Saturday, 7 February 2009

Land Value Tax - policy rethink

Following a long discussion on Longrider's 'blog, I have decided to revamp this policy.

The original policy was, scrap all wealth and property related taxes (Council Tax less Council Tax Benefit, Business Rates, Stamp Duty, Inheritance Tax, Capital Gains Tax, the TV licence fee*, Insurance Premium Tax and VAT on domestic fuel; less subsidies for land and property ownership like Housing Benefit for private tenants, mortgage subsidies and CAP subsidies to farmers**) and replace it with a fiscally neutral tax on all site-only location values, i.e. recent total selling values as recorded by HM Land Registry minus a standardised deduction for bricks and mortar.

Provided the rate were set correctly***, about half of households would be better off, and in the long run there would be relatively few winners or losers. As a sop to the 'little old ladies in the family home', it was always part of the policy that pensioners would be allowed to roll up unpaid tax to be redeemed on death or sale. This, apparently isn't good enough. 

Therefore, the new tweak is this - if existing home-owners want to stay under the current rules, then they may opt to do so, and will continue to be taxed until the old rules until they sell or transfer their house, or start letting it out. All existing laws on those various taxes will be carried forward in perpetuity.

The opt-out right does not apply to landlords, second homes, commercial property or properties owned by limited companies, offshore trusts, non-domiciles of course, I'm not accepting any special pleading from them. The opt out doesn't apply to tenants either, they will automatically be exempt from Inheritance Tax, Stamp Duty, the TV licence fee and Capital Gains Tax etc, but as they don't own any land, they will have no LVT to pay (the landlord will pay it out of their rent).

The new Land Value Tax system will therefore mainly apply to people who buy homes in future (and those on the list above). As a 'free market' tax, it will ultimately be first time buyers (who prop up the whole housing pyramid) and purchasers who set the amount of the tax. When they are buying a home, part of the sales particulars will be the deemed bricks and mortar value. So if you know the bricks and mortar value is £60,000, and you bid £80,000 for the property, £20,000 relates to the land/bubble element and the LVT bill would be £1,000.

If this is lower than what existing home-owners in that area are paying in Council Tax, TV licence fee (and potential IHT or CGT) they might choose to move to LVT - but once the opt-out right is waived it is irreversible. Very elderly pensioners with an estate liable to IHT might waive the opt-out, because the rolled up LVT would be a lot less than IHT, for example.

Remember always that in a 'free' market, provided you set the rule correctly, people respond to 'market signals'. The whole housing boom is based on people either not responding to market signals (and trading down into a smaller home, or being discouraged from selling a rental property because of the capital gains tax charge); responding in a perverse way (the higher prices get, the more people believe that the boom is unstoppable and the more they want to buy property, rather than less) or even rigging the rules (rampant NIMBYism to protect scarcity value).

So how will people respond?

1. This is just like a higher interest rate on the site-only location element, and that interest rate changes don't really affect FTB's. A FTB has a fixed budget, and if rates go up, house prices go down and vice versa. So even in those areas where LVT is more than council tax paid by existing home-owners, the FTB isn't bothered, as the extra tax he pays is compensated by a fall in mortgage payments.

2. The idea that landlords will just 'pass on' the LVT to the tenant is hokum. Tenants have a certain fixed housing budget that is very closely related to incomes and includes Council Tax and the rent. If Council Tax goes up, the rent that the landlord has to accept goes down and vice versa. For example, landlords of similar properties all charge similar rents, irrespective of their own marginal tax rate and the amount of mortgage interest they are paying. There are some costs that a landlord cannot 'pass on'.

3. Land/bubble values will be updated for each postcode sector each year - on the basis of actual sales - and bills recalculated each year on the basis of updated total property value minus the indexed bricks and mortar value. In normal conditions, only five or ten per cent of properties are bought and sold in any area, so the prices are set at the very margin - if a bubble develops, it only takes a small increase in people who don't like the idea of paying an extra £500 tax because property prices have jumped by ten per cent (without any corresponding increase in the desirability of the area) to decide to sell up, and a very small decrease in FTB's who decide that for a bricks and mortar value of £60,000 it isn't worth bidding £90,000 for the house (that they could have bought for £80,000 a year earlier) then bubbles will be quickly deflated.

