The Solution to Inequality: Land Value Tax

3.6 million.

This is the number of British citizens with assets worth over £1mn, affording them an opulent lifestyle and comfortable future for their family. Equally, it is the same number of households with a wealth of less than £20,000 – insufficient for any financial security nor a healthy retirement. The enormity of wealth inequality on the British Isles is almost incomprehensible, with the richest 10% owning 45% of all wealth – including land, pension wealth and financial assets. A solution must be found; yet as is so often decried, government intervention creates distortionary effects that prevent the natural flow of the economy.

But this is no longer the case. There is one policy instrument, whose success ranges from Denmark to Singapore, which can raise the necessary funds for local councils whilst garnering support from acclaimed economists across the political spectrum. With advocates from Winston Churchill to Milton Friedman, this policy – the Land Value Tax – must be adopted by the government in a radical tax overhaul to finally address the increasing inequality in our society.

Ridiculed by Richard Hammond as a “Marxist tax grab”, it is, in fact, the holy grail for taxation amongst liberal economic spheres. The current system of Council Tax and Business Rates are taxes based on the value of the property and the business respectively. Yet under this new system, the tax would only be based on the value of the land, irrespective of the developments made on the land. A derelict wasteland directly next to a modern skyscraper would thus both be taxed identical amounts; creating an incentive for land development on the barren land to justify payment of the annual levy. The LVT is a stimulant for productive investment, which is penalised under the current system. At present, a rise in the property’s valuation from investment by the landowner would result in a rise in Council Tax payable, and so this disincentive to invest vanishes under the LVT.

Yet the core reasoning for its support in laissez-faire circles is encapsulated in Milton Friedman’s acclaim that it is the “least bad tax”. The government aims for taxes to raise maximum public revenues whilst minimising the distortionary effects to the economy. Income tax reduces the incentive to supply labour and corporation tax reduces investment – but the supply of land cannot be changed. Taxing land itself, therefore, has no distortionary effect. Each plot of land makes its relative contribution to the Treasury based on how valuable it is, which would be used to replace more distortionary taxes such as the regressive Council Tax. LVT is the perfect method for raising revenue whilst affording labour and capital the necessary freedom to follow their natural incentives: a political world of which even Adam Smith would support.

Yet away from the realms of economic philosophy, the LVT has useful practical implications too. This one tax has the power to fundamentally reshape the geographical distribution of the economy. Lower land valuations in rural and run-down urban regions create the potential for a higher return on investment, encouraging land and property development in these regions. In contrast to the daunting prospect of London urban sprawl into the greenbelt, this would increase economic activity in smaller towns to enable their growth – beneficial for both the geographical wealth distribution and the environment.

Yet perhaps the most important benefit dates back to 1879; the benefit that was cited by the creator of the policy itself. Henry George, in his work Progress and Poverty, popularised the idea of LVT in mainstream political circles by arguing that the value of the land does not derive from the actions of the landowner, but the actions of those around it. In modern times this claim is perfectly captured by Crossrail – the £15bn public project has increased house prices in Abbey Wood – a station on its route – by 20% more than the London average since construction began in 2009. And this was all without any action taken by the landowner, who reaps all the benefit. This unfairness caught the eye of none other than Winston Churchill – claiming that all the roads, streetlights and water systems that create value for the owner are essentially funded by the taxpayer – whether they benefit from Crossrail or not. The LVT should not be seen as a tax; it is a payment to the government for the benefits that public investment has provided. By preventing excessive growth in landlord wealth and raising public revenue by doing so, the government will have increased funds to spend on those in the lower percentiles of the wealth distribution.

Wealth taxes have long been feared as too radical, stripping individuals of their assets by a predatory government. Yet with wealth inequality threatening to grind social mobility to a halt, the Land Value Tax is the best policy instrument at our disposal for limiting this dangerous advance whilst avoiding the distortionary economic side effects. For a policy to be supported by the polarities of  Milton Friedman and John McDonnell, it really must have a special economic value. The LVT is unique, and the government must utilise it.

40 Shares

Craig Stock

Second Year Economics Undergraduate at Warwick University.

Craig Stock has 16 posts and counting. See all posts by Craig Stock

This site uses Akismet to reduce spam. Learn how your comment data is processed.