Land Tax.

Basic points, 2010.
Interest and capital, 2016.
Tax havens, 2014.
Land, labour, capital, 2013.
Stamp duty, 2013.
City values, 2010.
UK bubble, 2007-2008.
UK bubble, 2004.
New Zealand, 1996.

Land Tax – Basic Points.
Alison Marshall, Greenprint, Summer 2010, [with later alterations in square brackets].

1. Fair taxes.

The housing market is like a compulsory lottery, with relative poverty as the punishment for failing to participate.

Most landowners got huge unearned gains between 1997 and 2007, but a land value tax (LVT) would also affect recent first-time buyers, who have already paid the full price for their land.

Unfair taxes are demoralising in the old-fashioned sense of lowering the moral tone of society.  MPs expenses claims for second homes are a recent example.

2. Capital value.

The annual value of a property is equal to the capital value multiplied by the interest rate plus the property tax rate. The annual value of land is determined by its earning potential, and the capital value of buildings and other manufactured assets is determined by the cost of replacement. So any increase in property tax is balanced elsewhere in the equation, with an increase in the annual value of buildings or a decrease in the capital value of land.

The tax rate on the capital value of land should be kept within the same range as interest rates, so that no more than half of the annual value is collected as tax. Pressure for maximum exploitation of land would be avoided, and there would still be reliable market information about capital values. Effectively half of the land would have been nationalised.

LVT should be phased in slowly so that future capital gains are reduced, rather than current land prices. Ancient woodland and wetlands should not be taxed.

3. Other assets taxes.

Capital gains tax and inheritance tax leave any capital gain untaxed until the sale or transfer of the property. So they punish mobility and collect less revenue than a tax at the same rate on the annual value of the property.

Wealth will also be redistributed unfairly and investment decisions distorted if residential property is not taxed.

Only irreplaceable essential assets, such as land, should be taxed. Manufactured assets, with prices approximately equal to the cost of replacement, have limited speculative potential. Speculation in luxury goods only affects connoisseurs and gamblers.

4. Local tax.

If local LVT, paid by owners, replaced Council Tax, paid by occupiers, rents would increase. But subsequent variations in LVT couldn’t always be matched by variations in affordable rents.  So in the long term LVT wouldn’t always be passed on to tenants.

LVT [on new developments] is financially equivalent to the planning gains sometimes demanded from developers by local councils. With local LVT, the council effectively becomes owner of part of the capital value increase, and collects the rent on it as LVT. 

[5. The New Labour bubble.]

The average UK house price increased by about 170% between 1997 and 2007. That’s about 10.4% per year, giving an annual gain in capital value approximately equal to the average (median) income.

[Martin Wolf, a member of the Commission on Banking, blames the financial and economic crisis on the “credit-fuelled property cycle”.  He wrote that if “a crisis is a terrible thing to waste”, as “an urgent case for action” some of the rental value of land should be socialised. Instead of the currently low property taxes and tax-free gains, any future gain should be collected as tax. The fever of land speculation would be eliminated and there would be a shift in the burden of taxation. (Financial Times, 8 July 2010, more details at https://ammpol.wordpress.com/ammtcrr )]

[6. Land tax for the 21st century.]

[A combination of land tax and citizen’s income could enable a sustainable lifestyle. Investment would be diverted from speculation in land to Green technology. People who want to slow down or do the subsistence lifestyle could use some of their citizen’s income to pay the LVT for their land.]

The purpose of land tax is the prevention of bubbles and speculation, and the collection of some of the unearned value. I don’t think a logical fair economy can be achieved without it.

Interest and capital.
Alison Marshall, 10 February 2016.

The tax rate on the capital value of land should be kept within the same range as interest rates, so that no more than half of its annual value is collected as tax.

Interest rates are now much lower than normal. The Bank of England interest rate since 2009, 0.5%, is the lowest in 320 years. The highest was 17% in 1979. Before the 1970s the interest rate always stayed within the range 2 to 10%.

