How to Fund Basic Income in the UK Part 2: Land Value Tax

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In my last post, I explored how to fund a basic income in the UK using existing welfare spending and various changes to the income tax system. According to my calculations, these changes would result in a basic income of £4550 per person of working age.

I also mentioned a few additional or alternative sources of funding basic income. This post will look at the potential of one of those ideas: a land value tax.

A land value tax (LVT) is a tax on the rental value of a piece of a land, paid by the owner. Essentially, LVT is a form of rent that the owner is willing to pay to occupy a piece of land. It is not a tax on the buildings on a property, rather just on the value of the land itself.

For a brief overview of LVT see Dominic Frisby’s video below:

LVT has several advantages other forms of taxation. For one, it is much harder to avoid, since it is impossible to hide land.

LVT would help to reduce the UK’s level of inequality in terms of land ownership. For example, it has been shown that Scotland has “the most concentrated pattern of private land ownership in the developed world” with just 432 landowners accounting for half of all privately owned land. Also, a study by Country Life magazine reported that 36,000 people own half of Britain’s rural land. LVT would make it less profitable to hold on to land that is not being used, therefore freeing it up for someone who does want to use it.

Furthermore, the value of land is created by everyone in the community. For example, new businesses that provide jobs and services increase the desirability of an area and raise land values, resulting in an unearned windfall for landowners. The presence of residents with money to spend creates demand in an area, further contributing to land values.

Public investment also raises land prices. LVT would enable the government to recapture some of the public money that is spent on infrastructure. In a 2007 blog post, Labour’s now shadow chancellor John McDonnell gave the following example:

“…land values in East London have risen due to the Olympics, yet it is the investment of public money that has enabled the Olympics to take place and for land values to rise. A tax on land values will return some of this unearned wealth to the community”

Carol Wilcox, secretary of Labour Land Campaign, adds to this in her article “Why a land tax should be at the top of Labour’s agenda”:

“By valuing land regularly and collecting the rent, LVT creates a positive cycle of public investment => increased land values => increased LVT revenues => increased public investment.”

Winston Churchill was also a supporter of LVT. The policy was included in the 1909/1910 People’s Budget that he championed along with Chancellor David Lloyd George. Unfortunately, the budget was rejected by the House of Lords, due to the fact that many of the lords were landowners.

“Roads are made, streets are made, railway services are improved… 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.”

Winston Churchill

LVT would encourage the more efficient use of urban land and encourage more compact cities, as Frank de Jong from Earthsharing Canada demonstrates in this brilliant video:

It is often argued that a problem with basic income is that landlords would simply increase rents to absorb the extra money given to people. This is similar to the idea that housing benefit does not help renters, rather only benefits the property owner.

An article on progress.org about Finland’s plans to implement basic income describes this:

“By decreasing the current transfer payments and providing all persons with a guaranteed income, the basic income would at first increase land rent even more, as people could afford to bid higher for housing, and tax-free enterprise would bid more for commercial land. If the basic income is not paid from land rent, much of that income will be captured by landowners.”

The article argues that increasing other taxes to pay for a basic income would stifle economic activity and suggests land value tax as the way forward:

“Higher value-added and income taxes would impose a greater burden on labor and enterprise, when the unemployment rate of Finland is already ten percent…

The way to implement basic income without stifling employment and growth is to tap a source that does not flee, shrink, or hide when paid. That source is land rent.”

In the case of the UK, one potential barrier to using LVT to fund a basic income, besides convincing the public of the necessity of either, is that many LVT supporters would want to replace other existing taxes first before considering funding a basic income. In the UK there seem to be three main taxes that are candidates for replacement: stamp duty, council tax and business rates.

Firstly, stamp duty has been criticised as having “a strong claim to be Britain’s worst tax”. LVT supporter Joe Sarling explains the problem with it:

“Stamp duty… is a levy placed upon the buyer through the transaction and not the seller (who has arguably benefited from uplift in values without their own development). We shouldn’t want to discourage transactions – a higher number of transactions will mean households can move freely and make most efficient use of the stock available.”

Council tax is viewed as a regressive tax, based on outdated property valuations from the 1990s.George Monbiot has written about the inadequacies of council tax in the Guardian:

“The most expensive flat in that favourite central London haunt of the international super-rich, One Hyde Park, cost £135m. The owner pays £1,369 in council tax, or 0.001% of its value. Last year the Independent revealed that the Sultan of Brunei pays only £32 a month more for his pleasure dome in Kensington Palace Gardens than some of the poorest people in the same London borough.”

According to Andy Wightman’s report “A Land Value Tax for England”, if LVT were implemented 83% of English households would pay less than they currently do in council tax.

