‘FURTHER ITEMS ON PARTICULAR ASPECTS OF LVT:
1. The Causes of Land Value.
2. Resource Rents.
3. Industrial Land Values.
4. Agricultural Land Values.
5. Unimproved Land Values.
6. Winners and Losers.
7. Affordable Housing.
8. Typical Objections.
9. The Single Tax Issue.
1. CAUSES of LAND VALUE
In part 2 of the explanation the relationship between land values and location was shown to be fundamental, but within that context it is worth noting how land in general or sites in particular may acquire value.
The primary causes affecting land value are:
1. Natural advantages.
3. Population Intensity.
4. The Planning System
The following caveat needs to be mentioned; that, where the causes of land values are concerned, there is a large difference between urban land and agricultural / rural land.
With urban land causes 2 – 5 certainly apply, but the first cause, natural advantages are considerably diminished, if not totally absent – as described in the evolutionary process in the diagrammatic explanation of Part 2. With agricultural land, natural advantages are of course of primary importance, infrastructure less so, population intensity of no significance.
The influence of the Planning System has an effect on both urban and rural land values, bearing in mind that a rural site may suddenly increase in value by as much as 200 times due to government legislation or the stroke of a Planner’s pen. It is this artificial ‘planning gain’ that is currently the subject of much discussion.
These causes are in place at the outset as they are provided by Nature and simply need to be recognised to be exploited. The earliest settlers would established themselves on the most fertile land with a good timber supply, or at the tidal limit, at the confluence of rivers or where known underground resources were easily accessible. The benefits of natural advantage are more evident in an agrarian situation, or in an industrial context where it is a question of the exploitation of natural resources. In this latter case the effect on land values is indirect and is discussed further under ‘Industrial Land Values’. With later urban development these natural advantages became overtaken by the man-made advantages of infrastructure and agglomeration.
As the community grows the need for communal facilities increases proportionately. In the earliest stages these requirements are pretty basic, a village pump, a schoolhouse, a bridge. Proximity to these increases land values. In the later more developed community, the requirements become more advanced; sewerage systems, street lighting, water, gas and electricity services, transport systems etc. All of this may be described as infrastructure, and it falls into two types, according to how it is financed; publicly or privately. Public infrastructure is financed and maintained through taxation. Private infrastructure is financed through private investment capital and maintained out of profits from charging for the service. In either case proximity of a site to any of these facilities increases its value.
In the early years of the 19th century in Britain the railways were a highly lucrative private investments but were eventually rendered uneconomic with the growth of road transport. However they had become an integral part of the economic structure of the country and had to be nationalised in 1948, to maintain the service, on which the country had become dependent. The railways could not be allowed to die away, as had the canal system when superseded by the railways. The subsequent attempt at re-privatisation has never really worked and the railway system is still heavily subsidised by the taxpayer. Those who have consistently profited from the railways throughout the whole period are the landlords, close to the stations, whose property values have increased.
Also part of infrastructure are the services provided for instance by the NHS and the school system. Parents will pay extra to be in the catchment area of a good school. This increases the economic pressure which is reflected immediately in higher house prices, due to the demand to be close to the school – another instance of the importance of location.
Population Intensity (Agglomeration)
The simple fact of population presence increases land values. Where all other factors remain unchanged, any population increase will increase the economic pressure within a community.
The introduction of an area of ‘non-productive’ residential housing will add to the overall economic pressure. Its presence will increase demand for goods and services, and those who provide the goods and services will prosper and compete for the best sites on which to operate. This will inevitably increase the site values. Assuming that the residents are also working elsewhere in the community, their work will add to the co-operative surplus and the overall wealth of the community. Increases of population due to immigrants willing and able to work will always increase the general level of prosperity.
Agricultural and industrial land are exceptions to this cause. As shown in the diagrams in part 2, the agglomeration effect is only significant in an urban context. The ‘agglomeration’ of a hundred farms over a vast area would not produce an agrarian economic centre due to location. The location value of farmland would vary according to proximity to markets, abattoirs, grain storage facilities etc. However the basic principle holds good within an urban situation.
The Planning System
The Planning system represents a massive, but necessary interference with the natural development of urban land values. Unrestrained organic growth gave rise to the chaotic squalor of the great industrial cities of the 19th century, and in the 20th century to the ribbon developments and urban sprawl of the interwar years. This was seen as a wasteful and inefficient use of land and attempts were made to bring it under control. The Housing and Town Planning Act of 1909 was the first of a series of measures that culminated in the 1947 Town and Country Planning Act, which introduced the principle of zoning for different uses, and the requirement of approvals to develop land. It also recognised that this gave rise to the phenomenon of ‘planning gain’. In 1955 the protective Green Belts were introduced, magnifying this problem.
Where land values are concerned the old natural organic growth at least provided a comparatively smooth transition between different use values, whereas the imposition of zoning introduced very abrupt changes of value on either side of an artificial boundary. On the drawing board Planners may re-zone an area for a different use or extend a boundary and so alter the potential values of the sites affected. The differences of use value vary considerably. Between say light industrial and retail uses the difference may not be great but where it involves re-zoning of land previously within the Green Belt for residential development the difference can be enormous. Where permission is granted for development of previous green belt land for residential purposes the increase in value can be up to 200 times (1).
