We need a land value tax to stop home owners getting money for nothing

The rising value of land means home ownership has become the equivalent of money laundering. It's time to tax it properly

October 26, 2017
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In the UK, profits on selling first homes are virtually tax free—a fact which means the UK economy suffers an impact equivalent to a £100bn annual currency counterfeiting operation.

Sound extreme? Winston Churchill’s budget speech of 1909 explains the situation:

“Roads are made, streets are made, railway services are improved, electric light turns night into day, electric trams glide swiftly to and fro, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still… To not one of these improvements does the [landlord] contribute, and yet by every one of them the value of his land is sensibly enhanced.”

Homeowners, we know, can increase the value of their property by erecting new buildings or improving existing buildings. But there is nothing the home owner can do to increase the value of the plot of land on which the buildings stand.

The value per square foot of land depends on its location and its scarcity value. Is it near a fast train? An attractive park? A good school? The value of the plot results from the actions of society, not the individual actions of the owner.

Yet many homeowners in London earn as much from rising house prices as do their from their day jobs. They do not need to take any action to accrue this benefit, since house price rises are driven by increasing land prices.

According to Nationwide, over the last quarter century average UK house prices (after adjustment for inflation) have almost doubled. Halifax estimates the current housing stock is worth £5.6 Trillion: an average increase of £100bn annually since 1992. Most of this increase in value is due to increasing land prices, and this gain is very lightly taxed via stamp duty.

The almost magical ability of homeowners to accumulate wealth without any effort means they have, in effect, the same economic impact as currency forgers. A forger who prints a fake banknote does no useful work, but gets richer at the expense of society. The homeowner whose house price benefits from increasing land prices also gains from work and investment done by the rest of society. Just as the currency forger weakens the economy by reducing the real return on work and investment, so does the homeowner when accumulating wealth from rising land prices.

In the UK the scale of this is so huge that investment and productivity are both adversely affected, causing the country to fast become a low wage economy. Home owners in the south east get rich at the expense of home owners elsewhere and renters everywhere. Failing to tax rising house prices therefore locks wealth inequality into our social fabric.

Land value tax (LVT) is one way directly addressing this problem. This would be an annual tax on the value of each plot of land—so it would be higher near city centres in the South East and lower in remote rural areas.

This sort of tax recovers windfall gains made by the homeowner at the expense of society. It is levied on land alone, and does not target the legitimate profits made by homeowners from home improvement or new construction; thus, it favours productive activity over freeloading.

Land Value Tax proper is successfully practiced in Denmark, parts of Australia and in some states of the USA, and property taxes in one form or another are far more widespread.

The introduction of LVT would, of course, need to be handled with care. To take one example: pensioners on a fixed income who own a home might be unable to afford additional tax payments. These individuals have arranged their financial affairs on the reasonable assumption that low taxation of property would continue indefinitely.

One possibility is to allow LVT payments to be postponed until death when the deferred tax (plus interest) would be deducted from the deceased’s estate. This would disappoint some prospective heirs. However gold plating the inheritances of middle-aged children of homeowners using wealth their parents did nothing to earn has to be paid for somehow. In the UK, this presently means homeowners are able to impose an annual levy of £100bn on productive activities.

The Conservative Party’s primary aim is to maintain the privileges and entitlements of the wealthy; for them competitiveness comes a distant second and any significant tax on wealth or property would be unacceptable. Both the Liberal Democrats and the Greens include Land Value Tax in their policy offerings. Unfortunately the Labour Party plans to introduce rent controls, which simply create a black market of insecure subletting. They would also raise taxes significantly to increase council house building.

If we wish to remain globally competitive, and are serious about tackling inequality, we must first break the equivalent of a £100bn currency counterfeiting ring.