Written evidence submitted by ALTER
EXECUTIVE SUMMARY
Economic rent, or "resource rents", are
a major component of national income. At present taxes are only
collected from it very indirectly and without regard to its chief
economic characteristic as a surplus. By shifting taxes off labour
and capital and on to economic rent, growth and employment would
be stimulated and many distortions in the economy would be avoided.
Annual land taxes would be the simplest means of collecting rent
as public revenue.
In particular, the margin of production, both geographically
and in specific areas of the economy, would be relieved of taxation,
whilst taxes would be borne instead by recipients of the surplus
attributable primarily to location. This would be both efficient
and fair, since providers of labour and capital would pay less
tax and rentiers would pay more.
Simultaneously, excessive rises in land prices would
be modified by a tax based on regularly reassessed land values.
This would prevent the kind of speculation fostered by the banking
system that led to the crisis of 2008-09 and would also greatly
stabilise trade cycle fluctuations.
Taxes assessed on economic rent are certain and easy
to collect, unlike most current taxes. They help secure efficient
allocation of factors of production and hold down consumer prices.
Complicated provisions to make tax assessments fair are not required.
This tax shift would move the U.K. economy away from rent-seeking
and towards a genuinely free market economy based upon equitable
rewards for those who actually produce goods and services.
1. The basic recommendation on taxation from
ALTER is that public revenue from the economic rent of land, otherwise
known as resource rents, should be maximised, rather than taxing
labour and capital. Such a "tax shift" would have fundamental
beneficial effects on the economy. The case for it is both moral
and economic. Since the submission that follows is largely concerned
with the latter case, the moral case is briefly stated first.
The economic case is then made in answers to the questions posed
by the Committee.
2. The moral case, acknowledged by virtually
all economists since Adam Smith, is that the economic rent of
land arises not from the actions of landowners but as a surplus
from the nature and location of the particular land itself. Ricardo,
Marshall, J S Mill, Henry George, Samuelson and Milton Friedman
all recognised that whilst labour and capital may receive short-term
quasi-rents, only land attracts a permanent surplus over and above
the value of inputs from labour and capital. Such economic rent
in relation to a particular site has three causes: natural resources
such as fertility and minerals; local population providing labour
and markets; and public services in the form of transport facilities,
police, schools and so on. Since none of these three are the outcome
of individual effort or capital, there is no moral case for economic
rent to be appropriated by individuals. Therefore it belongs by
right to the community which plays a major part in its creation
and which has an inherent claim to the natural attributes of the
land, if not to the land itself. This moral case was clearly recognised
in the case of North Sea oil, when Chancellor Lawson introduced
a system of royalties for oil production that took account of
the differential value of output from oil wells ie in recognition
of economic rent in the North Sea.
What are the key principles which should underlie
tax policy?
3. Most important is the principle that taxation
should support production and not impede it. Taxes on labour and
capital always tend to inhibit production, because both factors
require a reward in the form of wages and profits in order to
enter and be sustained in the productive process. Land and natural
resources do not require such a reward, since they are present
ab initio. Of course, if they can be withheld from production
by owners some reward may be required, but this assumes
that no charge is levied on unused land and resources, which would
not be the case if a tax on annual land values were introduced.
4. The principle of fairness is perhaps universally
acknowledged. In our view, fairness means rewarding effort, ability
and initiative and recognising need, whilst withholding reward
from those who contribute nothing. It is hard to see how a claimant
to economic rent contributes to the economy, since rent is a surplus
arising as outlined above. On the other hand those who offer labour
and capital are providing factors of production that actively
participate in creating value: arguably all taxes on these factors
are unfair.
5. Taxation must be adequate to meet current
public expenditure needs, both central and local. Current conditions
demonstrate that tax policy is severely strained to meet this
requirement. Economic rent is the great untapped fund available
to remedy this.
6. The tax collection system must to simple,
efficient, certain and transparent. The present system has become
unduly complicated. Taxes on labour and capital are bound to be
complex if they take account of individual circumstances. Taxes
levied on economic rent, however, are simple to assess, in so
far as particular pieces of land have a single annual value, which
can be updated easily, particularly if a land registry is used.
7. Non-evasion and non-avoidance: both illegal
and legal methods of reducing taxes decrease the tax take. A tax
on annual land values cannot be nullified by such means, for example,
as a change in the domicile of the owner or concealment of the
asset taxed.
How can tax policy best support growth?
8. Taxes on labour and capital inhibit growth
by reducing the rewards for effort, skill, enterprise and innovation,
including the use of new technology. This is especially so in
relation to incremental use of both factors, since tax rates tend
to be progressive. Indirect taxes, such as VAT, have a similar
effect by their impact on firms' revenues, which forces them to
reduce demand for factors. By contrast, a tax levied on economic
rent has no impact at all on the returns to labour and capital.