This ‘betterment’ gain is partially redeemed under the present Community Infrastructure Levy, depending on the tariff rate set by the Local Authority, which is known in advance by the developer. This system is probably better than the previous 106 Agreement, where the payment was negotiated, but it is still only a one-off payment and does not take into account the on-going rental values in the future.
Under an LVT system I would suggest a process where, when a change of zoning for development is intended, the Local Authority could compulsorily purchase the land with compensation to the farmer/landowner. The land could then be sold on the open market for residential development to the highest bidder. The developer would buy the land in the full knowledge of the future LVT obligation. In this way the farmer would get a fair price plus compensation, the Local Authority would get the same price for the land, with an assured tax revenue base in the future, and the developer would acquire a valuable site at his own price. Any need to appease local residents with particular amenities could be financed form the increased tax revenue.
(1) Using figures from the Valuation Office Agency: Property Market Report 2011
All communities require security. The vast majority of people throughout the world want a situation where they are able to live and work peacefully in a secure environment. Except during the period of the ‘troubles’ in Northern Ireland, in the UK we rather take for granted the security we enjoy. Lack of security and the rule of law affects the economic circumstances of any community. Absence of security discourages inward immigration and investment, impedes productive activity and reduces any desire of outsiders to locate in the community, which of course lowers land values.
An interesting case is in Rio de Janeiro where, since 2008, the authorities have been conducting a policy of ‘pacification’ in the old slum Favelas, which had become crime ridden no-go areas. The police moved in and systematically cleared out the drug pushers and criminal gangs and maintained permanent street patrols. Once the pacification was seen to be successful, residents and traders moved back in with the result that property values increased rapidly. (1). Some Favelas in fact are in a good locations, with stunning views over the ocean, but had lost their economic value due to the lack of security.
2. RESOURCE RENTS
“no-one can own the fish of the sea” — Mr Justice Cranston, in a high court ruling on fish quotas, 10.7.13 (1)
Amongst economists it is generally understood that the term ‘land’ includes all natural resources – all gifts of nature; natural forests, wildlife, minerals in the ground, fish in the sea etc. This definition raises the question of ownership, exploitation rights and also the concept of ‘resource rents’. Justice Cranston’s ruling could apply equally to all natural resources.
The overriding principle here is that no individual or organisation has the right to appropriate or exercise control over any gift of nature (including land) without recognising the debt to society, in the form of an appropriate payment. Such payment may be described as a Resource Rent. A land value tax is a similar payment, known by economists as the economic rent.
Urban land however should be distinguished from other natural resources, and the distinction between agrarian and urban land emphasised. Agrarian land may have value already due to natural circumstances, and this may be increased through directly applied work. Urban land however requires no such work; it simply has to be there. The three dimensional resources of coal, oil, fish etc. are tangible physical resources that require work to convert them into tangible wealth. With urban land, what is being considered is a two dimensional area on the surface that only has value because of its location within an agglomeration. All other natural resources require work directly applied to the resource to realise its value. Where tangible natural resources are concerned the increase of land value due to agglomeration does not apply; the natural resource may be remote from the land that benefits from its exploitation; as explained in item 3, Industrial Land Values.
In the explanation of part 2 the increase in value of the sites is due to direct occupation or work applied on the site in question. This does not apply where natural resource exploitation is concerned. The increased land values in Aberdeen are due to remote ‘work on land’ a hundred miles away in the North Sea.
For all these reasons it is more appropriate for the wealth derived from natural resources to be ‘taxed’ through a licensing or leasing system, whereby a private entrepreneur is granted a lease to exploit the natural resource for an agreed return over an agreed period to the controlling government.
Another option is for the government to invite companies to bid for a contract to carry out the extraction. Who ever came in with the highest bid and the best terms and conditions would get the contract for a fixed period.
3. INDUSTRIAL LAND VALUES
In the explanations of part 2, it may be queried why there is no mention of industrial land.
This is because there is a big distinction to be made between ‘heavy’ and ‘light’ industry. For the purpose of the part 2 explanation, light industrial land comes under the heading of ‘commercial’.
Heavy industrial land is somewhat anomalous in that, where land values are concerned, it does not follow the same pattern of development as for other forms of economic activity. The evolution of heavy industry land values are perhaps better understood in a historical context.
In Britain the earliest industrial activity was related to the location of natural resources. The iron ore deposits of South Yorkshire gave rise to the steel industry. The wealth of South Wales was based on the rich coal seams; the coal and soft water of South Lancashire gave rise to the cotton industry. But the steelworks, coal mines and cotton mills themselves did not increase the land values of the sites on which they were situated. On the contrary these industries gave rise to what became blighted areas surrounded by slum housing which had the effect of depressing overall values. No doubt the simple presence of an increased population added to the overall economic pressure but the benefit of that was manifested elsewhere, and not in the industrial area itself. The very activity of mining for instance depressed the value of the site and surrounding areas. The mining rights and the mining installation may have had very high value to the owner or any potential buyer, but the location value of the site due to agglomeration was negligible.
