Rhys ap Gwilym makes the case for the Welsh Government to prioritise utilising Land Value Tax
The poorest nation in western Europe needs to implement some transformative economic policies if it is serious about making up ground on its affluent neighbours. Here’s one proposal for such a policy.
From April 2019, the Welsh Government will have some influence over income taxes. At first glance, the powers that will be devolved appear to be very limited. The UK Government will continue to determine the overall architecture of the income tax system – the size and scope of tax-free allowances, the number of different bands of tax rate and their thresholds will all continue to be determined in Westminster. The powers that the Welsh Government will gain roughly equate to those that the Scottish Government have held for the past 18 years, and have chosen not to utilise.
Most of the discussion to date around how, and whether, the Welsh Government should exercise these new fiscal powers has focused narrowly on the revenue-raising implications of changing income tax rates in isolation (see, for example, here).These debates, however, miss the biggest opportunity that the (albeit limited) devolution of income tax powers presents – the opportunity to radically alter the tax mix in Wales.
We need to remind ourselves that the Welsh Government already, somewhat indirectly, has the power to tax property. When the UK Government imposed freezes on Council Tax in England between 2011 and 2016, the Welsh Government did not follow suit. Furthermore, under the Wales Act (2017) “local taxes to fund local authority expenditure (for example, council tax and non-domestic rates)” are explicitly excluded from the UK Government’s reserved fiscal powers. Given that a quarter of the Welsh Government’s budget currently passes directly to councils, there will clearly be scope for the Welsh Government to reduce the Welsh Income Tax across the board and make local services more reliant on local taxation. The key, of course, is that this local tax must be more efficient, more equitable and more progressive than those taxes which it replaces.
The clear candidate for this tax is a Land Value Tax, which taxes the ‘unimproved’ value of land – the value of the land, but not of any buildings that may occupy it. Such a tax is efficient because it does not distort economic incentives. The supply of land is fixed, and cannot alter in response to changes in the tax rate. Whilst income taxes disincentivise paid work, sales taxes discourage consumption and corporate taxes deter investment in enterprise, a Land Value Tax cannot alter the amount of land that is available.
In terms of equity, the Land Value Tax wins again. The value of land (as opposed to buildings on the land) is rarely dependent upon the actions of its owners. It is driven primarily by two factors – how easy it is to access various amenities from the land, and what the land can be used for. Both of these factors are determined by the actions of wider society, rather than the actions of the land owner. If we look back at the way in which land values have increased over the last half-century, it is impossible to justify why that increase in value should have been captured exclusively by the landowning classes, and disproportionately by the wealthiest amongst them.
In common with income tax, but in contrast to other wealth taxes and corporate taxes, a Land Value Tax has the advantage of being difficult to avoid or evade. Land ownership is clearly defined and a comprehensive register of ownership already exists. The valuation of land is not without its complexity, but it is an area where there are already well-developed methods and expertise.
Economists of all political hues favour the Land Value Tax because it’s efficient and difficult to avoid – Adam Smith, Henry George, Milton Freedman and, more recently James Mirrlees have all been proponents of a land tax. Some of us also like it because it’s progressive, it raises more revenue from the wealthier in society.
Given the advantages of a land tax, the natural question to ask is why so few states have attempted to implement one. The answer is relatively straightforward – that the initial implementation of a such a tax has potentially significant redistribution effects. There is a significant one-off cost to landowners as the introduction of such a tax will precipitate a fall in land values; and in most countries landownership is highly concentrated and landowners have a powerful political voice. This is where Wales has an advantage. Not only is landownership less concentrated, but the big landowners have less political clout in our young democracy than in the more established corridors of power in Westminster.
So here’s my proposal for a radical reform of the Welsh tax system that complies with the post-2019 devolution settlement, is revenue neutral in the short-run (of course, the efficiency of the Land Value Tax is likely to drive faster economic growth and hence higher tax revenues over time), and is more progressive and more efficient than the status-quo:
1. Set the Welsh Income Tax at zero.
2. Reduce the transfer from the Welsh Government to Councils correspondingly.
3. Get rid of the current regressive Council Tax.
4. Get rid of the current iniquitous Business Rates.
5. Replace both of these taxes with a Land Value Tax.
6. Introduce a fiscal compact which reallocates locally raised taxes from affluent Council areas to poorer Council areas on the basis of need.
[Here’s a quick back-of-the-fag-packet evaluation of the proposal: Poole et al estimate the ‘Welsh share’ of income tax receipts in 2014/15 at £1.877bn. Council tax and business rates receipts in 2014/15 were £1.277bn and £0.854bn respectively. A new local Land Value Tax would, therefore, need to raise in the region of £4bn. This is twice as much as current local taxes, but still covers less than 75% of council spending (the remainder would continue to be funded via a transfer from the block grant – at present over 60% of council revenues come from this source). Under these proposals, the Land Value Tax represent a relatively modest 17% of total tax revenues in Wales.]
