29 March 2007

Land Value Tax 4 - A Good Tax

Back in October I kicked off a discussion on land reform and land value tax (LVT) with the provocative title where's my acre? alluding to the fact that the UK contains 60 million people living on 60 million acres. I followed that post up with a couple more, but let the subject wither on the vine somewhat.

Having at least convinced myself of the virtues of LVT, my next post was to be on how to implement LVT, but it is an extensive project. Fortunately a bright spark has taken up the cause and has given me sight of his paper on implementing LVT. His work is particularly strong on addressing potential issues and objections. I hope to be able to let you know when he finalises it. In the meantime, I thought I would prepare a few lines on why replacing CGT, IHT, council tax and stamp duty with LVT would be efficient.

1. Economic efficiency. Tax should not distort business decisions and should discourage neither economic growth nor individual enterprise and effort.

The introduction of LVT would address several market distortions in the UK tax system. The current system taxes built property heavily. LVT removes this disincentive to build which would address housing shortages through the market. Secondly, it would level the playing field between land and other asset classes that are taxed such as cash and shares. Further, because land is finite there is no deadweight cost associated with lost output as a result of LVT.

2. Fairness The least well-off should pay a smaller proportion of tax. People in similar circumstances should be treated equally.

Counter-intuitively, more expensive residential properties have a lower council tax to property value ratio than cheaper properties. In the round LVT would be more progressive than the existing basket of property taxes.

3. Simplicity and transparency Tax should, as far as possible, be clear, easy to understand, of certain application, easy to calculate and easy to collect.

LVT is a very simple tax to understand. There would be no exemptions and due to its nature, avoidance or cheating would be very difficult. Replacing the existing taxes will reduce the number of unfair loopholes that currently exist.

4. Stability and predictability Once a tax has been adopted, changes to tax law should be kept to a minimum.

There are three parameters related to an LVT assessment ; land area (a matter of fact), land value (to be independently assessed) and the LVT rate applied (I would apply a single rate such as 1.5% of land value per annum). Herein lies a risk. If land values fall, so will LVT revenues and there could be a risk of the government tinkering with the rate and precipitating further falls in land values. I would legislate that LVT rates can only be moved incrementally and within a range (say 1% to 2.5%).

This topic has stimulated enjoyable debates in the past. Looking forward to another one.

4 comments:

Newmania said...

It sounds new and different and therefore I do not like it . It also sounds silly. there is ample pressurre to build housing its the planing permission that is lacking, ( Unless you are Prince Charles)

Newmania said...

It sounds new and different and therefore I do not like it . It also sounds silly. there is ample pressurre to build housing its the planing permission that is lacking, ( Unless you are Prince Charles)

tory boys never grow up said...

I think if you were designing a tax from scratch LVT would have a lot going for it - and it doesn't stand up badly against Adam Smith tenets of taxation. It could also be made as progressive as you political views want. However we are not starting from scratch and any sudden chnages in how stamp duty is applied to property could easily introduce a lot of instability into the property market and then the rest of the economy - recent experience e.g 1979-83 an the poll tax is that sudden changes in fiscal policy cause an awful lot of problems.

Also not sure that we don't need a tax which encourages older people to move to smaller properties once their children grow up - a lot of new properties are having to be built because of this.

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