diminished progressively, from 35% of total revenue at the start, to 17% in the 1790s and 11% by the 1820s. By 1733 that part of the tax on personal income and moveable goods had proved too difficult to collect and was largely abandoned, so the tax became almost entirely based on the revenue from land. The tax became gradually overshadowed by other taxes, but continued into the 20th century, raising eventually no more than the cost of collection. It was finally abolished in 1963, (1).
1758: Publication of ‘Tableau Economique’ by François Quesnay (1694-1774), Economist, Physician to Louis 15th and co-founder of the Physiocrats. The Physiocrats considered that all wealth derived from the agrarian production of land and proposed a ‘Single Tax’ on land only.
1781: Publication of ‘An Essay on the Right of Property in Land’ by William Ogilvie, (1736-1819); Scottish landowner and classical scholar. In his treatise Ogilvie claims ‘the birthright of every citizen to an equal share in the value of property in land’, and explains that ‘land values have three parts; the original, the improved and the improvable; the first and third of these belong to the community and only the second to the landowner’.
1796; Publication of ‘Agrarian Justice’ by Thomas Paine (1737-1809), Political Theorist and Revolutionary. In his pamphlet he writes ‘Every proprietor owes to the community a ground rent for the land which he holds’.
1776: Publication of ‘The Wealth of Nations’ by Adam Smith (1723-90), Political Economist and Philosopher. Adam Smith is generally considered to be the father of modern economics. In his book he advocates the taxing of ‘ground rents’.
1817: Publication of ‘On the Principles of Political Economy and Taxation’ by David Ricardo (1772-1823). Ricardo is credited with defining the idea of the ‘Economic Rent’ or the ‘Law of Rent’.
1848: Publication of ‘The Principles of Political Economy’ by John Stuart Mill (1806-73), Political economist and Philosopher. In book 5, chapter 2.28 he describes the benefits landlords gain from rents in which ‘They grow richer, as it were in their sleep, without working, risking or economising’.
1887; Publication of ‘Progress and Poverty’ by Henry George (1839-97), American Economist and Social Philosopher. In his book George finally pulls together all the threads and comprehensively explains an economic system based on ‘Land Value Taxation’, which will become the definitive work and will give rise to a world-wide movement.
Smith, Ricardo and Mill were the founders of what came to be known as Classical Economics, in which land was considered an essential factor of production along with Labour and Capital, and the phenomenon of ‘economic rent’ was acknowledged. In the 20th century the Neo-Classical school of economics arose in which Land became considered as a part of Capital, and so its significance virtually disappeared. It is this Neo-Classical school that still dominates economic thinking but which is now being challenged by some eminent economists. (2)
(1) National Archives talk by Mark Pearsal:
(2) Martin Wolf: http://www.eurotrib.com/story/2010/7/13/64728/5954
Prof. Steve Keen: http://en.wikipedia.org/wiki/Steve_Keen
Henry George’s influence was extensive at the turn of the 19th century and attracted many progressive thinkers of the time, not least of whom were Tolstoy, George Bernard Shaw and a young Winston Churchill, then still a Liberal MP. However the forces of landed vested interests also recognised the threat to their power base and were always able to defeat attempts to introduce the system. The‘People’s budget’ of the Liberal government of 1909 included LVT, but was defeated by the Lords (many of whom were landlords). In a further attempt in 1931 the Labour Chancellor Philip Snowden included LVT in his March budget, but in the subsequent Conservative dominated coalition government elected in October, the measure was repealed. In 1939 the Labour MP Herbert Morrison attempted to introduce a Site Value Rating bill for the London County area, but this was defeated again by a Conservative majority. Events were then overtaken by the advent of the Second World War.
After the war LVT had become forgotten in the new Labour government’s enthusiasm for the Town and Country Planning Act of 1947, which was indeed a necessary and progressive measure, and to which we owe the fact that England remains largely a green and pleasant land, but it did not deal sufficiently with the unearned gains to be made through land ownership. The government was aware that large gains could now be made through speculation and the possibilities of ‘planning gain’, but the Development Charge that was part of the act was too feeble a measure to capture the betterment gains for which it was intended; the landlords simply held on to their land and did not develop; awaiting a change of government, which arrived in 1951, and duly repealed the charge.
The ruling Conservative government took the matter further in protecting the interests of the landowners. In 1961 they introduced the ‘Land Compensation Act’, which was part of legislation required to compensate property owners in the case of compulsory purchase. The Land compensation Act was designed specifically to compensate landowners, not only for the existing use value, but also (in section 14) for the loss of speculative ‘hope’ value due to possible future increases in land values. In other words it was effectively a compensation for land speculators. This legislation is still in force today and (the section 14) should be one of the first things to be repealed in any move towards land reform.
