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 ABILITY
TO PAY
PRINCIPLE
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.
CAPITAL VALUE
OR ANNUAL
VALUE?
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.
LOCAL OR
NATIONAL?
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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