Sunday, 24 June 2018

The (moral) case for funding public services with taxes on land values.

Like most LVT-ers, I have got bogged down in fairly nuanced economic and philosophical arguments for LVT, which the Homeys always counter with "I paid for my house out of taxed income, why should I pay a bit more every year just to keep it?" and so on. Like most LVTers, I leave it vague what the proceeds should be spent on, short of reducing other taxes and/or dishing it out as a Citizen's Dividend. And we all get bogged down in trying to explain the interaction between LVT and the planning system.

Somebody invited/challenged me to put the 'populist' case for funding public services out of taxes on land values (put farmland to one side, the value of farmland, excluding farm subsidies is negligible so not worth taxing), so here goes...

The short, non-intellectual, non-economic answer is "Because to a large extent, it is government spending (of taxpayers' money) which creates land values in the first place.". What's wrong with apportioning the cost of public services proportional to the actual value of the benefit that people receive?

So the reply to the Homeys is: you are not being asked to pay for land you already 'own', you are being asked to contribute towards the cost of all those things that maintain the value of your 'property', the same as paying a roofer to fix your roof or an electrician to fix your electrics.

Let's start with the core functions of the state, the most public of 'public goods' - defence, law and order and the fire brigade.

What would UK land have been worth in 1939 if we hadn't had an army, air force and navy? Everybody who could would have emigrated, and people would have waited for the Germans to redistribute the land to themselves before buying any from the new overlords. Or put it this way, who had more to lose - a tenant worker or the various Dukes? And who benefited most from the 1945 outcome, tenant workers or the various Dukes?

The same goes for law and order and fire brigade. We know that house prices and rents are higher in areas with lower crime rates; and lower in areas with higher crime rates. Let's take that to the extreme and ask what would the house you live in be worth if they released everybody from prison and sacked all the police officers? Not much. How much would home and contents insurance or car theft insurance cost? How much extra would you have to pay on your home and contents insurance if there were no fire brigade to put out a fire in your neighbour's house?

The total budget for all these is about £67 bn a year, which is coincidentally about the same as total revenues from Council Tax (less discounts and allowances), Business Rates and Stamp Duty Land Tax. Would it not seem reasonable to replace these three taxes with a new tax specifically earmarked for defence, law and order and fire brigade, calculated as a certain low percentage of the value of land (or of land and buildings)*?

Next, what about the education budget?

Education is not really a core function of the state, it is more of a 'merit good', but seeing as just about every developed country has a taxpayer funded system of universal 'free' education, we can safely assume there are good reasons for this, and that it leads to better outcomes overall than simply 'leaving it to the markets'. I accept that the UK state school system performs badly in international comparisons - and not for lack of cash - but the basic principles are sound.

At present, most of UK tax revenues are taken from the productive sector (in income tax, corporation tax, VAT and National Insurance), so it is businesses and workers who are paying for education. On the whole, people get their money back, but there is one group who benefits particularly - landowners.

We know that homes in the catchment area of a good state school sell (or rent) for a huge premium. So somebody who sells (or rents out) a home in such an area is cashing in on expenditure that 'somebody else' is financing; and people who buy or rent a home in that area have to pay twice over for their children's education - once via the tax system and again in higher purchase price or rent.

The situation is even clearer with universities, which are all taxpayer subsidised (tuition fees notwithstanding). Universities and university education benefits landowners directly and indirectly.

Rents - paid by students - are much higher in Oxford, Cambridge and London because there are thousands of students who need to live there. Those universities act as a magnet for high tech and research based businesses, who have to pay higher rent to be able to tap in to all the qualified people in the area. Half of all graduates from any UK university end up moving to one of these three towns (because of the job opportunities), meaning higher incomes and more demand for housing, pushing up prices and rents further still.

Seeing as higher earners are currently expected to pay considerably more than the cost/value of their children's state school and university places (and are more likely to send them to private schools), would it not make sense for the education budget to be funded out of a tax on land values, like school districts in the USA?