Areas previously engaged in heavy industry do not generally have high land values. They are located at or beyond the urban agglomeration where land values are low or marginal. The wealth created from these activities is spent elsewhere. The coal, iron and cotton industries of 19th century Britain created great wealth, reflected in the growing size and prosperity of the provincial cities, in the business districts and select residential areas where the wealth was spent. It was in these separate and sometimes distant areas that land values increased, on the site of the industry itself the land values were low.
Taking a more contemporary situation; a modern oil refinery may be of immense value as an essential piece of capital equipment and command a high resale price, but the site on which it stands may have originally had only low agricultural value, and if the industry were to shut down, the installation would not only become a liability, but the land would not even have agricultural value.
In recent times, where industries have gone into decline or disappeared altogether, the abandoned ‘brownfield’ sites may be adjacent to or within a growing agglomeration and may therefore have high potential value for a different use, but remain un-saleable due to the cost of clearance and de-contamination. Such sites could be purchased by the local authority, who would bear the cost of rehabilitation. The site could then be sold for redevelopment, under a different designation, to the highest bidder who would thereafter pay the appropriate land value tax.
4. AGRICULTURAL LAND VALUES
In Explanation part 2 it was pointed out that LVT was predominantly an urban rather than a rural tax, in the sense that by far the greater revenue would be derived from the former.
The primary difference between urban and rural land values is that urban land values are determined by location within a close knit agglomeration of sites, each contributing to the ‘economic pressure’ that gives rise to the increase of value. This significance of location does not apply within the rural situation where sites are at some distance from any existing economic centre and although they may be adjacent, are far too large in area and diffuse to create any such economic centre due to proximity. As explained in part 2 under the heading: Causes of Land Value / Population Intensity, their is no agglomeration effect where rural land is devoted entirely to farming.
Agricultural land values are slight in comparison with urban land values, especially where large cities are concerned. The Planning and Architectural website Audacity quoted comparative figures for average agricultural and residential land values for 2005, in £/hectare (1)
Country Agricultural Residential
England £9.287 £2,460,000
Wales £8,628 £2,180,000
Scotland £4,858 £I,680,000
Another significant difference is that whereas urban values are determined by variations in location, agricultural values are determined only by variations in fertility, which are quite small by comparison. Agricultural values are quoted in £ per acre or hectare, urban values by the square foot or the plot, which may be no more than a small fraction of an acre. The best farmland (prime arable) is rarely more than double the price of the least valuable (poor grassland). Figures published by the estate agents Savills on farmland prices in 2012 show the average prime arable land selling for £7500/acre, poor grassland at £3500/acre (2). A Valuation Office report of 2011(3) shows mixed farmland in Oxfordshire selling at £8500 /acre, whereas residential (urban) land in Oxford itself was selling at £1.6m/acre. In the Chelsea Barracks redevelopment scheme of 2008, the 12.8 acre site was sold for £959m. (£75m/acre) (4). In central London in 2013 a half acre site was being offered for sale for residential redevelopment at the rate of £218m. /acre (5).
The point being made here is that there is such a vast difference between urban and rural land values where LVT implementation is concerned that, in the case of farmland, the simple application of a tax measured directly according to site value is probably not sufficient; clearly the factor of land area plays a more significant part. Using the figures for Oxfordshire above, it would require 188 acres of prime farmland to match the value of 1 acre of residential land in Oxford itself. In the central London example, a one acre site would require an equivalent farm area of almost 27,000 acres.
In considering how any land value tax should be applied to the rural situation it is necessary to recognise that the benefits of infrastructure are fewer in rural areas. Areas devoted exclusively to farming do not enjoy the same intensity of infrastructure. Items taken for granted in urban areas, street lighting, mains sewage, bus and train services, gas supplies, broadband etc. are often sparse or non-existent, and should be taken into account when devising any appropriate formula for taxing rural land. Also it should be noted that farmers, instead of actually farming, now have an additional or alternative role as custodians of the land; guardians of the environment, on behalf of society.
In a book on real estate investment in the US (6), Prof. Roger J. Brown presents an interesting analysis of land use rental values for a hypothetical city in which he breaks down the values and areas of different uses ranging from commercial, light industrial, residential, heavy industrial and agricultural. He shows these results in a diagram that bears a striking resemblance to fig.16 in the part 2 explanation, which I show again in fig.1 as a linear curve with the different zones indicated in similar proportions to those in Prof. Brown’s diagram.
