Principles of tax policy - Treasury Contents

Written evidence submitted by Land Value Taxation Campaign

The Inquiry wished to know the key principles which should underlie tax policy.

1.  How can tax policy best support growth?

2.  To what extent should the tax system be structured to support other specific policy goals?

3.  How much account should be taken of the ease and efficiency with which a particular tax can be imposed and collected?

4.  Are there aspects of the current tax system which are particularly distorting?

How can tax policy best support growth?

The tax system needs to be designed so as to minimise the deadweight cost. In other words, it should not discourage individuals from engaging in economic activity, for example, by adding friction to the production and exchange of goods and services. Money transactions should in principle be no different from barter transactions in which individuals or organisations exchange favours in the form of goods and services. Land value taxation has no deadweight effects.

To what extent should the tax system be structured to support other specific policy goals?

The principal policy goal of taxation policy should be economic justice. An unjust system must lead to undesirable outcomes. A just system of taxation may engender a state of affairs requiring little further intervention in the way of redistribution of wealth. It is the Campaign's considered view that a substantial shift from existing taxes to a tax on the rental value of land is based on natural justice and by promoting, in the first instance, the just distribution of wealth, would largely eliminate the need for further redistributive measures.

How much account should be taken of the ease and efficiency with which a particular tax can be imposed and collected?

Complexity in taxation should be avoided so far as possible, to reduce compliance and administrative costs and expensive disputes. The cost of running the taxation system is a drain on an economy, and particularly so when many of a nation's most talented individuals are engaged in an unproductive activity such as looking for legal loopholes and resolving disputes regarding tax liabilities.

Land value taxation is amongst the simplest possible tax systems, requiring only a cadaster, a valuation list and a billing system, and for these to be kept up to date. It is particularly well suited to the application of modern geographical information and mapping database systems.

Are there aspects of the current tax system which are particularly distorting?

The current tax system rewards idleness and discourages economic activity. It would be difficult to imagine anything worse, short of forced labour, which is essentially what it is. It is tolerated only because it is not transparent. If wages were paid in full, and cash-in-hand, and the tax collected on pay-day by teams of uniformed officials, people would take a different view.

Distortions caused by the tax system arise most at the margins. This arises because, due to the tax system, gross labour costs to employers are around 80% over and above net pay.

Marginal labour is forced out of employment as it is unable to add sufficient value through its work, and pay tax on top. Examples are those with few skills, young people, and immigrants whose English is poor. Marginal work is left undone or the labour replaced by machines. A current example is the introduction of scanning devices at supermarkets. Some work may be left altogether undone eg street sweeping takes place less often, bus conductors are replaced by pay-on-entry systems even though this can result in a doubling of journey times.

In contrast to existing taxes, land value taxation does not have a destructive effect on marginal labour.

Marginal locations are forced out of use through the same process. Replacement of existing taxes by LVT would eliminate this effect. Enterprises that are not economically viable and sub-marginal due to the taxation of employment and enterprise would be lifted above the margin and become viable.

Because land values are low at marginal locations, a system of land value taxation effectively creates tax havens precisely where they are most needed.


The case for Income Tax, both national and local, is that it is based on "Ability to pay". It is a flawed concept, for it takes little account of how the taxpayer has come by his ability. In any case, present-day taxes supposedly based on ability to pay are frequently unfair or worse.

Direct taxes such as income tax, corporation tax, or capital gains tax, are open to anomalies, avoidance, and evasion. Indirect taxes like customs duties, value added tax, or motor fuel taxes take no account of the financial standing or the obligations of the buyer of the goods affected. It does so happen, however, that landholders are in a perfect position to be able to pay, for they have an asset, land, whose value is derived from and reflects its capacity to produce a return with the appropriate input of labour and capital.

LVT is thus payment for benefits received, compensation to the rest of the community for exclusive use of a particular site. What the landholders achieve thereafter, they are free to enjoy untaxed or, depending on how high the land value levy is set, taxed at a much lower rate. What could be fairer than that?

The benefits received by virtue of paying rent for exclusive use of a plot of land need not always be for purposes of economic exploitation. Land might, for instance, be enjoyed for residential use. Indeed, site value is being paid to-day either in the purchase price of a house or in the rent handed over to its owner. LVT captures the rent of land for public revenue and allows removal of taxes from man-made wealth.

"The amenities provided by natural surroundings, society, and government, make some places so obviously more congenial than others. Justice demands that those who enjoy these amenities should pay for the privilege according to the degree of benefit accruing to the position they occupy"—Sir Kenneth Jupp ("Land & Liberty" magazine, Spring 2000).

Essential government services must obviously be paid for somehow. A tax should be:

1.  Equal and equitable in its burden.

2.  Certain and not arbitrary.

3.  Convenient as to the time and manner of the levy.

4.  Economical: inexpensive to collect and not unduly obstructive and discouraging to the taxpayer.

Land value taxation (LVT) meets all of these criteria.

There is here a fundamental issue of equity. Should citizens be penalised because they worked hard and applied their skills and labour? If people acquired wealth by anti-social means, this should be remedied by law enforcement agencies. Otherwise, if hard work, energy and enterprise are desirable attributes, and if increased productivity is a desirable goal, an undiscriminating tax on incomes or wealth per se is illogical and not in the public interest.