This is a proposal which should be able to gain support from across the political spectrum. For those who want to see work pay, the reduction in income tax is a clear strengthening of the incentive to work. For those who are concerned about inequalities in society, a land tax is not just progressive, but it also represents a significant shift in economic power. The concept of land as a common good from which all of society should benefit becomes enshrined in the tax code, and it is society as a whole that benefits from increases in the value of land. For those concerned with the right of self-determination of our communities, a locally implemented land tax redresses the democratic deficit by returning the control of land to local democratic accountability.
To quote the most notable advocate of a land tax, the 19th century American political economist Henry George,
There is danger in reckless change, but greater danger in blind conservatism.
April 2019 provides an opportunity for the Welsh Government to reject blind conservatism by implementing a change that is radical but far from reckless.
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Erthygl wych. Gobeithio fydd pob plaid gwleidyddol yn talu sylw iddo.
The objection to a land value tax is that its economic effects are essentially the same as those of the notorious Enclosure Acts of the 18th century.
It makes land ownership unsustainable for all except those with large cash reserves or a willingness to develop aggressively or, most likely, both large cash reserves and a willingness to develop aggressively.
This is why Adam Smith favoured land taxes, as he favoured enclosure, because it does indeed maximise the efficient use of the land. However, there was a huge social and environmental price to be paid for this efficiency.
The rich got richer, while, as Goldsmith put it, “a bold peasantry, their country’s pride, once destroyed, can never be supplied.”
Enclosure fed the Industrial Revolution, that cannot be denied, but something irreplaceable was lost. Since then, our wiser statesmen have tried to recover the ideal of a property owning democracy, but any tax that is disconnected from cash income takes us further from it.
Resistance to big bang changes like that proposed is not blind conservatism but reasonable prudence. As JWR says, taxes can have unexpected effects. And those that are not associated with a flow of cash, be it an income payment or a transaction, are always highly unpopular. Note how unpopular council tax is compared with, say VAT. That is the real reason why land taxes are used so sparingly in all countries. No Welsh government would survive the attempt to implement Rhys ap Gwilym’s programme and that is why no government will attempt it.
There is however scope to move carefully in the direction he advocates to derive some of the benefits he forsees. Council tax could be reformed to be proportional to capital values (which are largely a function of the land price). Bigger better houses would pay much more. If you want to be revenue neutral that could be offset by a reduction in income tax rates. Business rates could also be moved gradually on to a site-value basis, in effect taxing land values and not the buildings on the land. Both changes would tend to depress land prices in areas of high demand but to a manageable extent.
Reform – certainly but festina lente or, if you prefer, brysiwch yn araf.
Diolch, Moelwen, am eich geiriau caredig. Gobeithio wir neith hwn sbarduno dadl.
Thanks, John, for taking the time to reply. I’m not sure that I follow your logic. One way of thinking about the Land Value Tax is that it returns land to “common ownership”, and to that extent reverses some of the malevolent effects of the Enclosure Acts. The land, in effect, is owned by the community/state; houses and other buildings remain the property of individuals, and those individuals pay a tax in return for the amenity of using the land. Of course, there are big political questions here – given the immobility of houses/buildings there need to be institutions in place to prevent the community/state from exerting undue power.
Thanks, Garald, for your response. I would like to make a few counter-arguments.
Firstly, I’m not at all convinced that tinkering at the edges of existing policies is ever the optimal course of action. It is this approach to taxation that has brought the UK to a position where the tax system is so complex that even individuals of very modest means spend hundreds of pounds on accountants, either in the hope of finding some loophole to exploit or out of fear on being on the wrong side of the tax authorities.
Secondly, on the point of the unpopularity of different taxes. I’m not aware of any evidence on this, but it would be interesting to know if there is any. My guess would be that it isn’t the association with cashflows that makes taxes less unpopular, but rather their obfuscation. Stamp duty and inheritence taxes are associated with cashflows, but seem to be more unpopular than council tax. I suspect that income tax and NI are less unpopular amongst the employed (paying via PAYE, and often unaware of the sums involved) than amongst the self-employed (who have to calculate their tax payments). Similarly, sales taxes in the US are visible and are much more unpopular than VAT raised in Europe’s shops. Then again, ask your average plumber how popular VAT is when they add it to the bottom of their quote. I accept that a land value tax is not easy to hide, and that this does give rise to certain political constraints. However, political expediency and good economic governance don’t always go hand-in-hand.
Finally, if the last few years have taught us anything, it must be that making predictions about what will prove to be politically popular is even less reliable than making economic predictions. The latest British Social Attitudes survey (http://www.bsa.natcen.ac.uk/latest-report/british-social-attitudes-34/role-of-government.aspx) tells us that the appetite for ‘tax more, spend more’ is at its highest level in a decade. I remain to be convinced that a highly progressive Land Value Tax would be the electoral poison that you suggest.