It is notable that the largest proportion is taken up by residential and also that the agricultural zone becomes marginal at the greatest distance from the centre. Where the implementation of LVT is concerned there is a case for exempting agricultural land altogether. In 2009 the Irish Government commissioned a study on the feasibility of introducing a Site Value Tax (SVT), in which the final publication excluded agricultural land. It could be argued that the revenue raised from an agricultural land tax would not be worth the administration costs, but, in Ireland another reason would have been political, in that it would have been difficult to get the legislation past the big farming interests. Unfortunately however the recommendations of the study were not adopted and Ireland continued with a conventional undifferentiated property tax. A further issue of LVT is whether it is best applied as a national or a local tax. Most LVT advocates would prefer the tax to be national, but at the same time they acknowledge that this would be a very big step to take and that it may be more realistic to accept that successful implementation may be achieved more readily at the local level. If the tax is seen to work well at local level in different selected cities then it may be more easily extended to the national level. Also, as local taxes are essentially urban in nature, agricultural land would be excluded. In either case a lengthy transition period of at least 10 years would be required to avoid any sudden disruption.
There are good historic examples of the successful operation of local LVT around the world. In New Zealand it was used successfully for 133 years and in Pittsburgh USA for 87 years until both systems were brought to an end through the onset of Neo-liberalism in New Zealand In the 1980s, and the inadequate revaluation system in Pittsburgh in the 1990s.
5. UNIMPROVED LAND VALUES
The term ‘unimproved land value’ is widely employed in much writing on LVT, but can be misleading. What is intended is to make the distinction between a site that has been developed or built upon (improved) and a vacant site where no apparent development has taken place (unimproved).
The problem with this term is that it leaves unresolved various anomalies that might arise when trying to establish the actual meaning of ‘unimproved’ for the purposes of taxation.
Perhaps the commonest example is that of farmland, which from an urban point of view would appear to be ‘unimproved’, but which may have benefited from generations of careful cultivation, drainage and irrigation, but the evidence of which is not readily visible.
At the other extreme are industrial sites, which have been built upon and ‘developed’, but whether such development can be described as an improvement is debatable. The necessary structures, plant and machinery required for the industrial production become a liability when the industry goes into decline and the site is abandoned; no little expense is required to clear the site and render it usable for some other purpose.
Another example is that of reclaimed land, which is quite common throughout the world; the so-called unimproved site would still be on the seabed.
It is therefore suggested that the term ‘unimproved land value’ should be avoided and only the simple terms ‘land value’ or ‘site value’ be used. This would imply the current market value of the site regardless of its history, or whether it is urban or rural.
6. WINNERS AND LOSERS
Politicians are always averse to any change in taxation that will create ‘losers’ who will cost them votes, so they tend to resort to indirect taxes where no obviously disadvantaged group can be identified. Where homeownership is concerned the introduction of a land value tax would clearly create winners and losers. The losers would be those who hitherto have been the winners over several decades; those who have enjoyed the benefits of increases in their asset wealth without having had to pay any commensurate increase in taxation. Under LVT this advantage would be arrested and gradually reversed over time, and would undoubtedly create opposition from those who have got used to the idea of ever increasing unearned asset wealth (due to increased land values), who would not wish to see this advantage eroded.
The winners would of course be those homeowners who have seen their house values remain static or even reduce over the same period due to being in areas of low or declining land values.
LVT advocates have long accepted that any change to LVT would require a transition period of probably at least 10 years to avoid the sudden shock of the necessary correction. Regardless of any change to LVT, even an updating of the property valuations for the current Council Tax (last carried out in 1991) would create winners and losers, so is constantly deferred by the politicians, making the situation worse with every year that passes. The discrepancies have now become so bad that any update would also require a transition period.
Although a national application of LVT would be preferred, for such a radical transformation in taxation it is generally accepted that introduction at a local level is more feasible and less disruptive, and the best opportunity is in reform of the unpopular Council Tax.
The Council Tax is based on valuations of a property on what it would rent for and how large it is; how many rooms etc. If the owner makes an improvement such as an extension, the tax goes up. This would not happen under LVT as the tax is based only on the value of the site, which is very much a function of location; more sought after locations would be taxed more highly. An effective LVT would be dependent on regular and accurate valuations, so the first step would have to be a new valuation where building values are separated from site values.
During the transition period it is proposed that the winners should compensate the losers in a gradual manner. Also it is important that such compensation should be visible, immediate and personalised, and not in the form of some vague promise that other taxes would be reduced in the future. In the case of LVT replacing Council Tax the following proposal is suggested:
Assuming a new revaluation has taken place, this would then reveal the discrepancies due not only to the calculations being based on land values only but also to the consequencies of 27 years of previous neglect. These discrepancies are likely to be significant and the first step would be to inform all taxpayers of the new dispensation and the estimated future tax liabilities over a transition period of say 10 years. Assuming overall revenue neutrality, it is proposed that in the first year nothing would change, but taxpayers would be served notice of their current Council Tax liability, the new liability under LVT and the difference between the two divided into ten equal parts to be added or subtracted as appropriate over a ten year period, starting in the second year.
At the end of the 11th year a full LVT system would be established, and the Council Tax calculations could be abandoned. The transition period avoids any abrupt (and highly disruptive) changeover where taxpayers may gain or lose a large amount overnight. Those who are to gain from the change are obliged to defer their gain over a period, and those who are to lose, will have their loss eased over the same period. In this way the winners will be compensating the losers and the figures will be clearly shown in their tax bills every year.