The next Labour government introduced the Land Commission Act Betterment Levy in 1967, which was ritually abolished by the succeeding Conservative government in 1970. In a further move the third post-war Labour government brought in the Community Land Act in 1975, followed by the Development Land Tax in 1976. However none of these measures really encompassed the underlying principle of LVT, which is the continuous collection of the Economic Rent for the public purse.
Throughout the whole post-war period, ignorance of the real significance of land values is very evident in the various attempts at taxing ‘Betterment Gains’. The Capital Gains Tax (introduced in 1967) serves only to obscure the importance of land values; it is applied to all property, including art, antiques and cars, and principal homes are exempt. It is beset with complex exemptions and conditions, and in any case only applies once, at the moment of sale.
It had long been recognised that taxpayer funded infrastructure increases land values, the benefits of which go to private landlords in the form of higher rents and property values. In order to help finance the costs of infrastructure related to particular sites under development the Town and Country Planning Act of 1990 incorporated a ‘Section 106 Agreement’ (also known as Planning Obligation), which enabled local authorities to recoup some of the costs from the developer in exchange for the planning consent. However this was a matter of negotiation and included such items as the provision of affordable housing as part of the deal. Because of perceived deficiencies in this system the Town and Country Planning Act of 2010 included a new Community Infrastructure Levy (CIL) based on a fixed tariff schedule, so avoiding the uncertainties of negotiation. The CIL is considered simpler and more transparent and raises funds which may be used over a general area, whereas Section 106 is more site specific but may be seen as more suitable for negotiating the levels of affordable housing. Both systems may be used in tandem but care has to be taken to avoid any duplication of charges.
All of the above attempts at Land Value Capture, due to community created value, suffer from the one fatal flaw in that they were and are dependent on singular events; they do not have the continuity that is necessary for any reliable system of raising revenue through taxation; they reveal a disregard of continuity implicit in the underlying Law of Rent revealed 200 years ago by David Ricardo.
Various other ideas for Land Value Capture have also been proposed in recent years:
Tax Increment Financing (TIF)
This is a system of ‘value capture’ relating to specific infrastructure projects, whereby a proportion of the resulting increase in property values can be recouped by the local authority to finance the project. It has been employed (not without controversy) in the USA, (1) and is supported in the UK by Centre for Cities; an organisation which represents the interests of mainly provincial cities.
Community Land Auctions (CLAs)
A system whereby land parcels which come up for sale and which gain in value through planning consent for development can be auctioned to the highest bidder; the local authority taking a proportion of the proceeds. This system has been advocated by Tim Leunig of the think tank Centre Forum, (2).
These two systems recognize the significance of increased land (or property) values, but depend on one-off events so lacking the continuity that is required for any effective taxation system.
The Mansion Tax
The proposed Mansion Tax arose as a consequence of the excessive increases of house prices, especially before the collapse of 2008. As was explained earlier, the houses themselves do not change in any material way. What changes is the value of the sites upon which they are located. The Mansion Tax is an attempt to recoup some of this increase of value by imposing an annual tax of 1% on houses exceeding £2m. in value. Unfortunately it makes no distinction between building value and site value. It has been pointed out that the same end result could be achieved by simply extending the existing council tax bands; the valuation basis being the same.
As with TIF and CLAs a Mansion Tax would be automatically incorporated in any comprehensive system of Land Value Taxation.
1. The pittsburgh Experience.
2. The New Zealand Experience.
3. Advance Rent Collection.
4. Work, Gift and Theft.
LVT – FOUND AND LOST
Why was a successful LVT system abandoned?
The text is presented in the following sequence:
1. General Background
Before embarking on the history of Pittsburgh it is necessary to say a few words about the structure of taxes generally in the USA. To an outsider the US tax system would appear quite complex and onerous. There are federal taxes and state taxes before getting to local taxes.
LVT – FOUND AND LOST
Why was a successful system of LVT abandoned?
The text is presented in the following sequence:
New Zealand holds a rather special status in that it was notably the first country to introduce a system of LVT for raising revenue (2).
The Economic Rent Collected in Advance
As explained in the basic principles of part1 the economic rent of land arises inexorably and is collected by whoever is in control of the land, whether an individual or a government. One interpretation of Ricardo’s law of rent states:
‘The rent of land is determined by the excess of its product over that which the same application can secure from the least productive land in use’ (1).