HC 1652 Communities and Local Government CommitteeWritten submission from the Coalition for Economic Justice (CEJ)

1. The Coalition for Economic Justice (CEJ)

Organisations that make up the CEJ are concerned with:

fair, efficient and effective taxation;

the collection of natural resource rent to pay for public expenditure and to replace those taxes that are unfair, avoidable and/or which act as a drag anchor on the economy;

policies that ensure the efficient use of the UK’s and the world’s natural resources; and

policies that enable the provision of affordable homes, affordable business premises and which stimulate the sustainable production of goods and services.

The CEJ has no political party allegiance though some of its member organisations do.

2. Summary of CEJ’s Response

The true economic value of each site (the economic rent) is the surplus income the site can produce in excess of the market-determined rewards to suppliers of things made and services used in the process of production.

With particular regard to funding housing supply the CEJ recognises there are two distinct elements that make up the cost of housing provision:

(I)the cost of constructing and maintaining the building itself; and

(II)the cost of the land (ie the site or “location”) each building occupies.

The cost of constructing or maintaining a building does not vary to any great extent across the country; there may be marginal differences in wage levels and purchasing building materials but these are insignificant compared to the variable cost of the land. However, the cost of purchasing or renting land does vary considerably according to each site’s location. Buildings deteriorate and lose value as normally happens with anything made by human effort.

Land is a natural resource and is of fixed supply with no cost of production. Some locations are naturally more attractive or desirable than other locations and this is reflected in land values. But, the value of a particular site naturally increases as population grows, local services improve or the productivity of a site is increased by improved techniques such as new technology or labour-saving methodology. In addition, the selling price of a site can be subtly inflated by sellers who demand a price higher than the current value in anticipation of future land value increases (hope value) and by land speculators keeping buildings empty and sites idle thus creating an artificial shortage of land and hence a fabricated increased scarcity value.

The true economic value of each site (the economic rent) is determined by the surplus income that a site can produce in relation to a marginal site with no surplus income. The surplus income of a site is measured by deducting all the costs of production from the total income that the site produces. The cost of production includes wages, raw materials, machinery, computers, buildings, tools, transport costs, essential expenses, bank charges and a “reasonable” profit. Where these are in balance, the site will be used to produce wealth. Where the costs of production are greater than income, the site will be below the margin and will remain unused and jobs and homes will disappear. However, the greater the surplus of income over production costs, the greater the annual economic rent of the site. This surplus is clearly not a cost of production but a windfall for the economy which is currently collected by landowners.

However, taxes on wages and trade increase the cost of production, reducing the rent surplus and force some sites that could produce without taxes below the margin—creating unnecessary unemployment.

As local economies flourish around a site, so the surplus income—the rent—increases and landowners take that surplus as their unearned income.

The CEJ argues that the rent of land is created by society’s combined economic effort and not by owners of land and therefore should be collected by government to pay for the cost of running and improving public services.1 By collecting at least some land rent from landowners, government has the opportunity to abolish or reduce those taxes that stifle positive economic growth and cause unemployment and poverty.

The CEJ and others who examine the economic effects of privatised land rent predicted the current financial crisis would occur due to speculation in land causing a property bubble encouraged by the banks unfettered lending to speculators.2

The CEJ asserts the economy will inevitably be subject to regular and predictable economic booms and busts so long as the economic rental value of land (and of other natural resources) continues to go to private owners instead of being used as a positive form of taxation.

3. CEJ Recommendation

In response to this consultation on funding housing, the CEJ therefore advocates the shifting of current property taxes off buildings and on to each site’s annual rental value according to its optimum permitted use by abolishing current property taxes (National Non-Domestic Rates, Council Tax and Stamp Duty Land Tax) and introducing an annual Land Value Tax on all land thereby:

acting as an economic incentive for property owners to bring empty and underused sites into full use;

increasing the supply of building land for sale rather than it being held out of use for speculative purposes;

reducing the opportunity for land owners to exploit public investment into projects that require the purchase of land by increasing land prices above its true economic value;

reducing the need for “urban sprawl” on to green land with the wastefulness of commuting; and

ensuring grants provided to business or organisations are used for the purpose intended rather than being leached into land values3 and therefore being diverted to land owners as happens at present.

4. CEJ’s Response to Issues Set out in the Consultation Paper

(I) How and where the more limited capital and revenue public subsidy can best be applied to provide the biggest return on the investment, in housing supply terms

The CEJ asserts that under the present system of taxation, any public subsidy or grant will ultimately increase the rental value of the land, by the same amount as the grant or subsidy.4 This effect has been observed over the years by economists where subsidies are granted to farmers under the Common Agricultural Policy; rate free periods and grants given in previous Enterprise Zones; higher house prices where domestic rates were kept low (and vice versa—lower house prices where high domestic rates were applied) and with other grants and subsidies.

Grants and subsidies will eventually be capitalised into land prices and are not an effective means of financing social housing and two sources in support of this statement are:

(a)The Centre for European Policy Studies (CEPS) Study on the Functioning of Land Markets in the EU Member States under the Influence of Measures Applied under the Common Agricultural Policy states “Economic theory, as well as empirical findings, suggest that the way in which agricultural support is provided has an influence on land markets, because payments capitalise to some degree into land values, affecting both the sale and rental price of land.”

(b)In their publication “Capitalization of Central Government Grants into Local House Prices: Panel Data Evidence from England (Version: August 26, 2010)”, the authors—Christian A L Hilber, LSE & SERC; Teemu Lyytikäinen, LSE & SERC and Wouter Vermeulen, CPB Netherlands Bureau for Economic Policy Analysis, VU University and SERC—state “we explore the impact of central government grants on local house prices in England using a panel data set of local authorities (LAs) from 2001 to 2008. Electoral targeting of grants to LAs by the incumbent national government provides an exogenous source of variation in grants that we exploit to identify their causal effect on house prices. Our results indicate substantial or even full capitalization. ... Our findings imply that the possible crime prevention effects or lower taxes would increase house prices and rents in inner cities, which are largely populated by renters. Beneficiaries of the change are (the few) homeowners as well as landlords who own most of the inner city properties. Private renters would likely not benefit from the additional funding because they pay via higher rents for the benefits of the grant increase. Social renters may benefit to the extent that the grant increase does not affect their rents.”

The CEJ therefore concludes that until at least part of the economic rent of land is collected by government, any subsidy or grant will always divert to landowners in increased rents or higher land prices; this fundamental fault with economic understanding must be corrected to ensure all capital and revenue public subsidy is used in the funding of homes.

Once the economic rent of land is collected by government, then all of the limited capital and revenue public subsidy can best be applied to projects where the land concerned is owned by not-for-profit organisations including housing associations, housing co-operatives, community land trusts. By allocating any subsidy to non profit making bodies, any surplus income will thereby be ploughed back into maintaining those projects and/or enabling further investments in other housing projects.

CEJ Response to Issues (II) to (VII)

The CEJ reasserts that whichever path of financing housing the government chooses, unless the land issue is addressed, all government expenditure will be capitalised in land values and therefore in land costs. If the decision is for local authority housing to be self funding, then the higher land costs will mean higher rents being paid by tenants.

October 2011

1 See David Ricardo’s theory of Economic Rent.

2 See “Power in the Land” 1983 and “Boom and Bust” 2005, by Fred Harrison.

3 Centre for European Policy Studies (CEPS) Study on the Functioning of Land Markets in the EU Member States under the Influence of Measures Applied under the Common Agricultural Policy.

4 For explanation see Ricardo’s theory of Economic Rent.

Prepared 1st May 2012