Rhys, arguing for the specific pre-Enclosure rights of commoners is the opposite of arguing for state ownership of land because it assumes that there are such things as private land rights.
The notion that all land belongs to the state was the basis of the feudal system. It came with the Norman Conquest and has no foundation in traditional Welsh or Anglo-Saxon law.
For the state to claim otherwise would in itself be exerting undue power, as you put it.
The key to LVT is land value – but what is land value? At its purest, the ‘LVT value of land’ would be the residual price paid for land following a development appraisal against the ‘highest and best use’ planning consent or allocation. However, in Wales speculative commercial development is only apparent in Cardiff city centre and therefore that approach would put little or no value on sites in other regions. But that wouldn’t make any sense as there is always demand for open storage or car sales, speculation or whatever.
Such an approach would put a huge redistributive shift in taxes onto Cardiff. This, at face value, might appeal to some however would risk killing the golden goose … Cardiff has, arguably, been the one true success story of the Welsh economy since devolution. It is simply not the case that certain businesses located there would be interested in other parts of Wales.
We tinker at our peril with measures that lessen the attractiveness of our capital’s business environment where land taxes are considered in comparison to Bristol, Manchester and Dublin. Indeed, the author suggests replacing a basket of taxes with a single LVT tax of £4bn… won’t this make Wales a less attractive location for all land based investment decisions?
Turning to the practicalities of LVT, how do you take account of brownfield land that might have a valuable planning consent but also a horrendous list of unknown abnormals to deal with? In this scenario, is it the case that a wealthy site owner who can prove the abnormals through commissioning due diligence can secure a better deal than a site owner without resources?
How do you deal with sites zoned for a use for which there is no commercial demand. Imagine a site with an allocation for a foodstore but that the Big 4 grocers have stopped their build programme – do you value the site in comparison to a developed store or not? Overall, I would also be concerned at the relative lack of evidence in terms of land transactions – there are very few clean land transactions and the factors affecting value are many and varied. The accuracy of the evidence database would therefore be called into question.
We should also question the capacity of the public sector to accommodate a fundamental shift – look at the trouble that introducing a simple shift to Local Development Plans has caused our planning system in Wales – a deadline of 2008 and still many are outstanding (and moving from UDPs to LDPs is certainly not revolutionary – LVT would be like moving from the current plan based system to zoning or permits).
Then there is the risk to the £1bn tax take from Non Domestic Rates (NDR). The business rates system may be ‘iniquitous’ however it is rock solid in terms of bringing in a stable source of funding for public services. However any move away from NDR must be costly and risky. Then there would be significant set up costs in a move to LVT with High Court appeals and test cases to fund.
Taking a pragmatic approach, I suggest the status quo but with changes to NDR to incentivize investment and rebalance the yield. In my view, the fundamental issue with NDR is the level of the Uniform Business Rate. From 30p in 1990 to 48.9p in 2017, this means that business are now paying half their rent in business rates, up from one third – lower the UBR and you will remove many of the iniquities.
Chris,
We are on the same page when it comes to being wary of violent change. However the shift of business rates to a site-value basis can be accomplished smoothly and gradually. We get the Valuation Office to break their assessments into two: value of land and value of building. Land is more homogenous than buildings so you need far fewer observations to produce a valuation. At present we can say the rate is the same on both land and buildings. Over ten years there could be a programme of running the rate on buildings down and the rate on the site value (land) up in a revenue-neutral way. Yes, that will lead to a reduction in land prices. Land prices in Cardiff will be hit hardest for sure. That hurts only the goose sitting on the golden egg having already laid it. The new geese coming to lay eggs get cheaper land. Business in Cardiff would not be adversely affected – a standard finding in economics since David Ricardo.
Rhys, I believe stamp duty is not as unpopular as council tax with the general public, although economists like it much less. Council tax is unpopular despite being levied at less than 1 per cent of capital values in most cases, which means it is usually less than 20 per cent of the annual value of housing services. When there is no cash transaction people have to find money to pay the tax and that is what makes it more salient and less popular. You are right, of course, that the visibility of a tax is also very important in determining acceptability. The two go together, however. If there is no cash flow there is nowhere to hide the tax. Lloyd George introduced land taxes in 1910 or thereabouts and abolished them around 1920. Australian states have them but Victoria has reduced their scope. Economists like them but you have to face that no-one else seems to.
Complexity and gradualism are quite separate issues. You can make a system more or less complex and you can do either gradually or with a sharp change. We share a preference for as much simplicity as possible – but not more than is possible.
John, I take your point but think we’re in danger of entering into semantic arguments here. I deliberately conjoined the words community and state in my previous reply in order to infer ambiguity over the particular institutions that might implement the land tax. What’s clear from the work of Elinor Ostrom and others is the importance of institutions in the goverance of the commons – there was no free for all.
