It was a pleasant surprise to find that the Financial Times chief economics commentator Martin Wolf has come out in favour of a Land Value Tax (an annual tax on the value of land owned), following a debate on the FT website.
I have previously written a proposal for a Community Land Value Tax for the Scottish Parliament. I reproduce it here as originally written. I would probably change some of it now, but it contains the main elements of the case.
Proposal for a Community Land Value Tax
It was Marx who saw that the unequal distribution of ‘private property’, in particular land, was incompatible with social justice. Yet we have also seen from the former communist states that centralised ownership of land and the resources it produces brings a different sort of tyranny.
Land as fundamental property
In these days of highly manufactured technology it is very easy to lose sight of the importance of land. Look at any product of this technology, however, and we will find that it is composed of materials extracted from the earth’s crust, from crops grown from it or animals husbanded upon it. So land is the fundamental ‘property’ and all other material goods are derived from it. Social justice therefore demands some way of making the control of its use communal and democratic.
The control of land
But what does ownership of land really mean? For land is not mobile, it does not come in discrete packets (apart from islands) and in its vertical extensions, above and below ground, has properties that are out of the control of its ‘owner’. Even the surface of the land is not totally free for its owner to do with it as he wishes, in the way that he can with other possessions. Mineral extraction rights are often retained in a sale, development may be restricted by planning controls, and consideration has to be given to pollution of air or water. So we see that the ‘ownership’ of land does not in fact give complete control of its use. In other words in our society the status of land already exists somewhere between the two extremes of ‘private’ and ‘collective’ control, so to move it a little toward the ‘collective’ pole should not be too radical a step.
Socially valuable control
The ideal situation would be if the control of different aspects of land and its use were allocated to the person or persons most able and willing to maximise the social or community value of the land, whether this be householder, housebuilder, farmer or mining company. But how could such a more socially valuable distribution of land control be achieved without a massive programme of compulsory public land purchase, which would be seen as anti-libertarian and also be impossibly expensive?
Realising Community Input
In addition to a land use tax (currently the Council Tax) raised to cover the revenue needs of local communally provided services, such as water, sewage, refuse disposal, highways, public transport, parks and libraries, a new tax which allows the community to realise its own input into private land values could be introduced. I propose to call this new tax the ‘Community Land Value Tax’. Currently, land lying undeveloped or underdeveloped in towns or cities or on their outskirts gains in value as that town or city develops. This increase in value occurs entirely without any effort or expenditure on the part of the landowner but as a result of the paid and unpaid efforts of the people of the local area in building up their community.
Rise in Market Values
Where a landowner has developed his own land, in a way that meets the needs of the community – in the widest possible sense – it is right that he should gain some benefit. A private landowner should not gain however from a rise in the market value of his land that results from community growth or activity, since on a personal level he can only have played a small part in this rise in value. This change in ‘community value’ would govern the level of the tax levied.
Undeveloped land and Unmet Needs
Where land is assessed as having the potential to meet a community need but remains undeveloped, perhaps because the landowner is waiting for a possible further rise in land prices, then the tax levied would be the difference between the original purchase price of the land and the market price of the land given the planning permission and the recognised unmet need. So where land is sold to a housing developer, for example, the rise in value above the original purchase price resulting from the development of the surrounding community, rather than inflation or any development of the land carried out by the landowner himself, will decide the level of the Community Land Value Tax to be levied. In this way the rise in land value created by the community goes back to the community. Land that was not identified as having any socially useful potential for development or which was already fulfilling its potential would be zero-rated, and would only be liable to the current land use tax (presently the Council Tax).
Development leads to Discounting
Development of the land to fulfil its community need would result in the discounting of the tax to zero, whether this was done by the landlord himself or the purchaser of the land. Any loss of revenue to the local authority is compensated for by the provision of the community need.
Surveying the Land
Local democratic authorities would have to start from a base of identifying currently unmet community needs, such as housing, employment, resource extraction, agricultural produce etc. They would survey all land within their jurisdiction to assess its most appropriate use to meet these needs of the people of the area; in social, economic and environmental terms. For land which was designated as being able to help meet these needs; by development from scratch; by conversion to some new use – which might just include being open green-belt land – a Community Land Value Tax would be levied.
