Levies on land values do not depress or distort wealth creation and are easy to assess, cheap to collect and hard to avoid, says Phillip Inman in the Guardian
Amid all the talk of rebalancing the economy, there is little mention of the most powerful lever the government could pull to generate growth, which involves a switch from taxing income to taxing wealth. It is a subject that tends to get little coverage, mainly because its supporters are considered on the fringes of the political spectrum.
Ultra-lefties support wealth taxes for obvious reasons. Ultra-capitalists support them because they understand that allowing the rich to ring-fence much of the nation's assets and protect the mechanisms that allow values to increase without any serious government interference robs their children, and everyone else's, of any incentive to work harder.
And now it is not just the aristocrats who accumulate serious wealth but also increasing numbers of middle income babyboomers – senior teachers, BT engineers, BA airline pilots and local council middle managers. With their million pound homes and million pound pensions, the problem is even bigger. For an ultra-capitalist, the rapid accumulation of wealth over the last 15 years, which in property terms amounts to about £2.5 trillion, is making us fat and lazy. Only a wealth tax can sort it out.
Yet the debate has broadened in recent years with more mainstream groups taking up the cudgels. The OECD, the rich nation's thinktank, has joined the ranks of supporters. Liberal Democrats Chris Huhne and Vince Cable, in their pre-coalition careers, also voiced some sympathy. Andy Burnham adopted the scheme in his pitch for the Labour leadership. Many mainstream economists have also argued the case.
The OECD and the orange book Lib Dems, though mostly concerned with making capitalism work better, are also concerned about the potential for social unrest. As the full impact of the financial crisis hits, they can see radical solutions are necessary. They argue for a fairer society because they understand that mature capitalism is becoming sclerotic. Without some fundamental changes those groups with little to lose will turn to protest and violence.
Burnham, who has evidently been doing more thinking than most in the Labour party, can see the potential for an alliance across the political divide that allows him to give the keys of wealth creation and accumulation back to a younger generation too poor to save and with no option but to rent. What they are all talking about is the adoption of a land value tax. Purists would abolish all current taxes and replace them with an LVT that asked for a payment in line with the value of land under ownership.
Someone earning £40,000 a year would stop paying around £7,000 in income tax, £1,000 to £2,000 in VAT, £1,600 council tax and any of the transaction charges that fill the exchequer's coffers. No more capital gains tax or stamp duty on property sales or the sale of shares. Instead they would pay a fixed annual sum, to be paid monthly, on the value of their land, which could have a wide range, depending on how much the land is worth.
Move out of town and work locally, and your overall tax bill could be a fraction of its current total. Buy an expensive piece of real estate in the city centre and you would probably pay more. There are many consequences of following this path that are positive for wealth creation. The worker keeps all his income and there is a 100% gain for every extra hour worked. If you develop your property, it has only limited effect on the value of the land, giving you every incentive to modernise and improve the property.
Under the proper working of the council tax, increases in property values, as opposed to land values, lead to higher taxes, which is a disincentive to carry out those improvements in the first place. Mark Wadsworth is an economist, blogger, sometime Tory Bow Group adviser and campaigner for land value taxes. He recently told Economic Voice website:
"I'm an economist not a politician, and I can only repeat what all the great economists have said down the centuries: taxes on land values are the least bad taxes because they do not depress or distort economic activity, ie wealth creation. Land value tax is easy to assess, cheap to collect and impossible to evade.
Not only that, LVT is an entirely voluntary tax: you decide how much you are willing to pay and you choose a house or a flat within that price range. Only, instead of handing over all the rent or purchase price to the current owner, the location value would go to the government."
What he means by this last sentence is that property prices would necessarily settle at a lower level because a buyer will deduct the location value, knowing they must send it to the exchequer in the form of a tax. Fred Harrison, the doyen of LVT proponents, adds that the effects are broader and longer term. In his 2005 book Boom and Bust, he points out that landowners who aggressively accumulate land for property speculation in prime parts of the country would face a huge tax bill. Idle land would be brought into use, subject to planning permission.
So not only do we get a tax that is easy and cheap to collect, it would be difficult for the super rich to avoid with their offshore trusts and company ownership structures, and it would also lower the value of the asset that is stifling social mobility – property. As the economist Martin Weale has argued, the accumulation of property wealth is in effect an act of theft perpetrated on the younger generation who must pay the exorbitant prices demanded by baby boomers or rent.
The OECD argues against taking a purist line. It fully supports tackling taxes on the gains people have made through their businesses activities. These are taxes on entrepreneurialism or plain hard work. (Don't think of the City fat cat, but the Labour-voting JCB driver who works 20 hours overtime only to find he has crossed into the 40% higher tax bracket. The party of higher income taxes is not helping him.)
However, abolition is a step too far. In a series of documents over the last couple of years the OECD has argued for a shift away from income taxes on individuals and businesses to a land value tax and VAT. It wants to retain VAT for several reasons. There is the simple advice never to put all your eggs in a single basket. But more importantly, in an age of consumerism and potential environmental degradation, government's need to influence consumer behaviour and sales taxes are another tool. VAT is embedded in European tax raising and, like LVT, is hard to avoid.
Despite all these advantages, there are many powerful forces ready to dismiss LVT as fanciful, not least the property-owning classes who have an entrenched view that their house price is a just reward for their labour. But what LVT campaigners have shown is that the average taxpayer will be no worse off – they will simply pay less income tax and a higher wealth tax.
Phillip Inman, the Guardian