The combined effect of lower interest rates and higher land values might be that the revenue that could be collected as half of the annual value of land hasn’t changed much.

Land tax should be phased in slowly, to avoid sudden large decreases in land values.

Tax haven buyers set off property alarm.
Cynthia O’Murchu, Financial Times, 1 August 2014.

At least £122bn of property in England and Wales is held through companies in offshore tax havens where ownership is difficult to trace, a Financial Times analysis of Land Registry data has found.

. . . It raises concern that London property has become a haven for dirty money from around the world.

. . . Nearly two out of three of the 91,248 foreign-company owned properties in England and Wales are held via the British Virgin Islands and Channel Islands structures.

. . . Besides offering privacy to individuals and groups, the British Virgin Islands and the Channel Islands are attractive because of their tax regimes and . . . their strong ties with London’s banking and business community.

Land, labour and capital.
http://en.wikipedia.org/wiki/David_Ricardo , accessed January 2013.

Ricardo is responsible for developing theories of rent, wages, and profits. He defined rent as “the difference between the produce obtained by the employment of two equal quantities of capital and labor.”

. . . while only one grade of land is being used for cultivation, rent will not exist, but when multiple grades of land are being utilized, rent will be charged on the higher grades . . . Ricardo believed that the process of economic development . . . benefited first and foremost the landowners because they would receive the rent payments either in money or in product.

In a careful analysis of the effects of different forms of taxation, Ricardo concludes . . . that a tax on land value, equivalent to a tax on the land rent, was the only form of taxation that would not lead to price increases; it is paid by the landlord, who is not able to pass it on to a tenant. He stated that the poorest grade land in use has no (land) rent and so pays no land value tax . . . His analysis distinguishes between rent of (unimproved) land and rent associated with capital improvements such as buildings.

Stamp duty.
5 November 2013.
http://www.cml.org.uk/cml/publications/newsandviews/149/581

Government revenue from residential stamp duty . . . payable by home-buyers in the UK . . . in the current year will be not very far from the previous peak figure of £6.7 billion reached in 2007-08 – even though transactions this year are likely to total only around one million, compared to 1.6 million in 2007.

City property values.
http://www.prlog.org/11056934-homes-in-britains-biggest-cities-are-worth-264-trillion-says-findapropertycom.html
9 November 2010

The homes in Britain’s ten biggest cities are worth £2.64 trillion – according to the latest analysis from property portal FindaProperty.com.

Its calculation is based on the value of every home, from studio lofts through to luxury mansions . . . Assuming they were all sold at their current market value, FindaProperty.com believes they would add up to this huge figure.

And the national value has gone up slightly compared to this time last year, when homes in the same cities were worth £2.62 trillion (a difference of 1% or £12bn).

London . . . is 29 times more valuable than Glasgow in second place and 31 times more than Bristol in third. However by head of population Manchester is actually the second-most valuable city.

Nigel Lewis, property analyst at FindaProperty.com said: “We conducted this analysis because we think it’s the best way to track the full impact of fragile house prices during the current period of uncertainty. . . ”

1. London, £2144 billion, £299 thousand per person.
2. Glasgow, £74 billion, £117 thousand per person.
3. Bristol, £69 billion, £165 thousand per person.
4. Manchester, £68 billion, £172 thousand per person.
5. Birmingham, £64 billion, £66 thousand per person.
6. Leeds, £51 billion, £115 thousand per person.
7. Liverpool, £47 billion, £100 thousand per person.
8. Edinburgh, £43 billion, £100 thousand per person.
9. Leicester, £39 billion, £117 thousand per person.
10. Sheffield, £37 billion, £85 thousand per person.

UK bubble, 2007-2008.
Alison Marshall, 2007-2008.

Without land value tax (LVT) on residential homes the housing market is a huge, unfair, compulsory lottery, with poverty as the punishment for people who don’t participate.

