Nouslife: A land tax is 200 years overdue

11 January 2007

A land tax is 200 years overdue

An aquaintance and sometime blogging buddy of mine is very keen on the idea of land tax, and I must admit I have felt he has a point. Here's one important point from the recent Guardian article on the matter.

Residential property is an unproductive asset. If all houses rise in price, we do not, as a society, get richer. As Mr Weale noted in a fine paper last year, rising house prices do not create wealth, they merely transfer resources from people who will own houses in the future to those who own them at present.

As someone caught up in the thing about not being able to buy a house because we are in accommodation tied to a clergy job so we don't get enough to buy a house (even leaving aside the debate on the ethics of second home ownership), but at the moment, the possibility of doing so on or close to retirement seems ever more distant as the goalposts seem to move up ahead faster than our savings. Furthermore this is linked to ...

Even allowing for Britain's lack of housebuilding and its rapid population growth, Mr Weale thinks house prices here are 20% or 30% above the level that can be explained by the supply and demand.

Furthermore

house price gains are not taxed, meaning it is has a tax advantage over any other type of asset ... The government builds a new school in an area. The school is a success. This pushes up the house prices in the area leading to a windfall, untaxed gain for home owners as a direct result of government spending. The teachers in the school, on their modest salaries, will probably not be able to buy a house close to the school. There is clearly a problem here.

So, not only for selfish reasons, but for reasons of equity as outlined in other parts of the article,

... what is to be done? Mr Harrison, Mr Weale and other economists say the burden of taxation needs to be shifted off income and profits and on to those untaxed gains in property values. In short, we need a land value tax.

And it turns out that the idea comes with a good pedigree:

This is a not a new idea. Adam Smith argued two centuries ago that such a tax was a "peculiarly suitable" way to raise revenue since it did not distort people's incentives to work, save and invest. Churchill favoured a land value tax, as did Lloyd George. Mr Weale advocates a tax charged on residential property at 1% of its value each year, replacing council tax.

And in fact we are told that it is in use in some places in the world already;

Many countries, such as Denmark and Australia, already have some form of value tax. Hong Kong - that bastion of free-market capitalism - has no private land ownership at all. Land is owned by the state and leased.

I gather there are some cities in the USA which use it too. It seems to me it would be a good alternative to a chunk of council tax. For me one of the stronger arguments for it is this:

Land has a scarcity value when it is in desirable locations. That value is not down to individual effort but derives from the community, and often from schools, hospitals and parks provided by the public purse. Therefore, as the economist David Ricardo explained, land has a rental value that can be taxed.