Labour Manifesto 2017: What is a land value tax? How would it work?

For residential property, home owners would probably pay a tax based on the value of the house. Firms would pay a tax based on the value of the business premises, including the land

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The Independent Online

The Labour general election manifesto talks of a land value tax.

“We will initiate a review into reforming council tax and business rates and consider new options such as a land value tax, to ensure local government has sustainable funding for the long term.” (p86)

But what is a land value tax? How would it work? And who would pay it?

What is a land value tax?

It would do what it says: impose an annual tax on land based on its market value.

So for residential property, home owners would pay a tax based on the market value of the house (since this would generally reflect the value of the underlying land). This would replace the council tax.

Meanwhile, firms would pay an annual tax based on the value of the business premises, including the land. This would replace business rates.

Wouldn’t it be a bureaucratic nightmare to value all the land in the country every year?

Not really. Business properties are already valued regularly (although not as frequently as they ought to be) by the Valuation Office Agency to determine business rate liabilities.

There is no reason why this could not be tweaked to cover business land values and also why the same could not be done by the VOA for residential properties. A wealth of online data from estate agents should make it easier for assessors to get it right.

How is this different from council tax?

Council tax is a regressive tax system which (for historic political reasons) means that those with lower value properties pay a larger share of the value of their property in tax each year than those in higher value properties.

Presuming a new tax were levied as a flat percentage of the value of the land, then those with property in the most expensive areas (or the largest amounts of land) would pay more because the market value of their asset would be higher.

Would this mean landlords would have to pay the tax, rather than residential renters?

It might if the levy was designed in that way. But one would expect landlords to fully factor the tax into rents, meaning that renters would not really be any better off in the end.

And business tenants?

As with a residential land tax, if the landlord was liable to pay it, business tenants could expect to see their rents rise commensurately. 

There would also be an important difference from the existing business rates system: a land value tax would be based on the full value of the commercial land, not just the buildings. 

What do economists say about the tax?

It has a lot of support. Taxing land is seen as practical and non-distortionary because land is an immobile asset. A wealthy person can’t move his or her land offshore to avoid the tax inspectors in the way that they can with stocks and shares.

It is also seen as efficient because it encourages landowners to use the land as productively as possible. The Institute for Fiscal Studies is pushing for business rates (on property) to be replaced with a full land value tax since this should encourage landowners to develop their land.

Land value taxes are also widely seen as fair, since urban land and residential property market values usually rise due to improvements in local infrastructure, which are paid for by all taxpayers. Under a land value tax, some of this uplift in wealth flows to the local community rather than accruing entirely to the lucky landlord.

Where does the idea come from?

It is commonly associated with the 19th century American economist Henry George, who recommended that taxes on land should replace all other taxes.

In Britain the Liberal government in the early 20th century came close to establishing a form of land value tax. Winston Churchill (who was then a Liberal) made a famous speech in Parliament in favour of a land value tax in 1909 in which he stressed the socially equitable nature of the levy:

“Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains - and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.”