Lastly, business rates have been described as being the “single biggest threat to the survival of retail businesses on the high street”. Business rates are defined here as “a tax levied on non-residential properties, including shops, offices, warehouses and factories. Firms pay a proportion of the officially estimated market rent (‘rateable value’) of properties they occupy”. Abolishing or reducing business rates would likely encourage economic activity and potentially see Britain’s high streets flourish.

In “A Land Value Tax for England”, Andy Wightman discusses the perverse incentives created by business rates:

“Another effect of business rates in practice arises from the treatment of unused or undeveloped land, on which business rates are levied at reduced or zero rates. This provides a clear and perverse incentive to use land inefficiently. Indeed, this has led to a rash of garish press headlines about property-owners demolishing property in order to avoid business rates… If empty or unused property is taxed at a lower rate than property being used, then a tax disincentive to use it is created. An LVT avoids these problems.”

Current figures show that these three taxes generate £62 billion in revenue.

It is difficult to determine how high the LVT would need to be to cover these taxes since there are no accurate valuations of land values. However, in various reports (A Land Value Tax for England, A Land Value Tax for Scotland and A Land Value Tax for Northern Ireland), Andy Wightman has estimated a total rental value of £125.1 billion (likely an underestimate considering this excludes Wales and only includes residential land in Northern Ireland).

Wightman’s reports use figures from the 2011/12 financial year to calculate the amount that would need to be raised by LVT to replace council tax, business rates and stamp duty. Together, revenue from council tax and business rates in England has risen by approximately 8% since then. If we assume that land values have risen at the same rate then we can calculate a rental value of £135.045 billion for land in the UK.

Therefore, to replace the £62 billion raised from these taxes, an LVT of 45.91% on rental values would be required.

If an LVT could be successfully implemented at this rate to replace these taxes, then it could eventually be increased to fund a dividend awarded to all citizens. In an interview in 1885, Henry George, the economist credited with popularising the idea of land value taxation, stated “I hold that land belongs equally to all, that land values arise from the presence of all, and should be shared among all.” If land belongs equally to all, then it seems only fair that all citizens should see a return from land values in the form of a citizens’ dividend.

Any additional revenue that is used to fund a citizens’ dividend could be divided among the UK population and added to the basic income of around £4550 that I calculated in my previous post (alternatively, of course, it could be used to reduce the proportion of the basic income raised through income tax). However, the rate of LVT would need to be significantly higher than 45.91% to achieve a meaningful amount.

For example, an additional 4.09% to bring the LVT up to 50% would generate just over £5.5 billion, equating to a dividend of only £85.63 per person. As this is an annual amount, this is clearly not very significant.

However, if the rate could be raised to 100% of the rental value, the potential revenue could rise to over £73 billion or approximately £1,130 for every person in the UK.

An alternative to a dividend is the idea of a “basic rental income” to replace housing benefits, as proposed by think tank the RSA. This is explained in their fascinating report “Creative citizen, creative state”:

“The third option which the RSA proposes for further exploration is the introduction of a ‘Basic Rental Income’. The Basic Rental Income would not be income-contingent and therefore does not have the same disincentive or perverse incentive (e.g. family break-up) effects as housing benefit and council tax credit. A Basic Rental Income based upon local market conditions (and this would vary from year to year) would be granted to every individual who rented rather than owned a property…

A Basic Rental Income would have cost implications. The source of funding for additional cost should be those who have gained the most from increases in housing equity…

The introduction of a land value tax or similar to fund any shortfall in the Basic Rental Income is therefore justified on the basis of gains received by a few from the institutions of society and its collective action failures rather than through the individual’s endeavour.”

This “basic rental income” would represent a transfer of wealth from landowners to renters. Some 10 million households rent privately or are in social housing in the UK. If current spending on housing benefit (nearly £26.4 billion) were added to an LVT of 50% to 100% on land rents, a potential basic rental income of between around £3,190 and £9,940 could be provided to each of these households.

The introduction of LVT would result in improved productivity and increased economic activity brought about by abolishing the other taxes and the gradual redistribution of wealth from landowners to the rest of the population. This in turn would increase land values. Therefore, even if the LVT used to fund a citizens’ dividend or a basic rental income was set at a low level, it could grow as a nominal amount over time.

A land value tax to reduce other less progressive taxes ought to be implemented to increase prosperity and revive Britain’s high streets. Once that is achieved, the potential for a citizens’ dividend or basic rental income funded by land rents should certainly be explored.

See also:

How to Fund Basic Income in the UK

How to Fund Basic Income in the UK Part 3: Carbon Tax and Dividend

How to Fund Basic Income in the UK Part 4: Sovereign Wealth Funds and Dividends

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