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How much could LVT raise?

This question “how much could a land value tax raise” is constantly put to us. We in the LVTC have always answered with a vague “enough”, and then gone on to explain why we are vague on the subject. The question is in an inappropriate one. It is impossible to give a direct answer to the question because it depends on what existing taxes are removed.

The rental value of land is a residual amount left over after all other expenses have been paid. A good demonstration of the principle was evident in the 1980s when the rates-free Enterprise Zones were in operation, when identical properties were available just inside and just outside the zones. The total occupation costs were the same. A similar phenomenon could be observed on the two sides of the Wandsworth (low rates)/Lambeth (high rates) boundary. The latter was the subject of a research project by a firm of consultants in Cambridge.

At the present time, business rates and council tax are, whilst nominally levied on land and buildings, actually a deduction from the rental income stream. Which is why the amounts actually payable need to be added on to the valuations arrived at by market evidence eg from decapitalised selling prices and leases. When LVT is based on selling prices, this important point is lost sight of.

When the government defend their opposition to LVT by saying that the rental value of land is already the subject of tax, they are correct. The real objection is that the tax liability is not assessed on the rental value of land, but “Rebus sic stantibus” – taking the thing as it is. That is what is wrong with the system. Vacant sites and under-used land is left out or under-valued, so that the burden is loaded onto efficient users of land. The question that needs to be thrown back at them is that if they are collecting land rental value then they should be assessing it properly and not some other value. It is a bit like levying income tax by counting the number of payments made into somebody’s bank account.

What this means is that, first, there is no question that LVT could raise the same amount as all existing property taxes, and in addition, that most existing tax payers would end up paying less, because land presently contributing nothing would be made subject to tax. This was one conclusion of the Whitstable surveys, which you can read from the downloads section of the this web site.

The second issue follows from the point that rent is a residual. All existing taxes depress profitability and reduce the size of the residual amount ie rental values. Which means that as existing taxes come off, rental values rise.

Another and more rigorous way of viewing this is to observe what happens at the margin. As existing taxes come off, site presently sub-marginal can be brought into productive use. According to the Ricardian analysis, rents are the surplus production over the least productive site in use (the marginal site). If sites presently below the margin are brought into use, the rental value of all other sites increases.

Which means that when we say that LVT cannot be passed on in higher rents, that is only part of the story. As existing taxes came off, rents would naturally tend to rise, whilst at the same time, the existence of the LVT would keep them competitive. There are forces acting in opposite directions.

The eighteenth century Physiocrats argued that all taxes ultimately are at the expense of land rental value. Quesnay, who made this observation, was no socialist, and seems to have argued for land value taxation purely out of expediency, as France at that time was plagued by a plethora of troublesome taxes. But someone proficient in French really needs to go back to the original texts to find out what he really did say.

One other way of looking at the issue may be helpful. The government takes in about 500 billion a year, (though nearly half is paid out again, but that does not matter for the purposes of this illustration). One way of collecting it would be as a poll tax, which would make every man woman and child liable to about £8,500 a year if my arithmetic is right. Income tax loads the weight in accordance with earnings as declared to the authorities. (with all the undesirable side effects that we all know about). LVT simply distributes the same (or a smaller) burden in a different way. Only the amount would be a lot smaller because existing taxes, as Fred Harrison has pointed out, reduce GNP by about 12%, and the tax system is itself a cause of poverty which then has to be alleviated by costly welfare schemes.

Thus it is impossible to determine what land values would be if all other taxes came off. But it seems safe to say that all existing public revenue could be obtained from land value taxation instead. When surveys are done of existing land values, they are measuring a much-diminished amount. At best, they can estimate what land values would be if existing property taxes came off, and if the intention is that land values should, in the first instance, replace taxes such as the Council Tax and the Business Rate, it is essential that these deductions from the rental income stream are taken into account in the surveys. This is one important reason why land valuations should be an annual rental figure.