A land value tax is a charge on the ownership of land. It is generally thought of as an annual levy on land ownership whereby the value of the land, excluding the property/properties value/s that sit on the land.
The benefits to such a levy are wide-ranging.
Firstly, it would raise revenue for the exchequer. Land is more expensive than other land because of investment. When the state builds a railway, land adjacent to it increases in value – this investment has opened up sites for other investment (e.g. housing), increased demand and the value goes up. An annual levy on landowners means the exchequer captures some of the value uplift to spend on more public goods.
Secondly, it would encourage land owners to better use their land – either they pay a tax to keep hold of it as land values increase (again, often due to public investment in neighbouring land areas) or they bring it forwards for development (where it fits within local plans) or previously developed land would be better off as green space.
Thirdly, it would stabilise land prices as investors would have to think carefully about how they use the land and their build-out rates. As a result, land speculation would discouraged and prices would stabilise. This, in turn, will stabilise house prices which helps the consumer plan to buy and the developer as they have confidence in predicted values – i.e. it would dampen the boom-bust cycles and bring development forwards more quickly.
Fourthly, it is one of the most economically efficient taxation methods. Unlike income and capital, land cannot be moved or hidden – land is fixed and the owner is known (although there may well be issues here in the short-run, particularly in England). Furthermore, as land supply is fixed anyway, it shouldn’t affect the availability of land, nor should it create disincentives to buy, develop and use the land in question.
Fifthly, it could replace other forms of taxation. Property taxation in the UK has three key components: council tax (a regressive tax charged to occupiers and not owners based on the value of the property and not the income of the occupier), business rates and stamp duty. The problem is that these taxes have perverse effects. Council tax and business rates are taxes that are imposed on already developed land – these taxes would discourage development and improvements. Stamp duty, on the other hand, is a levy placed upon the buyer through the transaction and not the seller (who has arguably benefited from uplift in values without their own development). We shouldn’t want to discourage transactions – a higher number of transactions will mean households can move freely and make most efficient use of the stock available.
The benefits are large but there are limitations that need to be overcome. The next article in the series looks at these limitations and finds ways to get around them.
This article is part of a series on land value tax. More can be found using the tab on the right.