The total budget for education is about £87 bn a year. If there were an earmarked 'education tax' based on land values, we could just about get rid of the most economically damaging and regressive tax on the value created - or 'value added' - by private enterprise - Value Added Tax.

The National Health Service

The UK's health system is almost fully nationalised and funded out of general taxation, but this is not completely different to the system in all other European countries, where there is heavy state regulation of the medical system and the prices they can charge; these are all funded out of 'compulsory insurance', which is another word for 'taxes on earnings', as the contributions are usually set as a certain percentage of people's earnings up to a set amount.

While the NHS does not do well in terms of outcomes, it does perform well in terms of universal coverage and - administrative waste notwithstanding - is actually good value for money.

There is a premium for homes in the catchment area of good state schools or universities. The NHS has little such effect, either because standards are much the same everywhere or because statistics on the relative performance of local NHS trusts is simply not made public. But all things being equal, being near a GP surgery or a hospital with short waiting times must push up land values in that area.

Think about the opposite extreme, what if they shut down all GP surgeries and hospitals in the entire county of Kent - what would happen to selling prices and rents if people who lived in Kent had to shell out for private health insurance, which is always works out more expensive than the NHS because insurers have to make a profit and involve extra layers of admin. And payers would always have the realistic worry that private insurers find some loophole or other and simply never pay up.

This ties in neatly with another traditional argument advanced by the Homeys - what about a Poor Widow who still lives in the family home which for reasons beyond her control has rocketed in value? How will she be able to afford to pay the tax?

The commonsense solution is a roll up and defer-until-death option, but the logical rebuttal is, the average cost of NHS and social care is about £5,000 - £6,000 per pensioner; private health or social care insurance would cost twice that, so most Poor Widows In Mansions would still be getting reasonable value for money.

This is considerably more than today's Poor Widows were paying for the care of the generations before them, so there is no particular moral entitlement to it (unlike the state pension, which they were always promised in return for paying National Insurance contributions while they were working).

The total health and social care budget is £144 bn a year, if that were funded out of an earmarked tax on land values, this means we could scrap the second most economically damaging and regressive tax on earnings/private enterprise - namely National Insurance contributions and reduce the basic rate of income tax. State pensions could just be paid out of income tax in future.

Environment, housing, utilities such as street lighting, roads and transport

The list goes on, quite what kind of expenditure the government includes in these minor categories - and how much of it is actually worth doing - I do not know. But they are the type of expenditure that maintain land values, and benefit landowners in some areas more than others, total cost £52 bn a year.

Again, best funded by a tax on land values.

What does this mean for an actual household or business?

The total cost of all the above categories is about £350 bn a year, we can earmark duties on fuel towards the cost of 'environment' and transport; earmark duties on tobacco to the health budget: and split duties on alcohol between the budgets for health, transport (drink drivers!) and law and order, meaning that the total combined cost to be allocated between landowners would be about £300 bn a year.

A quarter of that would be paid on the most valuable land in city centres, which is largely commercial premises (shops, offices, restaurants etc), leaving £225 bn a year to be collected from the value of housing. As a rough estimate, this would average out at about 3.2% of the current value of each home.

So the tax on a median home would be about £6,000 a year. That's clearly a fair chunk of change, but that is just what public services cost - and is good value if you get defence, police, education and healthcare in return.

If that home is owned by a working-age household, then they will also be saving twice as much as that in lower VAT, National Insurance and basic rate income tax, so end up a lot better off.

These savings apply all the way up the scale - the tax on an average home in London would be about £15,000 a year, but so what? Wages in London are a lot higher as well, so most working-age owner-occupiers would be saving a lot than that in lower VAT, National Insurance and basic rate income tax.

So apart from taxes on land values to pay for basic services, the only other significant tax would be income tax, most of which would be paid by the top ten percent of taxpayers who earn more than £54,000.

Tenants and first time buyers would also be treated fairly - they would only have to pay for public services once over (their rent would include the tax on that home) instead of having to pay for the cost of public services once through their taxes and then being forced to pay for the value of those public services in rent or mortgage payments.