Income and corporate taxes and (in a time of structural unemployment, perhaps most of all) payroll taxes are inherently ill-conceived. Logically, revenue-raising should not be concerned with ability to pay. The most logical taxes are:

1.  those which focused on the use or possession of the community's natural resources (of land, sea and air);

2.  charges for the use of services or facilities provided by the community;

3.  charges, fines or contributions to offset costs imposed upon the community; and

4.  taxes or contributions to offset special benefits conferred upon particular groups or sectors within the community. While many of these contributions to revenue would tend to fall most heavily upon those who had the greatest ability or capacity to pay—because they used more resources or consumed more services—they would do so coincidentally and not because of their ability to pay.

Considerations of equity and efficiency lead to a fundamental and, in our view, logically unassailable decision, namely to prefer the benefit principle rather than ability-to-pay. Government should seek to avoid equating revenue-raising with simply taxing wealth. The legitimate generation of wealth through labour, skill and enterprise should be encouraged rather than penalised.

Exemplifying the maxim that taxing capital drives it away while taxing land forces it into use, an improved value tax such as the UBR [ie one on man-made improvements such as buildings] is not neutral in its effect and operates to discourage development by effectively penalising it.

A tax on unimproved land value is efficient. Ownership or occupation of land is primarily, if not exclusively, a benefit the components of which are its natural attributes and the public works and services available to it, together with the less tangible but nevertheless real benefits of membership of a cohesive organised society.

Land, like air and natural water, is a community resource the exclusive use or occupation of which by individuals should be paid for according to the extent of the benefit they enjoy. If all land in the UK were valued frequently and accurately and in accordance with the optimum use within the limits set by the planning consent as described in the planning register, a land value tax should be an accurate reflection of the current benefit derived from its use or occupation.

A land value tax bears most heavily upon those who have the capacity to own the most valuable land. Thus, without being aimed at the wealthy, it automatically (and equitably) also performs a redistributive function and effectively achieves cross-subsidisation.

Income is not a satisfactory measure of ability to pay tax; that because of the opportunities for avoidance and evasion which it presents the income tax ranks low on the overall scale of tax effectiveness and provides differing opportunities for non-compliance for different income classes and groups of taxpayers; that a nominally progressive rate structure does not necessarily make the rich pay more tax than the poor, although it is likely to make wage and salary earners pay more than other groups with comparable abilities to pay tax; that an income tax is consequently a weak instrument for achieving vertical and horizontal equity.

The virtue of regular taxes on property in terms of their inescapability is underestimated. The fiction that people pay the tax they are supposed to pay ignores the fact of tax avoidance and evasion. The tax system has generally been designed without any thought to the effectiveness of particular taxes, defined as the relationship of actual collections to nominal or potential collections. If tax reforms are to be effective they must start from the position that we will all avoid taxes to the extent that there are incentives and opportunities to do so; and that many of us will also evade taxes to the maximum extent possible. It follows that tax reforms must have regard to tax effectiveness—the prevention of avoidance and evasion—as a major policy objective in its own right.


It has always been understood that LVT is the collection as public revenue of the annual rental value of land (ARV). However, the Campaign has noticed that in recent months there have been several articles written in support of LVT, and whilst we naturally welcome this development, we are disturbed to note also that they appear to be advocating a tax based on the selling price of land, which we refer to as Capital Value (CV) assessment. In our view this is utterly mistaken. It would be unfair, and would consequently raise difficulties for public acceptance. There would also be practical problems.

The Campaign speaks from experience. In 2005 it was one of the sponsors of a CV valuation study. The area included residential property subject to an annual property tax of around £1,000 per annum, at the same time as commercial property was subject to about five times that amount per unit of floor space. This led to an under-valuation of the commercial properties relative to the domestic ones as capital values were depreciated by the capitalisation of the actual amount of the property taxes payable. We then capitalised the actual amounts of Council Tax and UBR payable and added them to the selling prices, which had already had the hope value "stripped out". Thus the valuations were very much adjusted from actual selling prices.

The fundamental objections to the use of CV assessment (though not of course to the use of CVs as valuation evidence) are:

1.  CV represents the capitalisation of the rental value that is uncollected. This is in our view the most serious objection. CV is not even a reliable proxy for ARV. To levy a tax on CVs will fail to take account of the land rent that is already being collected at the time of valuation.

2.  CV includes hope value. This will include expectations of what planning authorities might decide in the future and therefore allows scope for endless argument. ARV, on the other hand, is the value of the consent that has actually been granted. There is no dispute.

3.  CV is a tax on a value that can only be realised on sale. It is therefore unfair to landowners and gives rise to a legitimate objection to LVT as an unjust tax. The objection does not apply to ARV assessments as rental values can always be realised.

4.  CVs are volatile unless rates of LVT are high enough to damp the cycle. This can lead to hardship in some cases. ARVs are by contrast relatively stable.

5.  The primary value of land is its ARV. CV is a derivative value, subject to factors such as interest rates, market expectations and hope value based on the possibility of future development.

6.  The aim of LVT is to collect rent so why not simply measure the rental value? This is not difficult unless there is very little in the way of a rental market. CVs can be used as part of the evidence to construct the data set.

7.  LVT on CVs is lumpy—small differences in the rate result in large differences in yield and liability.

8.  To make sense and consistency of a CV system, it is necessary to capitalise the property tax actually being paid. Whatever ratio is to be used could equally well be applied to de-capitalising CV data for rental value purposes.

9.  When a tax is paid annually, it defies logic to seek to set an annual payment on a capitalised base, especially on one that must inevitably be beset by, frankly, guesswork. Commonsense suggests the adoption of annual rental value assessments.


It is possible to initiate the taxation of land values at the local level (in which case it may sometimes be referred to as site value rating or SVR) and extend it later to national level. There are complications associated with this approach, and the Land Value Taxation Campaign strongly urges the Treasury Committee to introduce and apply LVT nationally from the outset.

January 2011

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