A BRIEF EXPLANATION OF BASIC PRINCIPLES
I suggest there are four basic principles or characteristics of LVT, that may be expressed under the headings:
- Community created value.
- Taxation according to means.
- A direct tax.
- Simplicity and clarity.
1. Community Created Value
This is the principle of returning to the community, by means of a tax or levy, the value that the community itself has created. This value is measured through land values, which are simply an indication of collective prosperity.
The owner or occupier of a site may do nothing to effect any improvement or change on the site, but its value may increase nevertheless through surrounding communal activity or community funded infrastructure that has the effect of enhancing the value of the site.
This increased value falls fortuitously to the benefit of the owner and may be realised in the form of increased rents or capital value at any point of sale. The revenue thus derived is not due to any work done by the owner, and is clearly unearned.
The classical economists, from Adam Smith onwards, were aware of this source of revenue, and it was David Ricardo in his ‘Principles of Political Economy and Taxation’, of 1817, that named it the ‘Economic Rent’ of land. The economic rent still exists, it has never gone away, it is still collected and it still goes into private pockets. The prime purpose of LVT is not to stop this collection but to re-channel it into the public coffers, thereby returning to the community the value that it has created.
The value of any property has two parts: the value of the building, the bricks and mortar, and the value of the site. Unlike the building the site value is determined mainly by its location within a community. As most estate agents would concur; where property valuations are concerned it is more a question of ‘where’ rather than ‘what’; primarily a matter of location. It would not be incorrect to describe LVT as a Location Value Tax, where the value of a particular site is determined by communal demand.
It should also be noted that LVT is proposed as a replacement tax, not an additional tax. To the degree that it is introduced, other taxes should be proportionately reduced or eliminated. The overall tax take would remain the same.
2. Taxation according to means
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.
3. A Direct Tax
LVT has the advantage of being a direct tax.
One of the arguments against indirect taxes is that they are indiscriminate, ie. they are paid equally by the rich and poor alike and are therefore unfair. However they are popular with governments, as they allow the people to believe that they are not really being taxed, they are simply paying higher prices.
Direct taxes are therefore more honest. I suggest that they fall into two basic groups:
1. Taxes imposed on existing wealth.
2. Taxes imposed on the wealth creation process.
To encourage wealth creation and general prosperity it is always better to tax the first group rather than the second.
Among the first group are property taxes (Council Tax and Business Rates). Also included are Capital Gains Tax and Inheritance Tax which are more accurately, taxes on the transfer of wealth. Non of these are impediments to wealth creation.
Among the second group are Income Tax and Employee’s National Health Contributions, which are direct taxes on work. Also VAT, Corporation Tax and Stamp Duty, which are direct taxes on trade. These taxes act as discouragements to wealth creation.
LVT would fall into the first group as a direct tax on unearned wealth, actual or potential, due to the simple ownership of land, one of the essential elements of production.
4. Simplicity and Clarity
An important characteristic of LVT, which many other taxes do not enjoy, is its openness, clarity and predictability, which makes it a tax that would be difficult to avoid. With LVT, the basis of the tax would be obvious and apparent to all. Site values would be regularly assessed and published for public scrutiny. The tax due on any site could be calculated by anyone. The figures could not be hidden behind ‘creative accounting’ or ‘aggressive’ tax avoidance schemes. Furthermore land cannot be moved offshore to a convenient tax haven. A Tax Avoidance industry which costs the exchequer billions in lost revenue each year would be impossible with LVT. Income tax, VAT and Corporation tax provide a happy hunting ground for fraudsters and sharp practitioners who flourish in the complexity and obscurity that such taxes allow.
Under LVT, ownership of land would continue although land speculation as such would disappear. Excessive increases of house prices, which are caused through the increase of the land value factor, would be brought under control. Sites would continue to be bought and sold but any prospective purchaser would know in advance the tax obligation for any site and would be able to enter such commitment into his calculations. There would need to be regular and comprehensive valuations, which would be accessible to all as a matter of public information at all times, as are the existing public registers for Council Tax and Business Rates.