Levying the Tax
Single Identified Area
In a situation where only one area of land was identified as requiring a particular ‘development’ the full tax would be levied on the owner of the land in yearly instalments over a pre-determined period of time (taking account of prevailing inflation and interest rates). The landowner would then have the choice of paying the levy, selling the land – the cost of the levy acting to reduce the selling price, or developing the land himself to fulfil the designated social need.
Multiple Identified Areas
If, on the other hand, there were several suitable sites for a particular development there would be two options:
- Option 1- Full levy on one owner
The full land valuation tax liability would be levied on the owner of that area of land assessed as being the most appropriate for the needed development. In the last case the community value tax would be rerated at zero. If there were other pieces of land in the area which were also suitable for the specific development and the development was initiated there, then the tax would be transferred to this land from the original land.
- Option 2 – Spread levy onto all owners of appropriate land
The land valuation tax liability would be divided between all landowners whose land was assessed as being appropriate for the needed development. All these landowners would then have the choicesIf this development was commenced on one of these sites, then all the sites would then become zero-rated.
Development proposed for land which has been zero-rated for the Community Land Value Tax will still be liable to the usual planning regulations and procedures, as well as environmental protection legislation.
Fall in value of private land
What if community development lowers the value of privately-owned land? Generally speaking since this ‘public gain at private expense’ is far less of a problem than ‘private gain at public expense’, and is already addressed by pollution regulations and planning procedures. I don’t believe the added complexity of negative Community Land Value Tax is appropriate. Landowners are not generally poor and in any case they will still be able to realise a price from the sale of the land.
Land not producing direct income after development
Development still encouraged
Where a new land use will not produce direct income, development or sale for development will still be encouraged because the landowner would be free to contract with the local authority for appropriate remuneration to maintain the area as required for its new use. And if the landowner wishes to carry out some commercial activity on this land he would not be barred from this as long as this did not conflict with its primary community use, and met the usual planning and other regulations.
Method of Remuneration
Where land subject to the tax was converted to public access parkland, for example, the landowner could reasonably expect to receive payment to compensate him for the extra maintenance required to the land in view of its increased use. Whether this payment was contributed by individuals as a charge to use the facility or paid by the local authority would be for the community to decide.
Arguments in Favour
1. The community realises its own input into private land values
2. Private landowners will be encouraged to either develop their land in line with community needs or sell it to those who will. If they do not then at least the community will realise its input into the land in cash.
3. As a result of the imposition of the Community Land Value Tax the balance of costs will be altered. The market price of land allocated for community development will be lowered to those willing to carry out the required development. This has the result of making developments profitable when they might not otherwise have been so, or lowers the level of prices, rents or charges required to generate the income required to make a development viable. It will be important, however, to have some mechanism which would prevent the cost reduction simply being transferred to greater profit for the developer.
4. As a result of the development activity stimulated by the lowered land cost new jobs would be createdas a consequence.
5. Although local authorities would have a better chance of buying land at the lower prices as a result of the tax, the private sector is likely to be the main beneficiary, so maintaining diversity and competition in the provision of socially beneficial development.
1. The tax is unfair to landowners!
Landowners – not as a group among the underprivileged – will still be able to realise the benefits of their own input, are not forced to sell their land or to develop it if they have the desire and the means not to. They like the rest of the community can share in the community benefit, either of the extra revenue raised or from the new use of the land. The tax favours landowners who use their land for community benefit against absentee landlords who leave socially useful land undeveloped.
2. The level of tax raised will be difficult for local authorities to predict.
Although development of land on which the tax is levied will result in discounting and therefore the loss of revenue, the community’s costs will be lowered as a result of the development. For example, the provision of new low-cost housing by a developer will reduce local authority spending on social housing and homeless provision; new parkland or leisure facilities would reduce spending required on recreation; provision of new employment or educational facilities would reduce levels of social service provision etc. There will also be savings on items such as transport and welfare benefits, accruing to the wider ‘community’.
I can’t think of any more!
© Diarmid Weir 2010