4. Around ten per cent of the homes in this country are owned by private landlords, who, one would like to think, are a bit more financially clued up and in it for the money. If the market value of their properties goes up, then so does the LVT bill, but as the rents they are collecting are fixed, there come a break even stage where they are better off selling up and putting the money into cash or shares, so this nudges prices down again, giving us a much more stable equilibrium.

5. The 'ability to pay' argument against Council Tax or LVT is knocked on the head - if FTB's can afford to pay it, as well as a mortgage on the current market value, then existing home owners (to the extent that they aren't opted-out), with higher incomes, smaller mortgages and whose children are already of school age or above, can easily afford it. By definition, LVT will only be a small fraction of the market rent that tenants pay, and seeing as tenants are at the bottom of the housing heap, if they can afford to pay full market rent, then home-owners can afford to pay LVT.

6. If interest rates increase, then that hits all mortgage borrowers, and Council Tax stays the same. Under LVT, if interest rates go up, the prices that people can pay for housing goes down, and with it LVT bills. So LVT would act as a stabiliser - if rates go up, LVT goes down and vice versa.

There. What's not to like?****

* To the extent that we don't privatise it, which seems to be the popular choice.

** Remember that farmland is worth around £5,000 per acre - only a couple of per cent of the value or residential or commercially developed land - even after including the inflationary impact of the subsidies. For the time being I am happy to exempt farmland with a value up to £5,000 per acre from LVT as a quid pro quo for scrapping CAP subsidies, the total revenues are barely worth collecting.

*** On the assumption that house prices fall to their long run average, the rate would be about 5% of the site-only location value, or about 1% to 1.5% of total property values.

**** By all means slash the size of the state and cut taxes, but let's get rid of the worst ones first, like VAT (£80 billion) and Employer's National Insurance (£40 billion) and then move on to corporation tax (£40 billion) and income tax (£150 billion). LVT - and the taxes it would replace - are veritable minnows of taxes that would raise about £35 billion from 'households' and £25 billion from commercial property. The beauty of the system being that cuts in taxes on production mean that people have more to spend on rents or properties, and LVT would recapture a fifth to a third of any cut in taxes on production.

PS, no doubt somebody will leave a comment saying "I shouldn't pay tax on my property". Please bear in mind that an average couple might earn £1.5 million in wages and salaries over a lifetime, and will end up with a property worth about £120,000. Why are people happy with an effective tax rate of about 50% on their own hard work, but grumble about paying a tax that is about half the value that society generates for them as property-owners?


Anton Howes said...

Sounds very, very much like the LVCs that the Systemic Fiscal Reform Group are on about - this whole opt-in scheme on the property.
I think you have explained it better however, and it is better for landlords, etc. etc. to be included in it automatically.

(Btw, Employers' NIC is £53b - worse than you feared!)

Mark Wadsworth said...

AH, yup, this is a response to Dr Adrian's transitional ideas which are far too complicated.

Employer's NIC is stated as £53 billion, but don't forget a quarter of people work for the State anyway, £40 billion is the amount paid by private employers!

Anton Howes said...


Anonymous said...

A free market is one without tax.....

Mark Wadsworth said...

Anon, the UK land market is a million miles from free.

Planning regulations and other restrictions plus very light taxation of property gains (compared to heavy taxation of productive income) totally distorts the market and leads to these bubbles that are entirely avoidable.

Anonymous said...

I like the opt out idea - it at least gives a person an option to keep the status quo in their life, which they may have worked towards for many years.

One issue - whats to stop OAPs making deathbed conversions to LVT? Or when they have to go into a home? They could take advantage of lower (potentially) council taxes, and then their heirs would get the benfit of the IHT exemption too.

