For years, there’s been growing talk in politics of introducing a new land value tax to replace the old system of council tax and business rates. It even featured in the Labour party’s manifesto at the 2017 general election.
The principle is self explanatory: A land value tax is a tax on the value of land. That’s different to the current system because it only taxes the land and doesn’t take into consideration the value of the buildings that sit on it, whereas council tax and business rates both do.
This makes the current system a particularly acute problem for businesses because it disincentivises productive investment in improving property or buying heavy machinery, for example. If you make any improvements to your business’s commercial buildings, it will lead to higher rates.
It’s a similar argument with council tax, which is banded by property value. In theory, making home improvements and adding value to your property should lead to higher council tax. However, in practice, council tax bandings have not changed in nearly three decades — though a revaluation is often mooted.
A land value tax theoretically removes this problem of taxing productive investment, which could result in greater economic activity, more jobs, and wealth creation. Another advantage is that because there is essentially a fixed supply of land, taxing it does not mean you get less as a consequence, unlike, say, taxing the production of manufactured goods.
Campaigners for a land value tax say it would result in more efficient use of the land by removing the current penalties for development. They also argue this tax would help deter speculators from hanging on to land because they would face a regular levy, encouraging them to develop it or sell it.
This is how the system would work in practice: an assessment of a land’s market value then a tax levied on the landowner calculated as a percentage of that value, perhaps annually.
“Properly applied, land value tax would support a whole range of social and economic initiatives, including housing, transport, and other infrastructural investments,” according to LandValueTax.org. “It is an elementary fiscal measure that would go far towards correcting fundamental economic and social ills.”
Not everyone agrees. In a critique of the land value tax, the pro-market think tank Adam Smith Institute wrote that opportunity cost is already a significant incentive for owners to use their land productively.
“If you choose to use your land as a garden instead of a block of flats to rent out, you are ‘paying’ the cost of doing so in the rent you’re forgoing,” the ASI wrote. “Adding an additional tax to that would make things less efficient even if it raised GDP numbers — a bit like taxing leisure time, it would increase cash output at the cost of actual wellbeing.”
The debate will continue. But it’s worth understanding the land value tax and the arguments around it because it is now on the table in British politics. After the next election, you might find yourself paying it.
Source: Yahoo Finance UK