As a further concession to placate the losers it could be made possible for them to claim some percentage of the extra payments as a tax rebate.
7. AFFORDABLE HOUSING
As with any commodity, it is the combination of the price demanded and the financial means of the prospective buyer, that renders it affordable or not.
Housing is no different. House prices have been rising inexorably at least since the 1960s and continue to do so, especially in the most sought after areas, such as London and the South East. However these increases have not been matched by any commensurate increase of wages and salaries above the general level of inflation since the crash of 2008; even in the less sought after areas of the country, where the increases have been less severe, people have still struggled to find the down payment for a mortgage.
This situation is nothing new, but it has become far more acute in recent years. The consequence is that, since 2000, home ownership has been in decline and private renting has been increasing (see fig.1).
The problem of ‘affordability’ has been around at least since the end of the First World War, when the ‘Homes for Heroes’ programme was established leading later to subsidised council housing which, although a form of welfare, was an effective solution to the problem of affordability for many years. The council housing stock thereafter was added to with greater or lesser enthusiasm by all governments until being set into reverse by the ‘sell off’ policy of the Thatcher government in the 1980s. This policy of course added to the number of homeowners who then had a vested interest in continually rising house prices, not to mention a new group of grateful Tory voters.
But council housing, rightly or wrongly, has always carried a stigma; given the choice and the financial means, the majority of people would choose to live in the leafy suburbs rather than the council estate, and the crucial phrase here is ‘financial means’; without the financial means, many things become unaffordable, including housing.
The solution to this problem offered by politicians, (and many economic advisors) is to build more houses, hoping that by the law of supply and demand, the increase of supply will bring prices down. But they do not recognise that the price of a house is related not only the value of the building but also the value of the site upon which it stands. In high value areas the site value may be as much as 4 times that of the building value, so any increase of house building can only affect 25% of the total price, the 75% due to site value will continue to rise regardless. Land does not obey the law of supply and demand because the supply of land is fixed.
Ireland suffers the same problem with housing as England. Conall Boyle, Ex. lecturer in economics and statistics at Birmingham City University provides an interesting article showing that an increase of house building in Ireland between 1975 and 2015 did not help to bring prices down, see:
It is the site value factor that has the greatest affect on house prices in high value urban areas and these ever-rising prices are exacerbated through land hoarding and land speculation, creating an artificial shortage and pressure to increase prices – simply to the benefit of the landholder.
The best solution to this problem is to impose a land value tax which would arrest the rise of the land value factor, keep rising prices under control and make land banking and speculation unprofitable. Depending on the degree to which a land value tax is imposed, extreme house prices can be reduced. Only then will housing become affordable.
8. TYPICAL OBJECTIONS
These are some of the main objections raised by opponents of LVT:
1. LVT is a form of wealth confiscation.
2. The ‘Poor Widow’ objection.
3. Separate valuation of land would be too difficult.
The following are my responses:
1. LVT is a form of wealth Confiscation
In a Wikipedia article on Land Value Tax published in 2007, under the heading ‘Arguments against – Loss of Asset Value’, the writer suggests that most LVT opponents would see the loss of private citizen’s wealth, as confiscation. He then goes on to say:
‘ – – – this loss of property owner’s asset value may be the only genuine objection anyone really has to LVT, and the only real reason LVT has not been widely adopted for it’s demonstrated economic benefits.’
To this I would add:
No one is trying to disguise the fact that LVT would shift the burden of taxation off the less wealthy onto the more wealthy. Indeed, as inferred with the second principle in part 1, this is one of its main purposes. For many years politicians of all colours like to see themselves as champions of the poor, and spend endless time and effort devising legislation to improve the condition of the poor by trying to reduce the inequalities of wealth distribution that exist within society. These efforts have been going on for decades in vain, for they deal only with symptoms and never face up to the causes. One of the prime causes of the mal-distribution of wealth is due to the misunderstanding and misuse of the economic rent of land. LVT faces up to this problem directly and head on.
With any change to a system of LVT there would be winners and losers. The losers would be those who for centuries have reaped the unearned benefit of the economic rent at the expense of the rest of society. With some honourable exceptions, they will no doubt cry ‘foul’, ‘confiscation’, ‘class envy’, ‘Communism’ and anything else they can think of to protect their privilege. What would be confiscated is the capacity of private landowners and speculators to increase their unearned wealth gained from the work of others, and thereby exacerbating the ever widening wealth gap. The acceptance of LVT amongst ordinary citizens would depend on their inherent sense of fairness, and not on exploiting some opportunity to gain something for nothing. Interestingly, the winners would include everyone – even the rich. The necessary openness of an LVT system would increase efficiency at all levels of production. The owners of land and industry would benefit by being able to sell their products and services more readily to a wealthier population (1). They could also avoid the useless activity of protecting their wealth through wasteful tax avoidance and evasion.