Second issue, which is purely related to farmland - what do you do with hope value? Purely agricultural land is as you say £5K acre. But land close to a village, or smaller plots of land, have a significant premium over that - possibly up to 20K/acre depending on location/size. How do you say that this field is worth £10k/acre but the one next door is worth only £5K? Equally the pricing is very variable - a neighbour may be prepared to pay a lot to buy a piece of land that comes up for sale next to his, or he may not. That affects the value a great deal. I personally don't want to get into a great wrangle with District Valuers because they say some field of mine is worth more than £5K/acre, and I have to try and prove it isn't. Surely it would be better to just go with the planning status of the land - land without planning would be exempt from LVT. That would mean once planning was given, building would commence immediately, because it would then be subject to LVT. No one would get PP and then sit on land hoping to speculate on the price.

I think a system that put LVT on any land that had residential or commercial planning permission, and exempted all other land, and was brought in as you suggest only when you buy a new property, with an opt-in clause if its worth your while, could be a winner. The only problem I forsee is that for a Local Authority to increase their tax revenue they would have to increase the tax rate, because values would tend to be pretty stable. Would there be limits on the percentage any LA could demand in LVT?

Mark Wadsworth said...

S, thanks, I find it very helpful to discuss LVT with principled opponents like you!

"what's to stop OAPs making deathbed conversions to LVT? Or when they have to go into a home?"

The opt-in/opt-out window would be open for a year. There would then be a transitional phase of (say) ten years - if you originally opted out, but seven years later want to opt in for the reasons you mention, there would be a pro-rata charge to seven-tenths of the SDLT, IHT etc that would be due were you to pop your clogs today.

"...what do you do with hope value?". If local valuer thinks a punch up is worthwhile, he dictates a value. If said farmer is unhappy paying £1,000 tax per year for that acre with hope value (knowing he might net £100,000s in a few years time, CGT and SDLT free), it goes to auction, the farmer sets his own reserve, if nobody else wants it, the taxable value reverts to the reserve that the farmer set.

".. for a Local Authority to increase their tax revenue they would have to increase the tax rate..."

Nope. If the LA wants more tax, it just concentrates on making the area more desirable - evict the gypsies, get coppers out on the beat, spend money on road maintenance not five-a-day advisors, encourage firms to relocate there, whatever. Unless of course the local payers decide by majority to pay a precept to fund particular infrastructure.

Anonymous said...

If you scrap planning, and replace it with property rights courts / hearings, there would be no 'hope value'.

Anonymous said...

I still think the hope value issue would create the greatest amount of problems with regard to bureaucracy, and lack of universal valuations. For example close to where I live an 8 acre field was sold recently for £160K, £20K/acre. A mad price for land that holds little likelihood of planning, and is on a steep slope. It was bought by the owner of a house that overlooks it, so I guess it was bought for the view and /or to protect against any other development. This high price is in no way related to any local amenities. Now you could say that if someone wants to pay that price they deserve to pay LVT on that price. But what about the neighbouring fields? Suddenly the Local Valuer would argue (legitimately) that they were worth similar values, and the owners would be liable for LVT on the higher value. So unless they could afford that LVT they would be forced to sell, purely down to the actions of someone else over who they have no control. I don't think that is a fair way of taxing people.

If LVT was only enacted on improved land - ie not agricultural/horticultural/forestry/open space the whole hope value issue would disappear, as would the all the bureaucrats needed to police such a system. Improved land (housing/commercial) is much smaller in area, and due to the Land Registry, fairly well documented. And is easier to value too, as sales occur regularly in most areas. Undeveloped land is very difficult to value without actually selling it. I don't think that forcing people to put their property on the market at regular intervals to establish a value is a reasonable taxation system.

Mark Wadsworth said...

HH, you have a touching faith in courts and tribunals, who are just as prone to corruption as anybody else and entail a huge amount of 'experts' and 'solicitors' and other such leeching scum. Money talks and bullshit walks.
S, "unless they could afford that LVT they would be forced to sell"

If a farmer can't be bothered haggling, he can denude his land of any 'hope value' by entering into a restrictive covenant for the benefit of local council, local residents etc that that land will never be built on, ever.

Alternatively, I may ask, sell to whom? If nobody is prepared to pay that much, the field fails to reach its reserve and the value is deemed to be the reserve that the farmer set of £5,000 which is exempt. And if a local property owner wants to preserve his own view and pay £20,000, what happens to that field? The chances are he rents it back to the farmer for £50 or £100 a year.