The value of buildings remains close to the building cost plus interest, but the value of land builds up from unearned scarcity value, because more land can’t be created.  For example, if the value of a house worth £300,000 with a rebuilding value of £120,000 has increased by the average amount in the last 10 years, the capital gain is about £189,000, as house prices have increased by about 170% in that time.  If the rebuilding value has increased by 5% per year, a little more than the official inflation rate, £46,000 of the capital gain is in the building value. So the rest of the capital gain has come from the increase in land value, at about 17% per year, from £37,000 to £180,000.  If invested in a savings account for the last 10 years, £37,000 would have increased to about £50,000.  So if the property was bought ten years ago, the unearned gain on the land is £130,000 and the owner has paid real money for less than one third of the current land value.

Inefficient allocation of land is the main obstacle to efficient allocation of housing. The demand for spacious housing and the low number of housing starts are side-effects of the massive redistribution of wealth to land owners in the last 10 years.  LVT is more likely than capital gains tax (CGT) or inheritance tax to reduce such instability and social inequality. As CGT and inheritance tax effectively leave the increase in annual value untaxed in the years between the increase and the eventual transfer or sale,  they discriminate against mobility and families with high death rates.  LVT on the annual value of land is fairer and would be worth more than CGT or inheritance tax at the same rate on the sale or transfer of land.

Landowners who have benefited from huge windfalls in the last 10 years are either a very large minority or a majority. However LVT doesn’t just tax the windfall, so it should be phased in slowly to avoid sudden changes in land prices and to reduce the unfairness to recent first-time buyers, who are already very unfairly disadvantaged by the current system.  For example in the first year local tax could be based on capital value, in the second year 90% of local tax could be based on capital value and 10% on land value, in the third year 80% on capital value and 20% on land value, etc., until in the 11th year local tax would be based entirely on land value.

I don’t claim administrative simplicity as one of the advantages of LVT.  But income tax and VAT are administratively complex too. All the time and money that is spent on organising progressive marginal income tax rates should be diverted to organising fairer more up-to-date valuations for LVT, national as well as local.  If income tax is still needed as well as resource taxes, it should be a flat tax made progressive by combining it with a universal unconditional citizens income (as shown in https://ammpol.wordpress.com/ammgraf ). By flat tax I mean the same tax rate on all income, not the same amount of poll tax paid by everyone.

I think LVT should be 50% not 100% of annual value, to avoid pressure for maximum exploitation of land, and so that there is feedback from the market about prices. That is effectively nationalisation of half the land. The revenue it would collect from wealthy people would probably exceed the revenue from a much higher top rate of income tax. (Ashley Seager, business.guardian.co.uk)

LVT should be a revenue-neutral substitute for Council Tax . . . Rent is based on what occupiers can afford to pay, and if they aren’t paying Council Tax they will be able to pay more rent. But subsequent variations in the amount of LVT paid by owners won’t necessarily be matched by variations in the amount of rent that occupiers can afford to pay.  So in the long term LVT paid by owners won’t always be passed on to tenants.

LVT on developments is financially equivalent to the planning gains sometimes demanded from developers by local councils. With LVT, the council and/or the nation effectively become owners of part of the capital value increase, and collect the rent on it as LVT. 

UK bubble, 2004.
Alison Marshall, 2004.

If land was taxed at the same rate as other investments, land price bubbles would be smaller and less frequent, and house prices would make up a smaller proportion of total wealth, as they do in other European countries. Also land would be less attractive to speculators and second-home owners if it was taxed more.

In this latest land price bubble in the UK there has been an increase of 130 percent in the average house price since 1997. That’s an annual increase of 12.6 percent, about 10 percent more than inflation. 10 percent of the average house price is approximately equal to the average annual wage.

The doubling of house prices in the UK between 1999 and 2004 took longer than the doubling in 3 years in the 1970s in New Zealand, but its more disruptive because inflation is at least 10 percent lower now than it was in the 1970s. The 1970s doubling happened during the 3-year term of a Labour government, and was probably a major reason for its defeat in the next election. The current 7-year UK bubble has also coincided with the reign of a Labour government.