As has been said before, all taxes have to come from some form of wealth. To describe such taxes as confiscatory is nonsense. In 1692 William Petty titled his book ‘The Treatise on Taxes and Contributions’. Perhaps it would be better to describe all taxes as contributions – towards enabling a society to function as it should.
(1) In 1914, in order to solve the problem of employee turnover, Henry Ford doubled the pay of his workers. Within two years his company profits had also doubled.
2. The ‘Poor Widow’ objection
The Poor Widow objection has been around for at least a hundred years; at least since Winston Churchill expressed his exasperation in a speech to parliament in 1909 (1). It has become a shibboleth that is instantly brandished, by even those who admit to having only a vague knowledge of LVT; by some uncanny means they seem to know all about the Poor Widow. In more recent times it is expressed as the problem of the ‘asset rich, income poor’ or more specifically ‘elderly people having only a state pension, but still living in the large family home’ – especially widows in mansions. This issue has been discussed to exhaustion, and it is largely agreed amongst LVT advocates, that the best solution is the ‘deferment’ system, whereby any tax increase arising from a change to LVT, is deferred and settled out of the estate at death or from the proceeds at any prior point of sale. (2)
The Poor Widow objection is based on certain assumptions that in any case may not be true, namely that:
1. The tax liability will always go up rather than down.
2. The mansion in which the poor widow lives is in a high value location.
3. Any revaluation assessing land and buildings separately will be to the detriment of those living in large houses.
It tends to be forgotten that the poor widow is already paying a council tax based on selling price values. If she is in a large house it is likely to fall within the current highest band H already, which she is having to pay out of her pension now. If the house is in a low value, or even average value area, under LVT her tax bill might go down.
It should be remembered that within the current valuations, or any new re-valuation, it is only relative values that matter, not absolute values; the total tax take is the same. Since the last valuation in 1991 relative land values may have changed a great deal, but this is much less likely with relative building values. If there is any change in fortune for the poor widow, it will relate more to where she is living rather than the size of her house; it is quite possible that she could gain rather than lose.
3. Valuing land separately would be too difficult
This must be one of the weakest of objections, and it seems to be peculiar to Britain. Other countries that have practised LVT or have some form of LVT in place, report no particular problems with making separate valuations for land and buildings. The Danes had a National LVT from 1957 to 1964 (during which time the Danish economy prospered) (1). They produced regular valuation lists with land value maps and valuations were updated annually. The Australians have for many years employed different forms of LVT in different States, with regular re-valuations, and do not report any special difficulties. Many towns in the USA practise the ‘split rate’ system, which requires separate valuations between land and buildings on a regular basis.
In 1964 a land value study survey was carried out in the town of Whitstable in Kent for the Rating and Valuation Association. The valuer’s report included valuation lists and site value maps and was carried out without any insuperable problems. In his conclusion the valuer commented:
‘– – – the field work involved in valuing site only is very much less than valuing site plus improvements’. (2)
In a follow up survey done in 1973, the same valuer said: ‘The field work was done with notable speed’
In a 2010 report for The Green Party of Scotland (3), the environmental scientist Andy Wightman comments: ‘Valuers in Scotland have no difficulty in general in valuing land and property for a range of purposes’
With reference to a Land Value Survey carried out for the Inland Revenue in 1910, he also comments: ‘If the Edwardians can manage to survey the ownership and management of all land in Britain and Ireland with paper and ink, there is no reason why modern arial imagery, computerised mapping and GIS technology cannot do the same a hundred years later’.
A land value tax study was also carried out for Oxfordshire County Council in 2005 (4). The study group included a qualified surveyor who reported: ‘Valuation based on the undeveloped value of land present no special problems for a professional valuer’.
Professional valuers no doubt have their own sophisticated methods for making valuations, but for the layman there is a simple method known as the ‘Residual’ system which is easy to understand: Taking the overall value of the property (the selling price), one may deduct the replacement cost of the building; allowing for age depreciation, the remainder would be the site value. Insurance companies are continuously engaged in assessing the replacement costs of buildings for insurance purposes. For a newly built house the process would be even easier, where one would simply deduct the builder’s costs and profit, without any depreciation.
Further useful comment on the subject of valuation can be found in the paper by Dr. Tony Vickers, ‘Questions around the Smart Tax’ on the ALTER site: http://libdemsalter.org.uk/en/article/2013/737148/questions-and-answers-on-lvt-a-need-to-update-them
Objections to LVT are dealt with comprehensively in Mark Wadsworth’s blog: http://kaalvtn.blogspot.fr/p/index.html
Also refer to the FAQs of Land Value Taxation Campaign’s site: http://www.landvaluetax.org/frequently-asked-questions/
The main purpose of this website is to communicate the ideas of LVT to ordinary people with no special knowledge of economics, and therefore I have used terms and meanings as they are generally understood in common usage. However there are in certain cases definitions used by economists that differ, and need to be mentioned. The items covered are:
1. Wealth 2. Land 3. Real Estate 4. Earnings 5. Wages 6. Money 7. Capital 8. Ownership
As generally understood wealth is represented by the possession of goods, money, land or natural resources. However the economic definitions of the last three require some qualification:
Money is not wealth but primarily a deferred claim on wealth.