Such a tax is diverting an income flow from private recipients
of rent to the public purse, where these recipients are strictly
rentiers and not active contributors to production.
9. The way in which a land value tax (LVT) would
encourage growth is best seen in relation to the margin of production,
a concept too often ignored in current economic theory and practice.
The margin may be regional or local. Firms in more remote regions
and those on less central sites tend to produce less value added
than those at more favoured locations. A tax levied on economic
rent does not strike at these vulnerable marginal firms, for the
simple reason that it falls only upon the excess of the value
of output over that produced at the margin for the same input
of factors. Only the rentier who takes this excess, not the productive
firm, would pay the tax.
10. This principle, that a tax on the economic
rent has no disincentive effect at all on production, implies
that firms could be relieved of present taxes if these were replaced
by it. Hence they would immediately have a strong motive for increasing
their employment of factors and their output. At the same time,
new firms could enter an industry without the burden of incurring
taxes on their production. They would have a permanent "tax
holiday"! A complete tax shift of this kind may be politically
impossible, but to the extent that it might be carried out there
would be a corresponding new dynamic in the economy: growth by
existing firms and by new ones.
11. This cardinal feature of relieving the margin
of production is not the only way in which LVT would encourage
growth. If levied on all sites, including those left out of use,
land utilisation would become much more efficient. Derelict but
potentially productive sites would be brought into use as landowners
found that leaving land idle would incur a cost. (The present
empty property tax suffers from the serious drawback of taxing
just the buildings, thus encouraging their destruction.) Occupied
sites would also gradually be re-allocated to their most efficient
use. At present there is little incentive for this to happen,
because economic rent may not be maximised if it gives a good
return when it could in fact yield a better one. That this is
the case is proved conclusively by the large increases in the
capital value of sites that are granted planning permission. They
are clearly under-utilised until the permission is granted. Of
course, planning would remain necessary under a LVT regime, but
it would be carried out within a framework of best land use under
pre-existing plans.
12. Finally the situation for business start-ups
would be transformed by the tax shift. LVT tends to reduce land
prices pro rata, so that land costs, whether as
capital payments for land purchase or rent under leases, would
be reduced or eliminated for new firms. Moreover, new firms would
become more creditworthy, both because they would not need to
incur heavy start-up costs and because their growth prospects
would be considerably better under such a tax regime. Firms that
were no more than speculators in land would be correspondingly
less creditworthy, thus relieving the banking system of a major
form of risky loans.
To what extent should the tax system be structured
to support other specific policy goals?
13. The tax shift outlined above has other merits
besides supporting growth in the economy. Growth implies increased
employment, reducing social and economic costs of joblessness.
Taxes taken off labour mean it costs every organisation less to
employ; taken off capital, it improves employment in manufacturing.
Self-employment might also be stimulated by a reduction in start-up
costs from a fall in land prices and the easing of bank credit
for small businesses no longer burdened by high rents and taxation.
Partnerships and co-operatives, as opposed to large oligarchic
organisations, might be encouraged. The employment market would
thus be more flexible and less dominated by ponderous wage bargaining
processes.
14. Such changes would go some way to make a
fairer distribution of income and wealth a realisable policy goal.
Wage rates could rise in keeping with greater labour productivity,
and incomes derived from private capture of economic rent would
diminish. So too would the capital values associated with valuable
land now held free of any tax on its annual value. Speculative
fortunes made from rising land prices would, in particular, be
cut back as an annual LVT began to bite. This need not mean that
land prices would fall dramatically, if at all. As the economy
grew under the impetus given by the tax shift, land might become
more valuable, even whilst a tax on land value were imposed. This
would enable the tax rate to be increased, yielding yet more public
revenue.
15. LVT would support regional policy goals,
tending to significantly "level the playing field" as
between poorer and wealthier regions, without incurring public
expenditure. There would be a concomitant improvement in the relative
economic conditions of poorer regions, such as parts of the North
and of Wales, for the reasons given above. Overheating of the
economy in more prosperous areas would similarly be modified,
for these would pay over a relatively higher amount of rent as
public revenue, thus reducing speculative investment and the claims
of rentiers. The genuinely productive activities of the City of
London, for example, would become more easily identified as they
were freed from taxation, whilst the rentier activities would
become subject to the new tax. A more balanced distribution of
production throughout the country would be the outcome, enabling
population, public services, transport facilities and much else
to become more equitably distributed.