The Jubilee 2000 campaign for debt cancellation for developing countries was named after an old Jewish custom of pooling and redistributing wealth in the Jubilee Year, once every 50 years. (I think). The house price bubble of the last 7 years has been like a negative Jubilee. There has been a massive redistribution of wealth to landowners from everyone else.

But its too late to do anything about it now. A sudden introduction of a full land tax would penalise not only long-term owners whose property value has been mostly unearned and untaxed, but also recent first-time buyers who have paid the full price for their land and are now at risk of negative equity.

This crazy redistribution of wealth to landowners wouldn’t have been so extreme if land was taxed realistically. There is now probably plenty of time to phase in land tax before any more land price bubbles are likely to happen.

The purpose of land tax is the prevention of bubbles and speculation, and the collection of some of the unearned rent, and I don’t think a logical fair economy can be achieved without it. Whether the revenue from land tax is used for local or national purposes is a separate, secondary issue.

Land Tax, New Zealand, 1996.
Alison Marshall, 1996.
Published in the newsletter of the Green Party of Aotearoa, February 1997.

It was like old times to see the item on land tax contributed by Betty Noble in Greenweb, May 1996.  Betty Noble and I were two of the most active advocates for land tax in the Values Party in the 1980s. I didn’t agree with everything in the Greenweb paper, which was written by Australian Les Hemingway.  My reasons for agreeing or disagreeing follow the relevant extracts.

1. “Australia is facing debt and disaster because too many Australians grumble about land taxes and rates, so governments tax everything else instead.”

Assets and capital gains taxes are two kinds of tax which are more politically respectable, but in my opinion less economically respectable, than land tax.

The value of a property might be estimated using the equation:

(real interest rate + property tax rate) x (capital value of property) = (annual rent of property).

This equation shows why land taxes reduce prices, while taxes on “everything else” cause an increase in prices.  Assuming that the annual rent of land is determined by the earning potential of the land, and the capital value of manufactured assets such as buildings is determined by the cost of replacement, these terms in the equation are not affected much by rates or land taxes.  So any increase in rates or land taxes is paid for elsewhere in the equation, as a decrease in the capital value of the land or an increase in the annual rent of buildings.

The administration of a fair assets tax would be time-consuming and costly, so for manufactured assets and luxury goods I don’t think it would be worthwhile. As manufactured assets are usually sold at cost- plus prices, they have limited speculative potential.  There may be speculation in luxury goods, but only connoisseurs and gamblers need get involved.  So I think that only irreplaceable essential assets, such as land and other scarce natural resources, should be taxed.

2. “Tax land not incomes or consumption.”

Whether land tax and natural resource taxes can raise enough to replace income tax is controversial.  When prices are stable (in real terms) revenue from land tax should not exceed the annual rental value of the land.  As there are almost no land taxes at present, rent is equivalent to real interest on the capital value of the land, which was about $2 billion per year in New Zealand in 1990 when I last worked it out.  The revenue from income tax was about five times as much as this annual rental value of land.

If land tax was intended to replace all other taxes, there would need to be either drastic cuts in Government spending to match the major reduction in revenue due to the loss of income tax, or big increases in the prices of food, housing and other land uses, so that the revenue from land tax increased to replace what had been lost from income tax. These price increases would be like extra GST on the very items which many people think should be exempt from tax.

3. “Stop taxing interest and dividends.”

The inflation component of interest should not be taxed.  High interest rates have caused a lot of trouble, and it has been unfair and illogical that some income has been taxed heavily, while capital gains have been tax-free.  Saving and investment have been discouraged, and speculation has been favoured.

4. “Lift … land taxes and/or rates until they absorb at least 90%  of the gross annual rental value of every freehold site.”

