Samuel Brittan: A tax idea that cannot be buried By Samuel Brittan
Financial Times Published: April 14 2005 21:04
Pensions are not the only issue on which the government has decided to defer action until after the election. Another is the taxation of land. This is as near as anyone is likely to find to a tax that raises revenue without any disincentive effect. It is, as David Ricardo, the
19th-century British classical economist, explained, a tax on the original properties of the soil.If you think this is an eccentric notion look at the following: "The award of planning permission increases the value of a plot of land from £5,000 to £1m. Then even if the resulting gain were taxed at 90 per cent, the developer would still be better off by almost £100,000, using the land for housing than retaining it for agricultural purposes. Substantial incentives to bring projects forward would remain."
This analysis comes from a well-known text book, The British Tax System (Oxford),by J. A. Kay and M. A. King, one of whom is now governor of the Bank of England.
These far from original thoughts have long circulated among non-Marxist radicals. Henry George, a 19th-century American reformer, published a best-seller in the 1880s, Progress and Poverty, which went so far as to advocate a "single tax" on land values to replace all other taxes. The excuse normally given by British officials for taxing work and enterprise but not land values is that it is impossible to separate out the elements in the cost of property that represent pure space from the return on bricks and mortar. Yet this distinction is made every day by developers.
The puzzle is why past attempts at extracting economic rent for the public benefit have been unsuccessful. Lloyd George originally intended to introduce a flawed version of such a tax once a comprehensive land valuation register had been established. But the first world war intervened; and then the disintegration of the Liberal party took the plan off the map.
The post-1945 Labour government also tried to tax land values. But it made the mistake of trying to nationalise the development value that land acquired as a result of planning permission, whereas a true land tax would be a tax on its value, however derived. There are parts of the world, including Australia, where there is some land taxation, but not on the scale desired by the reformers.
There is another problem. The land tax movement tends to attract zealots who see it as a cure for every problem, from inflation and the business cycle to the common cold. In the course of their enthusiasm they do uncover interesting information. A new example is Boom Bust (Shepheard-Walwyn) by Fred Harrison. He does make a case for the existence of an 18-year business cycle, which he links to speculation in the property market. But there could still be speculative cycles based on bricks and mortar. Moreover, official valuations could not be revised so frequently as to eliminate all the land-based element.
The chequered history of the subject suggests that it would take a long time to introduce and embed a land tax as an important part of the tax system. Moreover, the reformers underestimate the political storm they would create, which could not be assuaged by calling it a "charge" rather than a tax.
Yet, for all the difficulties, the issue is almost certain to come up in the next parliament. The incoming government will be desperate to find means of raising revenue that do not involve increasing income tax, value added tax or other indirect taxes. There are also local pressures. The council tax is becoming almost as unpopular as the rates against which Margaret Thatcher used to inveigh. But it will be difficult to keep it down without some new sources of revenue. The Liberal Democrats' idea of a local income tax is bad, not only because it raises marginal rates of tax but also because it ends even the very partial taxation of property values now prevailing.
More specific pressure comes from schemes such as the proposed Crossrail project from the west to the east of London. Both government and local authorities are bound to try to extract some of the cost from businesses that will benefit. Once embarked on that course it will be difficult to resist the more general idea of auctioning planning permission. This would be an improvement on the present hole-in-the-corner deals by which developers promise specific services such as access roads or playing fields in return for development permission. The question will then arise: why only tax those values that accrue from planning permission? Would it not in the end be simpler as well as fairer to tax land values in general?
No one should underestimate the hue and cry that the idea of a land tax
- which would have to be brought in gradually - would provoke from thousands of vested interests. But this only makes it all the more desirable for advocates of this tax to avoid promising the moon and to link up with the general economic debate rather than forming a cult.
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