Chris, initial implementation of LVT would require an assessment of land values. The Mirrlees Review suggested that this could be achieved by comparing the prices of similar developments in different locations. Once implemented, adjustments to tax rates would need to be made when the amenity of land changes significantly (e.g. as a result of new infrastructure) or when planning consents are altered. As Gerald has already pointed out, the big redistribution here is away from current landowners to the population in general. Existing landowners in Cardiff (and elsewhere) would take a hit, but future economic activity in Cardiff would benefit – the lower land cost would in fact be offset by the requirement to pay the new LVT, but the lower income tax would make Cardiff (and the rest of Wales) more competitive. I haven’t done any detailed calculations, but I have a strong intuition that the median household would be better off in the short-run as a result of these changes as the combination of the new LVT and loss in the value of their land would be more than outweighed by the fall in income tax. Land ownership is highly concentrated and there would certainly be some big losers, but these are mainly the incumbent landowners who have profited unfairly from the increase in land values over past decades. In the long-run, the efficiency of land tax should benefit all.
Gerald, I’ve had a quick search for evidence on the popularity of various taxes and have drawn a blank (beyond some evidence for a clear distaste of inheritance tax), so unless you have have some evidence I guess we have to conclude that our acquaintances have disparate views on taxes. I’m glad that we seem to agree on the principle of LVT as an efficient tax, and I would certainly prefer your recipe for business rates to the status quo. However, I am not a fan of the gradualist approach.
Westminster has always favoured layering political expediencies upon political expediencies – minor adjustments to past policy which aggregate to one big mess. To date, the Welsh government has been unable or unwilling to do much more than add to this ugly edifice. Wales is the poorest nation in western Europe, with GDP per capita equal to 43% of our neighbours in the Republic of Ireland (http://ec.europa.eu/eurostat/documents/2995521/7962764/1-30032017-AP-EN.pdf/4e9c09e5-c743-41a5-afc8-eb4aa89913f6). I simply cannot see how, in these circumstances, a policy that incentivises economic activity and deters economic extraction can be construed as anything but pragmatic, or charcterised as excessively risky when it affects only 17% of tax revenues. I’m not saying that this is THE answer to Wales’ ills, but it is policy interventions on this scale or greater that we require, not the same old gradualist approach.
Rhys,
Many thanks for your thought provoking article which raises some very important issues as to the shape of taxation, what should be taxed, and the practicalities of taxation. There are a number of brief points that might be made:
A Land Value Tax is a tax on wealth, rather than a tax on income, and this has a significant impact on winners and losers and acceptability.
Land is only one asset that could be taxed, and an LVT may therefore well create distortions between asset classes
The way in which land is held would need to be looked at carefully. The use of a corporate structure to hold land could result in some serious anomalies
The border issues would raise some interesting questions. A person living in Wales and working in England might find themselves taxed twice, and in the reverse situation subject to very little tax.
There might be some merit in aligning the council tax and business rates methodology by looking at rentable value as the taxation benchmark for property. This would not only build on an existing approach and provide some coherence to the system (and provide a fairer system in capturing higher value homes at the top end of the market, even though this is far less of a problem in Wales than in London), but would provide an effective mechanism to a government to implement policy changes depending on whether they wished to favour housing or commercial development. It would also tend to capture increase in value as a result of public expenditure on infrastructure, which is notoriously difficult to do.
Rhys,
First apologies for a delayed response. Now, a tax on land is a tax on an asset whose price will adjust only gradually to business conditions. It will not be very responsive to the state of people’s incomes. That means the tax will be perceived as a particular burden when incomes stagnate or fall. For an example of that, observe the recent furore over business rates. People were exercised that they had to pay the same or higher rates at a time when business conditions and their incomes were depressed. Taxes that are not associated with cash flows and are not responsive to income do tend to be particularly unpopular and if you doubt that then I don’t think you have been reading the newspapers.
Moreover, given the lags in land valuations behind prices and the lags in prices behind business conditions, replacing income taxes entirely with a land value tax will remove an automatic stabiliser to business conditions and increase the amplitude of fluctuations. That is one forseeable implication but there may be other unforeseen implications. For example what will be the actual effect on land prices, hence valuation and hence revenue? What if revenue falls short of expectations? Such uncertainty is a powerful argument both for gradualism and not putting all your eggs in one basket. We agree that some taxation of land is a good idea. Your proposal to make it the only tax levied by the Welsh government pushes a good idea to an unreasonable point.
Rhys, excellent article, I particularly liked this response: “One way of thinking about the Land Value Tax is that it returns land to “common ownership”, and to that extent reverses some of the malevolent effects of the Enclosure Acts”
That is a large part of the appeal of LVT!