So the NIMBY is happy - for £1,000 a year he has protected his own land value; the farmer is happy, he has banked £20,000 and can rent the field back for £50 a year, and the council is happy, they are collecting £1,000 tax every year for no effort whatsoever.

Anonymous said...

HH, you have a touching faith in courts and tribunals, who are just as prone to corruption as anybody else and entail a huge amount of 'experts' and 'solicitors' and other such leeching scum. Money talks and bullshit walks.

I'm just a realist, Mark. Planning is all about 'experts' and 'solicitors' as it is,except that the ultimate decision is made behind closed doors. Any state run system is open to corruption, but the more open this is, the less likely it is.

Keep in mind that with presumed consent, and any compensation awarded would need to show it's 'workings' as it were, corruption would be minimal. You really have to understand what a feted, corrupt, corporatist turn the present planning system is. Apart from the 'war on drugs', never has such a successful con been played on the population.

DBC Reed said...

Are you saying that existing homeowners pay the old taxes but as soon as they sell , have to pay LVT plus poor widows style roll-up covering the LVT non-payment years ,as well?

Mark Wadsworth said...

HH, why should owner of one plot compensate owner of neighbouring plot, unless it's malicious/negligent (Ryland v Fletcher etc)? If your plot goes down in value, you get a tax cut and the chap who gets planning or just goes ahead and builds pays more tax on his site, those are the rules. Indirectly it comes to the same thing but without the hassle.

DBC, no. If a home-owner opts out and stays in there until he dies, then he pays Council Tax as he goes along, and the executors pay the Inheritance Tax (under old rules) and also the Stamp Duty on the sale (which the purchaser, being under the new scheme, no longer has to pay).

If a home-owner sells up after a few years and buys a new home, he is then under the LVT scheme (and is IHT and SDLT and CGT exempt), so that triggers a pro-rata charge to IHT and SDLT (see reply to Sobers, above).

Or, if (for example) it's a young couple who own a flat and intend to trade up to a house in a year or two, they might well choose to go under the new rules straight away, rather than having a cashflow hit right when they are trying to raise a deposit.

neil craig said...

I take it this tweak protects farmers for the rest of their lives since they wil not be moving from the family farm to a new one. This has always been a big problem with LVT. That proprely applied it would bankrupt every farmer since they may own land equal in area to that of several thousand people. Bankrupting them may well be economicaly valid but is still cruel. If instead they get to stay in busines & the kids get sell it for for less than they would get for land with planning permission now but probably more than for purely agriculturaly zoned land that seems ok.

Mark Wadsworth said...

NC, "properly applied [LVT] would bankrupt every farmer since they may own land equal in area to that of several thousand people."

In area yes, but in terms of value, no, they don't. Potential LVT from farmland (even if you imposed it, which I wouldn't) would work out at £20 an acre or so, which LVT for a typical 100 acre farm would be £2,000 per annum (the same as LVT on a biggish house). If tenant farmers can afford to pay rents of £50 - £100 per acre per year, then landowner farmers would certainly afford £20.

Anonymous said...


2 comments on your revision.
1) Simplification - you are giving lots of opportunities for me to keep my job working in tax by advising what people should do when faced with complicated transitional legislation. There is a perceived trade off between equity and simplification, but generally I think complex tax systems are inequitable. So although there will be losers under any simplification I would say that in general it is fairer for everyone. So I would turn my face against even the most deserving cases.
2) Your Bow Group proposal for a flat rate income tax, basic income and a lvt I read as a unity. People who would lose out under the lvt might well gain under the flat rate tax changes. If the lvt proposals tended to make income poor, asset rich people worse off, the flat rate tax proposals might make such people better off. Particularly the pensioner living in a house they owned. So looked at in the round a scheme could be devised which would render the objection vacuous.

DBC Reed said...

My main problem with this kind of Systemic transitional operation is that it is in two minds about house price inflation.My feeling now is that the aim of LVT should be to eliminate HPI for good and all.LVT should be instituted when the market in land hits bottom and then kick in when prices go up.Also re-branded as land value repayment, the reason for levying would be virtually self -explanatory.Pitched at the right rate LVR would act like a circuit breaker stopping a surge in prices so it would not bother all those angry right-wing bloggers who want to hang on to property : the tax payments would be very low; in good non-inflationary years zilch.The aim should be that LVT would become more and more look like a background threat.