16. An interesting side effect of the tax shift
would help to achieve a further major policy goal. A most significant
element in the asset price bubble of 2008 that brought the U.K.
economy almost to its knees was the huge upward rise in land prices
that had developed over the previous decade or so. This led to
a great deal of unwise bank lending for commercial and housing
ventures. Banks were bewitched by the expected continual rise
in land values that underlay the prices of commercial property
and private housing. "House prices" were, and are, largely
a function of the prices of the land on which they are built.
A tax on land values would prevent such a harmful surge in prices,
and a fortiori such a corresponding bonanza in speculative
lending by banks.
17. Policy regarding the banking system is closely
related to macro-economic stability, another major objective to
which tax reform is pertinent. How would a shift towards LVT affect
this? Present automatic stabilisers, such as unemployment benefits,
would be supplemented by a tax levied on inflated rents of land
in periods of rising output and prices and a reduction of LVT
yield when these decline. No change of tax rates would be required.
There is a strong correlation between fluctuations in land rents
and cycles in the nominal GDP. Indeed speculative motives probably
make such rents a leading indicator of GDP movements. There can
be little doubt that the crisis of 2008-09 would have been greatly
moderated had there been a substantial annual tax on such rents
in the preceding years. The introduction of LVT now would help
to ensure no repetition of the same disastrous hyperinflation
of land values and its accompanying financial crisis.
How much account should be taken of the ease and
efficiency with which a particular tax can be imposed and collected?
18. LVT is virtually impossible to evade or avoid.
The land remains through good and bad times, and cannot be moved,
unlike all other assets: even buildings, which can be destroyed
or not erected at all, if taxed heavily. Land value registers,
necessary for LVT, would improve the transparency and efficiency
of the property market. Recent research (Vickers, 2009) indicates
that the entire LVT administration system could be financed by
the private sector (primarily insurance and investment sectors).
19. Initially self-assessment could be used to
establish taxable land values. The landowner would have an incentive
not to overvalue the land, nor to undervalue it if sanctions were
attached, such as the testing of doubtful valuations by a public
valuation or even the compulsory sale at the market price of seriously
undervalued land.
20. This compares very favourably with the present
tax regime with its thousands of special provisions for a host
of taxes imposed on wages, pensions, dividends, interest, company
profits, capital gains, value added, etc.
Are there aspects of the current tax system which
are particularly distorting?
21. Distortion of the productive capacity of
the economy and of land use have been mentioned. There are, however,
other serious distortions, arising from the unsound principle
of taxing labour and capital rather than economic rent.
22. The idea that income is a measure of the
ability to pay tax has become deeply embedded in the national
consciousness. But income leaves out of account the wealth of
the taxpayer, which may differ greatly from his or her standing
as a recipient of taxable income. Wealth, in general, may be concealed,
held abroad or otherwise used to avoid the generation of taxable
income. Its owner can borrow against its value, enjoy tax-free
beneficial occupation of property, and afford expert advice as
to how to minimise the taxable income derived from it. Increases
in the capital value of assets are a greater source of wealth
creation than is saving out of income, as every successful entrepreneur,
bank director or speculator knows.
23. A wealth tax would be a complicated and probably
inefficient exercise. All real capital (ie buildings, equipment,
machinery etc.) has a limited life span. Land values alone provide
a permanent foundation for most private wealth accumulation in
the long run, often in the form of real estate directly owned,
but also through shares in companies that own valuable land, mineral
rights, and other natural resources. Much land value is hidden
in various kinds of such claims. Hence a tax on land values would
encapsulate most of the benefits that a wealth tax might aspire
to, without the serious drawbacks of trying to tax such an amorphous
thing as wealth.
24. Income is an especially poor measure of the
ability to pay, in a society where homes—their values largely
comprised of inflated land values—are bought through mortgages
unless they are inherited. One person may have inherited a family
house, free of a mortgage; another may be struggling to save a
deposit and then make mortgage payments for 25 years. If they
both have the same income, where is the fairness in the tax system?
25. A more technical point about distortions
caused by the present tax system concerns the "second best
theorem". This refers to the way in which indirect taxes
like VAT change the final prices of goods and services, so that
a Pareto optimum obtainable without those taxes is frustrated.
Taxes on land values have no effect at all on a Pareto optimum,
since collecting economic rent does not affect final prices (except,
of course, the capital price of land). Ricardo's famous adage
that price does not enter into rent is the general principle behind
this.
26. Finally there is the enormous distortion
in the whole economy arising from rent-seeking activity, rather
than production of goods and services. Firms of all kinds are
drawn into a search for available economic rent in the form of
capital appreciation of land—often leading to unnecessary
takeovers and asset stripping—investment in land rather
than in productive capital, lending by banks for land speculation,
and the siting of businesses in areas of high rent, rather than
in the most efficient location.
January 2011
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