Monday, February 27, 2012

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.


Blogger Demetrius said...

In the past I have had a good deal to say about property tax and admit that a Land Tax would serve much the same purpose. The way things are going this one is going to have to come.

7:12 am  
Anonymous Eleanor Firman said...

Thank you for this excellent blog - not least for the wise caution against treating LVT as panacea. It is certainly not that but benefits include promoting a more stable economy based on genuinely productive activity, not property boom and bust. You can't hide land in a tax haven either. Although the potential for considerable revenue is often stressed -even overstressed - what should be understood first, is that it takes out what is unhealthy (speculation, land hoarding, empty properties, regressive taxes) and incentivises productive use of land and development - creating jobs, lowering land prices for affordable homes and so on. Your support will definitely help LVT take it's place on 'Alternative' agendas as a key reform.

3:32 pm  
Blogger DavidECooper said...

" much so that over half of office property in the City of London is owned abroad."

I reject your comment that this "half-sentence is a bit speculative". A British Virgin Islands company is based abroad, regardless of who its shareholders may be. The sentence stands.

5:56 am  
Anonymous Steven Clarke said...

So glad you're on board. LVT is a no-brainer - a necessary, but insufficient, part of a just economic system.

Let's also not forget the indirect benefits. Infrastructure spending becomes self-financing, cheap land coming onto the market allowing for affordable housing to be built, reduced urban sprawl and revitalised inner cities, far greater wealth equality and distribution of land ownership etc etc.

But let's not dismiss the opposition we will come across - even just the lazy 'not more taxes!' line. This policy has to be embedded in a comprehensive program that sees other taxes reduced.

6:02 am  
Anonymous JamesStGeorge said...

Unadulterated drivel. There is never ever any justification to tax any asset at all. Just because it may be easy to do, or target a pet prejudice, is not any excuse for a moral crime. Assets have NO income to pay with. Annual payments to own anything is utterly unacceptable at any level whatsoever.

We already tax any income derived form assets, which is fair enough, new money.

This old LVT idea is in the dustbin of history for very good reason.

The planning issue and land value increase is totally separate and easy to deal with. Charge or tax on sale, for granting public permissions on land 90% of the gain over the agricultural value. Public permissions create all that value the public purse should be the only gainer from it.

3:14 am  
Anonymous Anonymous said...

@ JamesStGeorge

For someone new to LVT it's good to hear from an opponent.

"Assets have NO income to pay with. Annual payments to own anything is utterly unacceptable at any level whatsoever."

I see these two sentences as separate issues, not as one following from the other.

Is the first not a practical issue? Of course there are instances where an owner of an asset has no income with which to pay. One idea may be in such cases to allow the owner to pay the unearned difference in price upon sale. There may be a fundamental flaw with this particular proposed solution but that's not to say that there aren't solutions that would work.

The second is a matter of principle where you obviously find LVT abhorrent and even suggest it to be a moral issue. On this I will not argue though I disagree with you. Some may find the taxing of assets immoral, others the taxing of income. It takes more than stating your position strongly to claim the moral high ground.

"This old LVT idea is in the dustbin of history for very good reason."

...Except it's not binned. There are good examples of its successful implementation that prove otherwise. And the better I understand it the more I hope to see it implemented more widely.


12:50 pm  
Anonymous Anonymous said...

When I Tweeted the link to "A tax that can curb corruption" last night little did I realise the nature of the organisation I was promoting! I didn't think further than that I liked the way it was presenting an idea I'd like to see more people talking about.
I have a strong opinion on tax exiles: Where entrepreneurs' own countries are demanding so much tax that they are prepared to go to great lengths in order to base themselves and their businesses abroad then it's a shame but good luck to them! I find the Big Brother ideas of getting loads of untrustworthy governments to freely exchange information and create international laws to hound the successful as criminals a very scary concept that is simply wrong in my book.
However, one of the things I like about LVT is that it brings people of such diametrically opposed views as you and I have into the same discussion :)


12:04 am  

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