Mark Wadsworth said...

Tony G, I trust that my responses here made sense.

As to your point 2), in the meantime, I have become slightly more rabid and reckon that a personal allowance of £10,000 and a flat rate tax of 31% (no VAT, no higher rate, no Employer's NI) is just about feasible. So the high earner in a big house gains more on the income tax swings than he loses on the LVT roundabouts.

DBC's comment and Tony G's point 1) seems to be the same thing. I completely agree, what I am suggesting is all foul political compromise - even the list of taxes I would scrap to get the ball rolling is just a rag-bag collection.

In my darker moments, I see LVT like nuclear weapons - it is not supposed to be used, it is just supposed to be there to prevent something worse happening. As it happens, I am quite confident it would raise a shedload of money, but hey ...

It is just the 'little old lady' problem that needs a work-around. Perhaps, we could fund part of Citizen's Pension from LVT receipts? So if 'little old lady in big house' doesn't want to pay, this means that 'little old lady shivering in council flat' will starve? How about that for foul politicking?

Anonymous said...

The opt-in idea sounds like a good one. Over time fewer people (or rather properties) will remain in the old system of Council Tax, etc. Make sure the admin cost of running these is very explicitly charged only to those who haven't opted-in to LVT.

I disagree with DBC Reed about LVR - I want the land tax to raise significant amounts of money every year, to allow other taxes to be reduced, and to encourage economic development.

Minor point: Can we have a 30% flat rate income tax rather than 31%? I like nice, round numbers. :-)

Citizens income (or dividend) for all UK citizens, equivalent as a personal allowance for non-UK citizens who are resident here. No problem with a higher Citizen's Pension, but I still have to work out how to handle non-UK citizens who have lived and worked here for many years - they deserve a state pension more than some native born UK citizens who have never worked.

Farmers and "asset rich, income poor": I would not allow any exceptions. Once one starts to do that, any number of other worthy causes will demand similar special treatment. Anyway, the opt-in or remain in the current system solves that problem.

Mark Wadsworth said...

Ed, "Make sure the admin cost of running these is very explicitly charged only to those who haven't opted-in to LVT."

You'll find that councils will crank up Council Tax (they can't influence LVT receipts directly) so more and more will opt-in to LVT.

31% happens to be current basic rate plus NI, so it's a good place to start. The lower the better, obviously, but let's get rid of VAT and Employee's NI first.

"Non-UK citizens who have lived and worked here for many years" will also get Citizen's Pension, but pro rata to number of years they've been here legally since the age of (say) 25. UK pensioners living overseas is a bigger issue, actually.

DBC Reed said...

@Ed said
To rake in loads of LVT (or LVR as I call it),land values would have to be very high with all the attendant problems ,including bribery of the middle classes by the political parties.Most of the problems of land values diminish as land value inflation declines.As land values are presently declining (by 75% our Tory MP asserts)then let the Credit crunch cop the blame, otherwise the right-wing panickers will start squealing LVT is making our dearly beloved house prices go down. Once down,keep them down.
What otherwise? They go down and you wait for them to go up again before implementing LVT at optimum?Like slavery the only coherent answer is abolition (of land price inflation).

Anonymous said...

DBC Reed, I agree that the bottom of the market is the best time to introduce them. However a LVT will have to produce at least as much as Council Tax, Stamp Duty and IHT if we are to replace these taxes, and even more if we want to fund such things as a citizens income, eliminate VAT etc[1]. A LVT can produce lots of money even on low land values if the rate is suitably high.

[1] Yes, I know there is lots of wasteful or unnecessary government spending we can also cut to help balance the books (or better still run a large budget surplus for the next few decades to pay off past debts and liabilities).

Mark Wadsworth said...

Ed, we could and should scrap the existing welfare state with all its complexities and perverse incentives to fund a Citizens Income, that's a different topic - what we are discussing here is how to raise the money, not how to spend it.