A tax that can curb corruption

. . . and achieve many other things too.

From the UK's Daily Mail, on a particular part of the Berkshire countryside:

Locally, an acre of productive farmland can be purchased for about £7000. Working a farm in West Berkshire turns a decent profit, and is a perfectly good business proposition. But land speculators bank on far richer rewards. If they can get planning permission to turn this acre into residential land, its value will shoot up to over £700,000.

A huge market distortion here. And with it, of course, risks and temptations:

To bring about this increase, a planning inspector has to sign a piece of paper. In the case of Sandleford Park, about 100 acres are scheduled for development, so if the inspector signs on the dotted line the landowners will make a profit in the region of £70 million. The word for this dramatic price increase is “value uplift”.

And the sharks are circling:

"Land speculation in the UK is now a globalised business. From Russian gangsters, African dictators and tax dodging Greeks, hot money is flooding onto the UK property market, as overseas speculators seek a safe haven for their fortunes; so much so that over half of office property in the City of London is owned abroad."

That last half-sentence is a bit speculative: we can't know exactly who owns many of these properties because they are hidden behind companies from the BVI and other tax havens. But still, lots of foreigners do own this property. And of course the result is one set of shiny rules for the global rich, and another, shabbier set for ordinary British people:

"The relationship is entirely parasitical: these speculators benefit from the protection of British law, but contribute not a penny in taxes towards the costs of maintaining such excellence."

(Let's not forget that this is a right-wing newspaper, while reading this. And good on 'em for this article.)

But now here is the point:

The profit from building houses is different from the profit from land speculation, and is a legitimate reward for business and enterprise. . . . . By contrast, the land speculator makes hugely inflated profits, and does nothing beyond influencing the right people for his own ends.

The former (building houses) is value creation, while the latter is value extraction. Economic rents, is how some describe this. And economists from Adam Smith onwards have said that the correct response to economic rents is to tax them, hard. And now we turn to the Financial Times, and an article from Samuel Brittan, entitled Tax England’s green and pleasant land.

He is talking about a Land Value Tax (LVT). This is a tax levied not on the value of a building, say, but on the value of the land underlying that building. Those in expensive areas will pay higher land value taxes: if set up correctly, it is potentially a highly progressive tax.

In fact, we dedicated a whole edition of Tax Justice Focus to this issue, and it's an incredibly important one. We wholeheartedly support this tax, and urge others to spread the message and badger their political representatives on it - in the UK and anywhere else. But there's a proviso here - unlike some LVT fanatics, who see this as some kind of tax nirvana, we see LVT as just one important part of a healthy tax system. Indeed, as Brittan says:

"A land tax is one of those subjects – basic income is another – which divides commentators into a great majority who never mention it, and a minority who talk of nothing else. The result is to give supporters a cranky appearance, while the eyes of chancellors of either main party glaze over if you as much as mention the subject."

Those of you who follow such things will probably know what we are talking about. (We like to think that we fall into the all-too-small, but happy, middle.) But Brittan notes that the case for a land tax is "one of the oldest and least disputed propositions in economic thought." Absolutely. It's the landed classes who hate them - and their influence spreads far and wide.

That luxury Mayfair penthouse owned by a BVI trust - a Land Value Tax would hit it just as hard as any other property. If designed correctly, it is offshore-proof. Brittan continues:

"The basic point is that the supply of land, with rare exceptions such as reclamation in the Netherlands, is fixed. But because of its scarcity owners can command an income over and above the normal return to the enterprises placed upon it. . . . There is one way in which the supply of usable land can increase. That is when land, previously off limits, is newly released by local authorities for development."

Which is just as the Daily Mail describes (the article goes on to describe the "Valentine’s day massacre of Sandleford," where the developers got their hooks in and made "huge tax free fortunes from the violation of our countryside."

The consequent increase in value from changing land from one use to another is, as some LVTers put it, is created by “the community” - and therefore that community is entitled to a big share of the increase. Absolutely. And that share would come about through a land value tax. It could transform the relative values of different kinds of land uses and - among many other things - curb market distortions and stem this kind of temptation for corruption.

One last thing. Brittan says this:

"Gross UK trading profits of non-financial and non-oil corporations are running at over £200bn per year or about 20 per cent of gross domestic output. Some part of this – we do not know how much – is not true profit but the return on land."

Well, indeed, and that's important - but he is selling this short. The financial sector makes a huge share of its profits through land-related businesses such as residential mortgages - all of which depend on land values. Tax this stuff, and you get to take a lot of hot (and poisonous) air out of a socially useless part of the financial sector. Collectively, neither Britons (nor anyone else) are better off from selling ever costlier property to each other. The only long-term beneficiaries from the UK housing bubble are bankers.

So this is a tax whose time has come. Crucially, there is no intellectual argument against this tax that can withstand any scrutiny. What is preventing it being put in place is the pure political power of those who don't want to be taxed - (combined with the ignorance of voters and politicians).

From #Occupy to those worried about inner city poverty to the Daily Mail, this valuable land tax can, and must, be supported.