Windfalls from public investment should be shared

Generally, the weekly ‘short debate’ slot at the National Assembly is not amongst its most prestigious occasions. They take place at the end of a long Wednesday afternoon and are usually a signal for a mass exodus of weary legislators, leaving the proposer and a duty Minister behind. Yet the short debate can be useful as a means of increasing the gene pool of policy ideas which are available for consideration. In that spirit, this week I used to slot yesterday evening to make the case for serious consideration of a Land Value Tax.

This would be levied on the annual rental value of specific pieces of land, where the value is determined by different usages, for example whether it was agricultural or industrial land. Of course, it would be an alternative to existing forms of taxation, not an addition to them. At its most radical, a Land Value Tax would allow for the abolition of Council Tax, Business Rates and Stamp Duty Land Tax, Instead it would introduce a levy on the annual rental value of every site in Wales including all residential, commercial and farming land, as well as privately owned estates.

A major virtue of the change would be that Land Value Tax is a progressive tax. On the other hand, Council Tax is regressive because it imposes a lower burden on the rich than the poor – and also a lower burden on rich places than poor places. The Land Value Tax reverses that proposition.

The basic idea behind it is that the supply of land is fixed. As Mark Twain said, when advising people to buy land, they aren’t making it any more. As a result, it is inherently scarce. Its price reflects three things:

• its scarcity value;

• the value of improvements made by the landowner; and

• the value of improvements made by other people, especially the public sector.

In modern conditions the first and third of these almost entirely swamp the second. Therefore it is right and fair that value created not by the landowner but (mostly) by national and local government should be taxed.

One practical example is the estimate that the Jubilee Line extension through south and east London from Green Park to Stratford has raised property values around the stations it connects by £10 billion. If only a small part of this windfall had been taxed, it would have paid for the extension very easily. At the same time, while those who benefit from big increases in land values as a result of such development pay more, those whose sites have suffered (such as, for example, housing close to railway tracks which may decline in value because of noise or vibration) would pay less. This is a form of automatic compensation without any complicated appeals system. In just the same way a Land Value Tax could easily pay for many other much-needed infrastructure schemes.

What, then, are the main practical advantages of a Land Value Tax? First and foremost, such a tax would be tricky for even the rich to avoid. It’s hard to hide land or move it offshore to avoid getting taxed. For economists who advocate a Land Value Tax, such as those at the Organisation for Economic Development and Co-operation (OECD), there are two other big advantages: land taxes increase long-term stability and growth by fostering more productive use of capital; and they stabilise government finances by bringing in revenue efficiently and quickly. In short a Land Value Tax is:

• Cheap to collect

• Difficult to evade

• Discourages speculative land holding

• Encourages active use of land, creating more job opportunities and wealth

Meanwhile, in Wales, we already have, in TAN 6, ‘One Planet Development’, a policy approach which is sympathetic to land value principles.

Is it, then, a practical, political possibility? Well, I don’t want to underestimate the problems of tackling taxation, especially in an economic downturn. And the experience of the poll tax remains one which has scarred the collective memory of tax change in the property field.

Nevertheless, a Land Value Tax has an impressive economic and political pedigree. Lib Dem supporters have included both Vince Cable and Chris Huhne. For Labour, Andy Burnham made it a centrepiece of his campaign for the Labour leadership, describing it as an idea so old-Labour it can be traced back to Thomas Paine.

It is also the official policy of the Green Party in Scotland where research carried out late in 2010 suggested that a land value tax of 3.16p per pound would generate enough cash to replace council tax and the uniform business rate, while leaving 75 per cent of Scottish households better off in the process.

But Land Value Tax is not simply a policy of the radical left. Free-market capitalists and mainstream economists, such as Martin Wolf and Samuel Brittan, have both argued the case in favour. And, indeed, on the right of the political spectrum, a Land Value Tax has gained new traction in relation to problems in Greece. Put simply, it is quite difficult to move an Athens mansion off-shore (or, indeed, one in Belgravia) in order to avoid taxation.

In Wales Land Value Tax is also an idea with a strong lineage. Inside the Labour Party, the idea was first seriously advanced by Keir Hardie, in his 1906 Manifesto to the people of Merthyr Tydfil and Aberdare. Here is what he said:

“The slums remain, overcrowding continues whilst the land goes to waste. Shopkeepers and traders are over burdened with rates and taxation whilst the increasing land values that should relieve the ratepayer go to people who have not earned them.”

Three years later, a Land Value Tax was intended to be the centre piece of Lloyd George’s ‘People’s Budget’ of 1909. However, it was defeated by the vested interests of the House of Lords and property owners in the House of Commons. Now, in the era of devolution, there may be a chance for their uncompleted work to be brought to a conclusion in Wales.

Of course, it may be that the current settlement will not make it easy for such a reform to be introduced in the immediate future. Nonetheless, the whole future of responsibility for taxation is very much a matter of current debate. I hope that, by raising this matter, it can be brought to the attention of the Silk Commission so that it can include a consideration, if not of land value tax itself, then at least of the case for providing the National Assembly with powers to reform taxation in Wales, in this way, should it chose to do so.

In Wales –  the part of the United Kingdom with the longest tradition of radicalism -we have no difficulty in understanding the notion that land is a resource we share in common, a true ‘common wealth’. As a result of being fixed and fundamental, it should belong to the people.

Those who have the privilege of ownership should pay something back for that privilege, through a Land Value Tax. Once this is understood and agreed, the serious work of detailed investigation of its pros and cons and its practical implementation here in Wales can begin.