The banking system

I shall bore you with one final supposed argument against taxes on land values - it would push down selling prices, which would lead to negative equity and endanger the whole financial system. Well, we are where we are and we can't magic away these huge mortgages - which make up 80% - 90% of total bank lending in the UK. Recent purchasers have the most to gain from future net tax savings, so it all evens out.

But is this not madness? An average UK home was built decades ago for £100,000 in today's prices. The bricklayers, carpenters and electricians were paid what they earned and the property developer made a mark-up to reflect risk and finance costs; that house was paid for long ago.

If that average home is sold again today for £300,000, with a £240,000 mortgage, then the lending bank and its depositors will collect as much again in mortgage interest (£100,000) over the next twenty-five years as the house originally cost to build; and the seller has made a capital gain of £100,000.

I have hopefully shown that it is taxpayers' money which underpins land values in the first place, so when we say that mortgages are 'secured on land and buildings', what we really mean is, 'mortgages are secured on the value generated by spending taxpayers' money'. Is that not an insane way to run a financial system or economy?

Here endeth.

* Let's not get bogged down in the subtle difference between basing the tax on the current value of land (or land and buildings) and basing it on 'site premiums', i.e. the total rental value minus the capital cost of teh building and other improvements.


Ben Jamin' said...

This boils down to the landowners create land values KLN,

Imagine a King builds a city and provides all the services ie schools, hospitals, army etc.

The totality of all land values now belong to him?

Or perhaps its the people that use those facilities that create land values, in which case London land values should stay in London?

For a start land values aren't created. People say that land values are socially created, but if that's the case then capital values and labour values are equally created by society too. It's an untrue banality.

What makes one plot of land more valuable than another is interesting, but has no relevance to the moral case of LVT. That being that those excluded from valuable land suffer a loss of opportunity as surely as they do when they sell their labour or goods/services.

While the state may collect our compensation(LVT) on our behalf, that's a separate issue. It doesn't have a right to do so, because it didn't create land, and only creation and not causation confers a moral property right.

Mark Wadsworth said...

BJ, that's the wrong KLN. The KLN in question is "I paid for my land (out of taxed income). Why should I be forced to pay again."

Mark Wadsworth said...

The "Landowners create their own land values" is a non-argument. Even if it were true, how come it's acceptable to tax earned salary but not to tax 'earned' house price gains.

Ralph Musgrave said...

Two leading economists suggest funding a debt jubilee via a land tax. Perhaps Mark could comment. See:

Mark Wadsworth said...

RM, that is one of the worst ways of spending land value tax. Also depends what kind of debts are being cancelled.

Ben Jamin' said...

@ MW

No, I'm saying you are making the equivalent argument that landowners create land values, in this case the state. That's an incorrect way of looking at things

You are conflating two separate, though related issues. ie what gives us aggregated demand, thus aggregated land, labour and capital values. And who owes what to whom and why.

Of course, optimal resource allocation results in the maximisation of aggregated land, labour and capital values and the rules, regulations and spending of the state governs how those resources are allocated.

That doesn't give the state a property right over that which it hasn't created, be that land or privately owned wages or capital.

LVT belongs to each of us as an equal share, as of right. That right has nothing to do with what the state does or doesn't do.

For understandable reasons, Georgism is couched in the same socialistic language of your article, so perceived as such. This misunderstanding of LVT stops it from being widely accepted, IMHO.

Mark Wadsworth said...

BJ, that's the beauty of it.

However land values arise (and the average voter couldn't care less), it is clear that government spending pushes them higher. Chicken and egg.

My article is not an 'argument' for anything, other than funding public services out of taxes on land values.

L fairfax said...

It convinced me, but I would be a winner under that system so it is not that surprising.

Shiney said...

I've been convinced for a while even though I'd probably be a loser in the short term (nice house in a nice area).

However because I'm an 'evil capitalist' aka a small business owner and actually create value I know that LVT would see me and my ilk win in the long run.

ontheotherhand said...

Brilliant Mark. This helps to explain the concept better.

