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Work and prosperity
20 December 2012

The land tax is a bad solution to a genuine problem

David Cooper is the secretary of something called Liberal Democrat ALTER (Action on Land Taxation and Economic Reform). No doubt, readers of ConservativeHome would like to alter the Liberal Democrats in a variety of ways, but for the moment Mr Cooper’s arguments do merit some attention.

As he explains in a blog for Prospect, ALTER’s big idea is Land Value Taxation:

  • "The solution is a land value tax, an annual tax based on the value of the plot of land. This would be very difficult to avoid paying, and would ensure those who benefit from public expenditure shoulder their share of the costs. At present, the only serious tax on residential property is council tax, which takes a lower proportion of the property value as the property gets more expensive, thus punishing owners of low-cost homes and rewarding owners of more valuable properties. Furthermore, it reaches a maximum level once the house is sufficiently expensive, so a £30m house can attract the same council tax as a family home." 

If land value taxation is "the solution", then what is the problem? Cooper enlightens us by quoting Winston Churchill:

  • "Roads are made, streets are made, railway services are improved, electric light turns night into day, electric trams glide swiftly to and fro, water is brought from reservoirs a hundred miles off in the mountains—and all the while the landlord sits still… To not one of these improvements does the land monopolist as a land monopolist contribute, and yet by every one of them the value of his land is sensibly enhanced." 

According to Cooper, landowners are still freeloading on a massive scale:

  • "The total value of the private housing stock in the UK has risen from about £1.3tn in 1992 to about £4.2tn today… If the increase had been due to inflation alone, this would have taken the value to £2.3tn. The additional £2tn reflects the increase in the value of the land that the houses are built on. So landowners, including homeowners, have gained almost £2tn over 20 years from a rise in land values." 

Though some of this money does finds its way into the public purse, there is a strong case to be made for taxing idle wealth in preference to wealth creating activity. The trouble is that a land value tax is a really bad way of doing it.

First of all taxation should always be related to the ability to pay. Just because someone owns land it does not mean they are making money from it. They could, of course, sell some or all of it to pay the tax – which could encourage more productive use of the asset; but when it comes to people’s homes, it is surely deeply immoral to apply such an argument.

Secondly, where property is rented, the cost of the tax would most likely be passed on to the tenants. In effect, the burden of the land value tax would fall upon the shoulders of the landless. Some irony.

These and other objections could be addressed if the tax was only payable when the property was sold and in proportion to the increase in its value over that period. However, this could be achieved (and to some extent already is achieved) through capital gains taxation.

In other words, there is no need for a separate land value tax, but rather a good look at what should and shouldn't be subject to CGT.


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