Land is one of the elements of wealth production, not wealth itself.
Equally, natural resources remain only potential wealth until labour is applied.
The economic definition being rather more complex, I have used the definition as commonly understood, which is perfectly adequate for the purposes of the Part 2 explanation.
As generally understood land is taken to be simply the dry surface of the earth on which we live and work, but for economists the definition extends to all natural resources; oil and minerals below ground, natural forests, fish in the sea, even the radio spectrum; in other words all the gifts of nature that are not man-made. In Part 3 under Resource Rents I necessarily make this distinction, but for the general explanation I keep land separate from natural resources. In fact for the purposes of LVT, in an urban situation, the ‘land’ in question is an abstraction; a two dimensional area on the surface of the earth, for the use of which any owner or occupier is liable to a charge.
3. Real Estate
This term is more commonly used in the USA, and means land and buildings together. In the UK we would use the word ‘property’(which includes land). In the USA an Estate Agent is a Realtor.
Earnings are the direct reward for work done.
Earnings may take the form of money, produce, manufactured items, modified natural resources, or any other form of wealth that may be exchanged for money.
Wages are that share of earnings paid to an employee by an employer, usually in the form of money, but may be in produce.
Money is a deferred claim on wealth; it is not in itself wealth. It is a representation of wealth, the value of which depends entirely on the trust of society that it will be honoured as a medium of exchange. It also has value as a means of wealth storage.
It is generally considered better if money has no intrinsic value such as, for instance as gold or silver coins. Apart from notes and coins it does not need to exist physically; notes and coins have largely been replaced by the credit card system, which is generally considered more convenient and efficient. Exchange of money may take place by the alteration of figures on the account sheets of the parties concerned, or by electronic transfers; the accounts being stored in a computer memory. In every case it depends on the existence of trust.
Capital is the wealth used to create more wealth.
A workman’s tools are capital. The farmer’s seeds are capital. Any tool or machine, even a whole factory is capital. However capital is more commonly represented by money, which is lent, at interest, to an entrepreneur to purchase the means to produce more wealth. This is the basis of the ‘Capitalist’ system, in which the lenders are banks or investors looking for a return on their money.
Another form of capital is Intellectual Capital (or skill). A teacher’s knowledge is his or her capital. It is another form of ‘tool’ which expedites the process of wealth creation and may be sold, as with any other form of labour. The classical economists always recognised the three elements of wealth creation; land, labour and capital. Unfortunately the later neo-classical economists only recognised labour and capital; land being considered just another form of capital. This mistaken view still predominates today amongst mainstream economists.
Although this hardly needs definition, it needs to be mentioned as it forms the foundation of so many issues in economics and underlies many of our beliefs and misconceptions.
In a recent fishing quotas dispute (1), Judge Cranston ruled that ‘no-one can own the fish of the sea’ This judgement could be readily extended to include all the gifts of nature, including land.
The fundamental truth is that land is not ownable.
If this is so, how can it be that we accept the ownership of land, and have done so for centuries? This is why the understanding of the importance of ownership is vital for any society; it is closely allied with the exercise of economic power. Whoever has the ownership of land has the ownership of one of the two primary elements of wealth, land and labour, and also of the economic rent.
In Britain the tradition of land ownership is usually traced back to Norman times, where after the conquest the king rewarded his followers by granting parcels of land in return for a share of produce and the provision of Men at Arms. Of course the King did not have the right to make this transaction; he had the duty of custodianship, but not the right of ownership. The Knights and Barons gained their status, which went with the titles to their estates. In later years this became formalised with ‘legal’ documentation to grant them ownership as land Lords, which of course gave them ownership of one of the two primary elements of production (up to the time of the Civil War in the USA, the southern slave owners had control of both elements).
The notion of the legitimacy of the ownership of land has become entrenched through tradition and has continued to this day. It is written into legal documents and accepted without question, regardless of the fact that by any rational recognition of natural law, it is not only illegitimate but immoral. In his wisdom, Henry George realised that confiscating land ownership or nationalising land, would be politically difficult, and in any case was not necessary. A fully implemented system of LVT would have the same effect; of surrendering the economic rent for public use.
9. THE SINGLE TAX ISSUE
In his book, Progress and Poverty, Henry George proposed that the Land Value Tax should be the only tax. This ‘single tax’ idea has been identified with the LVT movement ever since, and is still insisted upon by the purists, but in recent times it has been questioned more and more. It may have been feasible in George’s time when economic structures were much simpler, but in the complex contemporary world, it is in my view, more realistic to accept the need for other taxes.
As an overview of taxation in general I would suggest that there are two principles for any system of fair taxation, including LVT, that come before all others, namely:
1. Anyone who benefits from belonging to a society should make an appropriate contribution towards it.
2. Such contribution should be in proportion to the ability to pay.
Of these two principles the first is more basic. The notion that everyone should contribute towards any benefit received is beyond dispute, and one could reasonably argue that simply being a member of a community is a benefit in itself. It is with the second principle that disagreement and discord usually arises.
