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With Ed Miliband having another go at selling his mansion tax proposal, now seems a good time to return to the knotty issue of land and property taxation.

As noted before on ConservativeHome, the mansion tax is a truly terrible idea – not just because wealth taxes (as opposed to income taxes) are wrong in principle, but also because the implementation would be a nightmare and the precedents are bad enough to put off any sensible policy maker.

On the other hand, we do need to do something about land taxation. So, if the mansion tax is a non-starter, is there an alternative?

One option is the land value tax or LVT – which is a tax on the unimproved value of land and the subject of a lucid explainer in the Economist:

“Land value taxation is so beloved of economists because, in theory, it does not distort decision making. Suppose a land value tax of one per cent on land value is introduced tomorrow. There can be no supply response: there would still be as much land as there is today. Neither would consumers’ preferences change, as land would be no more useful, either. So if the market for land is competitive, no transactions would be deterred or encouraged. 

“All that changes is the price, which falls until it exactly offsets the discounted cost of paying the tax forever.”

In theory, the cost of paying the tax wouldn’t be passed on to tenants, but it would capture the “‘undeserved’ gains landowners make on the investment of others, such as the government improving nearby transport links.”

One could also argue that it would be an excellent way of discouraging the excesses of the British property market.

This is not some new-fangled idea, but one with a long history of support not only from the left, but also from such luminaries as Adam Smith, Winston Churchill and Milton Friedman. If an obviously flawed proposal like the mansion tax can get a hearing, one has to ask why there is so little political interest in the LVT.

The Economist tries to solve the mystery:

“One explanation is that it is too difficult to value land separately from what sits on it. There is not much of a market, for example, for undeveloped land in central London.”

That’s certainly a problem, but it’s not insurmountable. Assessing the value of buildings is something that tax systems have to do anyway, for example in accounting for depreciation.

But there’s another issue:

“The bigger barrier is political. LVTs would impose concentrated costs on today’s landowners, who face a new tax bill and a reduced sale price. The benefit, by contrast, is spread equally over today’s population and future generations.”

In this context, it has to be said that the narrow interest group isn’t so narrow, as there are ten of millions of landowners in Britain today. One could increase popular support for an LVT by exempting all land holdings under a certain threshold plus those owned by charities, public sector bodies and so forth.

However, even if the public could be persuaded that the thresholds wouldn’t be eroded over time (like the higher rate on income tax), a fundamental objection still remains. A land value tax, however modified, applies to the whole value of the land not just the capital gain – and therefore amounts to the gradual confiscation of an asset purchased out of taxed income.

A fairer system would be a purpose-designed Land Value Appreciation Tax, levied only on the capital gain. This could apply both to the land and anything built upon it (with appropriate allowances made for expenditure on improvements) – so that there would be no need to come up with a separate notional value for the land alone.

Government could still choose to apply a separate levy on the purchase of British land as a safe haven investment (analogous to the fees that posh banks charge their customers just for having an account), but this would be calculated in regard to the amount of money thus ‘deposited’ not in regard to land values.

Except in the case of the so-called ‘sin taxes’, taxation should be seen as a commission, not a penalty. Owning property is not a sin, but where it primarily provides its owners with an opportunity to make (and manage) money it should be taxed accordingly.

28 comments for: How and why should we tax land?

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