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Implementing LVT

Written on . Posted in Transition.

There are several articles on this website about how Land Value Tax (LVT) might be implemented, and also on other web sites such as that of the Labour Land Campaign. The proposal by the campaign Fairer Share is another approach at reform, in the same general direction. There is a comprehensive discussion of the topic on the LVTC website here.

Advocates of LVT generally take the view that the best way to achieve it is through a transition from the present property taxes, accompanied by the reduction and abolition of existing taxes. The details vary because circumstances change over the years. An obvious and necessary first step is a general rationalisation of existing property taxes, since these compete directly for the same stream of revenue and would need to be scrapped. Rationalisation of existing property taxes include the abolition of

  • Business Rates
  • Council Tax
  • Stamp Duty and Stamp Duty Land Tax
  • Capital Gains Tax
  • Inheritance Tax
  • Insurance Premium Tax
  • TV licence fee
  • Anything relating to construction – planning fees over and above the reasonable cost of administration, and planning gain conditions, VAT and VAT rebates (applied in a hit and miss fashion)
  • Income tax on rental income

At the same time, some subsidies become unnecessary and could disappear, including  

  • Agricultural land subsidies
  • Housing subsidies like Housing Benefit for private landlords
  • Mortgage interest subsidies
  • Ad hoc concessions designed to mitigate the effects of present taxes, such as freeports.

After that, priority should be given to phasing out the most damaging and inefficient taxes; those which give rise to the greatest deadweight losses. VAT is the worst offender for reasons which are explained here, and should be first for the axe. After that could come substantial increases in thresholds for income tax and NI, so that at least half the work force was no longer subject to these taxes. As an interim measure, increases in thresholds on a regional basis might be worth considering as a way of “levelling up”; it is a pity that this idea has not been discussed in public. The main benefit of an increase in thresholds is to reduce gross labour costs to employers.

It is essential to emphasise that LVT is a REPLACEMENT for other taxes and not an additional tax. One reason is because existing taxes cut into the LVT base by reducing land values. When people argue for LVT as part of a balance of taxes, they are revealing that they do not appreciate this interaction between taxes and land values. That is not to say that certain other taxes should not remain so as to discourage harmful actions, but if “sin taxes” raise significant amounts of revenue it demonstrates that that do not work as intended!

The big objection that is usually raised is pensioners in valuable locations. The quick fixes, for which is probably a transition problem, are means-tested rebates, or rolling up the amounts due and claiming it on sale, or from the estate. The raising of tax thresholds mentioned above would relieve most pensioners from having to pay income tax anyway. The reduction in the welfare bill that would result from getting rid of taxes which give rise to large deadweight losses would also allow scope for a general increase in pensions.

One dimension of the promotion of LVT is to try to spread public understanding of the principle that the burden of a tax does not usually fall on the individual or corporation formally responsible for the payment. This is known as Tax Incidence and was noted by the French Physiocrats and by Adam Smith. It follows also from the work of Ricardo. For example, labour-related taxes such as PAYE Income Tax and National Insurance are functionally equivalent to a payroll tax and could perfectly well have been applied long ago, as a tax openly charged on the total wage bill of companies and other employers.

This would have hugely simplified administration; in the public sector it would have revealed the circular flow of money known as “churning”; we are not suggesting this, by the way! Unfortunately the mechanism of tax incidence is not well understood by economists or politicians or commentators.