I think that only half the rent should be collected as tax.  If all the rent was collected, the land would have no capital value, so there would be no feedback from the market about prices.  Also if 90% or more of the rent was collected, there might be too much pressure to exploit land rather than use it sustainably.

5. “Stop handing site rent to foreigners and take it for revenue instead.”

Stop handing all the site rent to any landholder, foreign or otherwise.  I believe that fair taxes have a good chance of being accepted, but unfair taxes are demoralising in the old-fashioned sense of lowering the moral tone of society.  If residential property is exempted, or assets are taxed only when they are sold, or the interest which compensates for inflation is taxed, then investment decisions will be distorted and wealth will be redistributed unfairly, as in the early 1970s when house prices doubled in 3 years, or in the 1980s before the sharemarket crash.  We would have fewer problems now if we’d had a land tax then, to damp down the speculative gains.  It would have collected or prevented much of the profit made from houses in the 1970s and from shares in asset-stripping companies in the 1980s.

I hope that land tax in time will be sufficient to diminish the wealth gap, and it would be difficult or impossible to reduce it fairly any other way.  I don’t think it should be eliminated altogether, as there should be some rewards for work, saving, and luck.

6. “Compensate farmers and anyone else whose irreplaceable assets  disappear along with the price of land.”

As an alternative to compensation, land tax could be phased in slowly (over 10 years or longer), so that its effect is to reduce future capital gains rather than current land prices.  I think the land tax enthusiasts, such as the followers of Henry George and the writers of Progress and Land & Liberty, might have achieved more in the last 100 years if they had campaigned for a slow, fair phasing in of land tax, instead of a sudden introduction of a full land tax or land reform.

Another more precise way of phasing in land tax fairly would be to introduce it as a form of capital gains tax.  The tax could apply only to any increase in land value above the general rate of inflation since the date of introduction of the tax.  This increase should be taxed annually, not just when the land is sold.  If land values continued to increase above the rate of inflation, eventually there would be a negligible difference between paying the tax on these capital gains only, or paying tax at the same rate on the full land value, so the transition to a land tax could be completed without much trouble.

7. “Unemployment, homelessness, poverty and debt …  could all be cured by a properly organised, uniform and substantial tax on land.”

Inequitable ownership of land rent is not our only economic problem. Another problem is the globalisation of the economy.  International co-operation is necessary to prevent excessive concentration of wealth, and New Zealand should be a reluctant follower rather than a leader when reducing taxes to attract business.

Also I am a believer in the Kondratieff theory of long-wave international economic cycles, and I think what happened in the 1970s and 1980s was the latest Kondratieff depression.  The depressions in the 1930s and the 1890s are two other examples of the Kondratieff “down-swing”, which occurs every 50 years approximately.  The Kondratieff cycle is controversial and not understood.  My theory about the cause of these depressions was first published in Linkletter, the newsletter of the NZ Values Party, no. 73, December 1987.

At the same time as the latest Kondratieff depression, New Zealand had another problem: our trading advantages with the U.K. were replaced by the discriminatory trading practices of the European Community.

8. . . . “Land tax is not an optional extra.  It is an essential ingredient in a healthy socio-economic mix.”

Either GST or income tax should be abolished and replaced with the revenue from resource taxes or tradeable resource quotas, as well as with an increase in income tax or GST, whichever has not been abolished.  It is an unnecessary duplication of administrative effort to have both income tax and GST.

Like other scarce natural resources, the annual value of land should be taxed at a rate at least as high as income tax or GST.  The taxable value should be the estimated rental value including land tax and rates.  There should be exemptions from land tax for indigenous forests and wetlands and Treaty of Waitangi compensation.

Further reading.

Background paper for Victoria University of Wellington Tax Working Group, prepared by the Policy Advice Division of the Inland Revenue Department and by the New Zealand Treasury, September 2009.
http://www.victoria.ac.nz/sacl/centres-and-institutes/cagtr/twg/publications/3-land-tax-ird_treasury.pdf