Most would agree with Marx’s dictum: ‘From each according to his ability, to each according to his need’, but much disagreement arises with the definitions of ‘ability’ and ‘need’. However no-one has expressed it better and it remains a guiding principle for all systems of fair taxation. But in deciding those who are best able to bear the burden of taxation one must acknowledge the importance of existing wealth ownership. As described in the explanation, part 1, item 3, the best forms of taxation are direct taxes and those aimed at existing wealth. LVT satisfies both of these requirements, but as the name implies, it is limited in scope to the economic relationship that society has with land, especially urban land.
It is clear from the explanation in part 2 that the bulk of any revenue derived from LVT would be from higher value urban sites. In large part the enterprises that occupy these sites are there through necessity; in the need to be close to the centre of economic activity. They are essentially ‘site dependent’; the high street shop, the department store, the central office, the bank, all need a central site to operate effectively. There are however other enterprises and individuals who are not site dependent, who are able to generate high earnings through activities that require no need to be permanently located on high value land. One thinks for instance of high earning individuals in the areas of sport, entertainments and online trading. A skilled operator can work effectively at home or trading from a lap-top in a hotel room, purely as an agent, without any need of an office, display space or warehousing.
Under a single LVT system, those who are not site dependent, though they may be high earners, would be virtually free of tax. How then, in satisfaction of the first principle, would they make their contribution to the society from which they benefit? To say that they pay tax through the site value of where they live is not sufficient, that applies to everyone. No doubt they all do useful work, but why should the burden of tax fall mainly on those who are site dependent?
Mark Zuckerman’s Facebook enterprise does not need large areas of warehousing or centrally located office space; it files its information in the ether; Facebook administration can be located on some low value site and still be successful. Zuckerman deserves to be highly rewarded for his enterprise, but he is now worth $20 billion personally. Should that accumulation of wealth not be taxed? He benefits from the infrastructure and collective security like the rest of us. It seems reasonable that he should make some contribution to society in proportion to the wealth he has acquired – by virtue of the existence of society; albeit in cyberspace. With great respect to Mr. Zuckerman, no-one is worth $20 billion (1).
This is a question that cannot be avoided, and my own view is that there has to be some other form of tax that addresses this anomaly. Although LVT might always be the tax of first resort, perhaps a modified form of income tax would be a solution as to how to tax excessive accumulations of wealth that cannot be captured by LVT.
All taxes have to come out of some form of wealth, but it has always been difficult finding a socially acceptable way of taxing wealth, without it appearing as confiscation. All taxes are unpopular, but income tax is generally accepted as fair in that it is at least progressive. Perhaps one could retain the income tax with a threshold of say £50,000. That would exempt the majority of earners whilst dealing with the remainder progressively. There are other taxes that might also be retained; the so-called Social Taxes, which are designed as much to influence behaviour as to gain a source of revenue. The ‘sin taxes’ on alcohol, smoking and gambling and the ‘eco-taxes’ on fuel and carbon emissions are amongst these which even the purists would consider keeping; so perhaps the idea of a single tax is already an anachronism.
It would be useful for all those concerned with LVT to read through the list of all 26 taxes that we currently pay and to note their preferences for the ones they would keep, abolish or modify, with reasons for doing so. (2)
(1) For more on the relationship of wealth to work refer to the essay Work, Gift and Theft in related essays.
(2) For relevant data refer to the IFS, Survey of the UK tax System http://www.ifs.org.uk/bns/bn09.pdf
Also, a very useful site is:
Aesop, 620-564 BC
‘We hang the petty thieves, the great ones we appoint to high office’
Adam Smith, (1723-90)
‘Wherever there is great property, there is great inequality… for one very rich man there must be at least five hundred poor’.
Lord Macaulay, 1837
‘An acre in Middlesex is better than a principality in Utopia’
Mark Twain, (1835-1910)
‘Buy land, they’re not making it any more’
David Lloyd George, 1909
‘ To prove legal title to land, one must trace it back to the man who stole it’
Anatole France: (1884-1924) French poet and novelist.
‘The law in its majestic equality forbids the rich as well as the poor to sleep under bridges, to beg in the streets and to steal bread’.
Andew MacLaren (1883-1975) Independent Labour MP for Burslem (1922-45), LVT advocate and educator.
‘Revolutions take place in the mind, not in the streets’.
‘For how long does an evil have to be practiced for it to become a good?’ (re-quoted from Henry George?)
Milton Friedman, Prof. of Economics, U. of Chicago, 1978
‘In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago’
Dr. Joseph Stiglitz: Nobel Economics Laureate, 1998.
‘Rent is the secret tax the wealthy charge the poor.’
Martin Wolf, Economics editor, Financial Times, 2010
‘Land Value Taxation is a no-brainer … it is both fair and efficient. It should be adopted’
Mr. Justice Cranston (in a high court ruling on fish quotas) July 2013
‘ No-one can own the fish of the sea’