As the value of land in Britain has skyrocketed, housing crises and runaway business rates have started to bite. The answer to these issues, according to Land for the Many, a major new report on land ownership and distribution, lies in our tax system.
“Dig deep enough into many of the problems this country faces, and you will soon hit land.” That’s how the writer and activist George Monbiot opens his introduction for the Labour-commissioned ‘Land for the Many’ report.
And yet, as Monbiot observes, land rarely features in our political discourse. Houses, property, inequality, Generation Rent -- yes, these terms crop up, but the land that underlies these things often eludes closer inspection.
It wasn't always this way. In the 1890s, social theorist Henry George’s book Progress and Poverty sold millions of copies, a rare feat in those days usually reserved for the Holy Bible.
In George’s book, which is outside copyright so it can be read online for free, he asked a question many are asking now: Why, amid economic and technological progress, does poverty persist and why does the economy tend towards cyclical boom and bust?
Land, George argued, was the culprit. The price of land outstripped the pace that wealth can be produced, and as a result, people were cut off from the land they needed to live and work on.
George’s solution was a Land Value Tax (LVT), an idea that has recently enjoyed a second life, and has been labelled a ‘Garden Tax’ by elements of the press. But George’s LVT enjoys remarkable popularity across the political spectrum. Even Milton Friedman called it the “least bad tax”.
An LVT is, as the name suggests, a single tax on land values, ignoring anything that’s built on the land. It’s praised for its efficiency and, perhaps unsurprising given the focus of the ‘Land for the Many’, it features as one part of the report’s tax proposals.
But the LVT is just one among a few suggestions. To find out more, we spoke to one of the report’s authors: Laurie MacFarlane, economics editor at openDemocracy and the head of finance at the UCL Institute for Innovation and Public Purpose.
We rarely seem to talk about ‘land’ as a salient political issue any more. It’s disappeared from the political lexicon to a large extent. Why do you think this is?
In general, there's been an image that's been ingrained in people's minds that land as an issue invokes images of farming, agriculture, and pre-industrial society. Many people and even economists believe that in modern, advanced economies where we have smartphones and space travel that land has a less important role to play.
To classical political economists, not just Henry George, but Adam Smith, David Ricardo, John Stuart Mill, Karl Marx, land was integral to the way they looked at and understood the economy in terms of production, distribution, and exchange.
As neoclassical economics replaced classical economics, land got neglected as a factor of production, and instead, economists focused on labour and capital.
Getting to the report, and focusing on taxation, what changes are you proposing in terms of taxing land and property?
The way that land and property are taxed has been very poorly designed. It's left us in a position where property has been very attractive as an investment or a financial asset relative to other types of investment.
There's been an incentive for people to invest. If they have money or the means to get money, ie get a loan, the most attractive thing to do is to buy property and get the capital gains.
What we're trying to do is to discourage the use of property as a financial asset, and use taxation not only as a means to raise revenue but actually as the disincentivising the financialisation of property.
So firstly, we want to replace council tax which is currently paid by the occupiers of housing. It's badly designed and regressive. It's based on what the value of your property was in 1991. No government has actually updated the valuation since then.
We want to replace it with a progressive property tax. Crucially, it's based on the modern value of the property and that'll be updated year on year. It will be paid by the owners, not occupiers.
We're also proposing that empty homes and second homes would be taxed at a higher rate automatically. And then any property that's owned by people outside the UK for tax purposes would incur a surcharge.
We are also proposing that stamp duty land tax be phased out. We're saying that the capital gains tax should be phased in on property. At the moment, you don't pay CGT on your property.
Inheritance tax should be abolished completely and replaced by a lifetime gift tax. This has been proposed by the Institute for Fiscal Studies as a more efficient way to tax inheritance. Any lifetime gifts over a certain amount should be taxed.
We're also proposing that business rates should be abolished and replaced by an LVT based on the rental value of the land. There's a long-established evidence base on why LVT is an efficient form of tax.
Just to pause on LVT for a second, which you want to replace business rates. It's proponents often call it an ‘efficient tax’ and that's a sentiment you've echoed. Why is LVT efficient?
It has no deadweight loss. When you tax something in economic theory, you will reduce its supply and it imposes a cost.
But land is a fixed supply. So no matter how much you tax it, it can't reduce its supply because it's finite. In economic terms, there's no deadweight loss. It doesn't impact economic production in the same way if you taxed other things.
LVT doesn't disincentivise development in the way if you tax a whole property. Under the rates system, if you improve your premises, you'll get taxed on it. Whereas if you only tax the land, it incentivises development. You can build and yet face the same tax.