Personally I would like to understand more about the transition solutions. Rolling up for the old widow makes sense. OK the banks will not go bust, but surely the economy will shrink if many people are tipped into negative equity, and therefore continue to pay a private LVT to the bank for the rest of their lives? Personally, I could not vote for it because I bought a house with a mortgage based on all the information available to me at the time. If a government can come in and change the rules of the game so drastically, how can anyone plan for the future? What would be the point, for example, in saving for a private pension unless you can assume that the rules today will be the same as the rules in 30 years?

Mark Wadsworth said...

LF, Sh, thanks.

OTOH, a govt brave enough to do this would also be able sort fudge the whole nequity issue. I have done several posts about this, if you look at the issue honestly and sensibly, it more or less melts away.
Let's not get bogged down in transitional 'problems'.

Mark Wadsworth said...

OTOH, see for example here...

Ben Jamin' said...


From a moral POV, why should state services be funded out of anything other than a Poll Tax?

Clearly anything other than a PT is re-distributional. Which is why we tax incomes, capital, transactions and have a welfare state as this acts as a quasi LVT/CI.

As I said, once you go down the road of spending=land values you open up a can of worms.

Would private schools and hospitals be entitled to a share of LVT? If not, why? Same with railway companies etc, etc.

L fairfax said...

@Ben Jamin'
"From a moral POV, why should state services be funded out of anything other than a Poll Tax?"
Because not all benefit equally from services.
As the original post said
"What would UK land have been worth in 1939 if we hadn't had an army, air force and navy? Everybody who could would have emigrated, and people would have waited for the Germans to redistribute the land to themselves before buying any from the new overlords. Or put it this way, who had more to lose - a tenant worker or the various Dukes? And who benefited most from the 1945 outcome, tenant workers or the various Dukes?"

Mark Wadsworth said...

BJ: "Would private schools and hospitals be entitled to a share of LVT? If not, why?"

They wouldn't be. But patients could claim cash vouchers equivalent to cost of NHS treatment to spend at private hospitals. Ditto education.

Mark Wadsworth said...

LF, re poll tax, this is a mathematical thing that BJ and I discuss in the pub.

If you collect £X in taxes on rents, spend £Y on public services then this leaves £X - £Y = £Z over for dishing out as per capita equal Citizen's Dividend.

If the govt spends a bit more on public services £Y goes up so £Z goes down and everybody's citizen's dividend goes down by the same amount.

Ergo, mathematically, it is the same as dishing out the full £X as a citizen's dividend and then clawing back a poll tax to fund public services.

But it is a pretty arcane point.

Ben Jamin' said...

@ MW

Sure the maths is the same, but as per the title of your article, the morals are very different. Doesn't matter to me (or you), but when trying to put forward a coherent justification, it does to others. The whole "socially/state created land values" thing really doesn't help matters, in my humble opinion.

Mark Wadsworth said...

BJ, I know that this post misses some of the logical steps. But so what? We've failed miserably on winning the sophisticated arguments, let's simplify as much as possible.

Ben Jamin' said...

@ MW

Agree failed miserably. Agree simple is best. However, what Georgists/LVTers tend to do is argue from consequences, rather than first principles. That conflates things and allows the water to get muddied rather quickly.

I know what you really mean when I read your article, but the faux-libs will jump on any little inconstancy and twist it out of all proportion. This is why Henry George's ideas were able to be sidelined so easily. The foundations were just a little bit wobbly. If he'd have worked with/formed an alliance with "academic economists" the whole thing would have been more resilient.

This is a hobby horse of mine, so it's not a criticism of your article per se. Obvs.

Mark Wadsworth said...

BJ, I'm not worried about Faux Libs, a tiny minority in society. They have no party, they are not mainstream, it's just spotty blokes blogging from their mum's basement.

Our real opponents are the mainstream Daily Mailexpressgraph Homeys, normal people with jobs and families and stuff. Using my new approach, we can head off most of their crap.

For example, this stuff about 'losing our home because of care fees'. OK, let's spend £20 bn a year (or whatever) on 'free' care and finance that with a 0.3% tax on the value of housing, it's like home and contents insurance.