Since the UK voted to leave the EU in June, the Tory leadership has been determined to make it clear to the rest of the world that Brexit Britain will remain “open for business”.
A recent report published by the Institute of Economic Affairs (IEA) has suggested numerous tax and government spending reforms intended to achieve just that. The authors encourage Chancellor Philip Hammond to take a sledgehammer to the UK’s tax system to stimulate economic growth, in what has been dubbed a “bonfire of taxes” by the Telegraph.
A key part of their solution is to replace several taxes with a new land value tax, described in the report as “well understood by economists to be one of the least growth-inhibiting taxes available”.
The idea of a land value tax – or LVT- has a long history, with figures from the 18th to early 19th century such as Thomas Paine, Adam Smith and David Ricardo supporting its implementation. It is closely associated with American journalist and economist Henry George, who believed that a tax on land could act as a “single tax” and replace all other taxes. LVT was also described by 20th century economist Milton Friedman as “the least bad tax”.
In the UK, a land value tax was proposed in 1909 by then Chancellor of the Exchequer David Lloyd George and his ally Winston Churchill. The reform was included in their People’s Budget but was ultimately rejected by the land owners who filled the House of Lords.
More recently, LVT has been supported by the Green Party and Labour’s Shadow Chancellor John McDonnell.
Numerous arguments are made in favour of LVT. Firstly, increases in the value of land are largely a result of the economic activity of other people. It is possible for land owners to receive unearned income simply by speculating on increases in the value of land without making any improvements themselves. Furthermore, by taxing land, governments can recoup some of the money that they invest in infrastructure and utilities, rather than allowing the resulting increase in land values to merely provide a windfall for land owners.
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Secondly, the tax would encourage owners to develop valuable land rather than leaving it unused. In particular, sites in inner city areas would be used more efficiently, leading to a reduction in urban sprawl.
Unlike corporation and income tax, LVT would be virtually impossible to avoid. Advocates also claim that it would stabilise the economy, curbing the boom-bust cycle.
Lastly, switching to a land value tax means the burden of taxation can be shifted away from productive enterprise, and taxes that fall mostly on the poor can potentially be reduced or even abolished.
In the UK, three taxes that are usually considered prime candidates for replacement with LVT are:
- Council tax – In the above-mentioned report published by the IEA, council tax is derided as “Confused, outdated and unpopular”.
The regressive nature of council tax has been criticised by journalist George Monbiot: “Why should council tax banding ensure that the owners of cheap houses are charged at a far greater relative rate than the owners of expensive houses? Why should Rinat Akhmetov pay less council tax for his £136m flat in London than the owners of a £200,000 house in Blackburn?”
Furthermore, MSP and LVT advocate, Andy Wightman of the Scottish Green Party has noted that 83% of households in England would immediately be made better off by a revenue-neutral shift from council tax to a land value tax.
- Business rates – The IEA has previously criticised business rates in a blog post arguing for LVT: “Ideally, as argued here, they [the government] should at minimum consider scrapping business rates and replacing them with LVT. Business rates have long been criticised by many businesses because of their complexity and discouragement of investment and growth.”
Another problem is that business rates are reduced or zero for charities, agriculture and unused or underdeveloped land, which, according to the IFS, “provides a clear and perverse incentive to use land inefficiently”.
- Stamp duty -It has been claimed that stamp duty, a tax on property purchases, has “a strong claim to be Britain’s worst tax”.
Jonathan Isaby, Chief Executive of the TaxPayers’ Alliance says that “Stamp Duty is unfair, unjust and must be reformed. It stops ordinary families moving up the property ladder, discourages the elderly from downsizing, and worst of all is a barrier to young people looking for their first home”.
However, abolishing these taxes could be just a first step. As mentioned above, a land value tax could also be used to shift the burden of taxation away from workers and businesses, thus encouraging enterprise and entrepreneurship. Taxing land rather than income would help the government to achieve its aim of “making work pay”.
A shift to a land value tax would encourage economic growth as it would result in lower “deadweight losses” than other forms of taxation. Economist and land value tax advocate Fred Harrison estimates that these deadweight losses amount to around £500 billion every year: “How does this happen? Taxes such as those on corporate profits, consumption and most of the rest of the fiscal tools imposed on the people of Britain result in negative forms of behaviour. The cumulative effect of all those distortions can be summed in one statistic: £500bn. That is the additional annual wealth and welfare which the people of Britain would produce if they were not burdened by Treadmill Taxes… That is because the incentives to work, save and invest would favour higher productivity in the way people went about their daily lives.“
Although, strictly speaking, they don’t have a land value tax, Singapore and Hong Kong are good examples of places where land rents have been captured for public revenue. In Singapore and Hong Kong most land is owned by the government, which leases it out to businesses and private individuals.
According to economist Neville Bennett, Hong Kong raises approximately 38% of its revenue from land leases. This has enabled the city state to keep its taxes on businesses and income relatively low. Income tax is very low in Hong Kong, with a top marginal rate of just 17%. Corporation tax there is 4% lower than in the UK (16% vs 20%).
Similarly, the highest earners in Singapore pay a maximum marginal rate of 20% on income above $320,000, while businesses pay a flat rate of 17%.
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Land value taxes have been implemented in a couple of European countries. One of these is Estonia. In part thanks to its use of LVT, Estonia is considered to have the most competitive tax system in the OECD.
Denmark also has a land value tax in place, and like Hong Kong and Singapore, it has been among the top six countries in the ease of doing business index every year since 2008. Impressively, Singapore topped the rankings every year between 2007 and 2016.
Although numerous other factors contribute to the ease of doing business in a particular country, basing their tax systems on capturing land rents clearly hasn’t had a negative impact on those countries in this respect.
In addition to regularly featuring among the easiest places to do business, these places also perform significantly better than the UK in terms of budget surpluses/deficits.
The most impressive record belongs to Hong Kong, which has achieved a budget surplus every year since 2006, while Singapore has done so on seven occasions over the same period.
Meanwhile, although not as impressive as Hong Kong or Singapore’s records, European countries Denmark and Estonia have also registered multiple budget surpluses during the period 2006-15.
By contrast, the UK has only achieved a budget surplus eight times in the past six decades, and not once in recent years, despite the austerity measures implemented by the coalition and subsequent Conservative government.
If the government wants to ensure that Brexit Britain is truly open for business, it would be well-advised to consider the examples of Hong Kong, Singapore, Denmark and Estonia and take a serious look at the idea of land value taxation.
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