An LVT also disincentivises speculation. One of the UK's biggest problems is that a lot of money flows into property which is an already existing asset. It's not engaging in new economic activity.
If you have a lot of money flowing into an already existing asset, it pushes the price up. If you tax land, you're taxing away the windfalls that would otherwise accrue to the owner. Property won't be as lucrative an investment if you had LVT, and banks and investors will divert their money into productive parts of the economy.
Your proposals would be a radical shake-up, and there's the argument that our political system isn't geared towards radical shifts. If you look at Brexit, it's caused parliamentary gridlock as politicians try to manufacture an orderly withdrawal. Aren’t these proposals for major tax reform DOA?
I don't think it's the case that the UK simply can't implement change. Brexit is a constitutional change that's separate from domestic policy. We've seen radical changes in the UK many times.
Margaret Thatcher completely rewrote the UK economy: radical changes and privatisation, slashing taxes, deregulating the economy. Similarly, if you go back to the end of WW2, we saw a Labour government enact radical change through nationalisation and taxation.
So it doesn't hold that the UK can't implement change. The challenge is that there are serious special interest groups that'll lose from these reforms and will fight them. With property tax, if you introduce it overnight, it can create winners and losers. That's partly why council tax, which everyone agrees is a terrible tax, hasn't changed: it's politically tricky to do.
The challenge isn't necessarily that our proposals are DOA because Britain can't change. The challenge is introducing an agenda in a space where you'll encounter specific, powerful interest groups.
There are people who own a single home but have a vested interest in seeing the property's price going up. Wouldn’t that be one of the larger interest groups you'd face?
We live in a country where the majority of the population are property owners, either outright or with a mortgage. But we should also recognise that home ownership has been falling dramatically. So even on its own terms, if this government thinks home ownership is a good idea then its current policy is failing.
The reason it's failing is that we've allowed house prices to get so detached from earnings that a whole generation is priced out of the market. There's no way to buy and they remain stranded in the private rent sector.
We have reached that tipping point where even homeowners -- parents, for example -- can see that something is wrong in the property market. They see their children struggling. Many parents have helped their kids onto the property ladder. The bank of mum and dad is now the third biggest mortgage lender in the UK.
Many parents can see something needs to change because if it doesn't, we're heading for a bad place. There's a large enough constituency between people in social housing, private renters, and by homeowners who, yes they own housing, but recognise something needs to change. That coalition is now there to enact some changes.
Obviously, there will be homeowners out there who don't want to change, who just want property prices to go up 10% per year like it did in the past. But those days aren't coming back. The idea that house prices will continue increasing forever can't happen, it was a one-off and we're now living with the consequences.
Isn't the problem more about price inequality? Affordability differs by geography: in Bristol, the housing market is extremely competitive, but in areas outside Liverpool it's much more affordable. So wouldn't the answer be investing in these areas so people aren't forced into the cities? Wouldn't that equalise the situation much more than meddling with the tax system?
It's not an either or. Over the last three decades, we've seen de-industrialisation and large parts of the economy completely neglected. That absolutely needs to be addressed through regional policy and investment. But that's not going to alleviate the very real housing pressures that people face today, as in right now in many places around the country.
We talk about the housing crisis, but there are actually multiple crises. Depending on where you are, they're different. The narrative in the media predominantly focuses on London and the southeast, which is a specific and huge affordability crisis.
In other parts of the country, there are other crises. In some parts of the country, it's true we need to build houses. But it's not really true, on aggregate, that we've not built enough houses. Housing supply has kept up with housing formation.
The problem is on the demand side where we've created a system where huge waves of money are flooding into the property market. It's pushed up prices well beyond the means of most people.
So yes, we need to rebalance the UK economy, but we also need to deal with the significant land crisis that we face here-and-now. If we don't, it'll only get worse. People will still view property in London as a financial investment, you'll still get people investing money where they can and in the buy-to-let market.
I've heard it said that property can't simultaneously be a good investment and affordable. Would you agree with that?
Well, there are two different roles that property plays in the economy that are completely in tension with each other. One is as an essential good that everyone needs to survive. We all need somewhere to live and work. From that perspective, it's better for land and property prices to be lower.
Its other role is as a commodity and financial asset, to be invested in, traded and leveraged upon. In that respect, it's good for prices to go up and the rent to be high.
In the past few decades, land has skewed towards that latter function, but they're in direct contradiction to one another.
What we argue is that we need to move away from the world where land is seen as a vehicle for accumulating wealth, to a world where it's seen as an essential place to live and work.
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.