Vlog number 3 is here.
If somebody has a special talent, and they work really hard it and they excel – maybe they’re a brilliant sportsman, or they’re a comedian and they make millions of people laugh, or they invent something we all use. Or they start some business that brings benefit to everyone, I don’t think anybody resents that person making a great deal of money.
What pisses people off is those that have done sweet FA for what they have. It’s an objection to what is known as ‘unearned wealth’.
And I think in the current raging inequality debate it’s very important to differentiate between wealth that is earned and wealth that is unearned.
Defending Owen Jones
The Guardian columnist Owen Jones is getting a lot of flak at the moment because, in terms of earnings, he has joined the so-called 1%. And being part of that 1% is in some ways a contradiction of his socialist principles.
I would defend Jones and say that he has earned his place in the 1% by writing books and columns that people want to read. And by going on TV and saying provocative things that people want to hear.
If you born with nothing the only way you have of bridging the wealth gap is by working. But if you’re tax at 45% on your labour, while those that own assets go untaxed, bridging that wealth gap is very hard to do.
I’m going to describe a system of taxation now that would result in unearned wealth being distributed and shared, while earned wealth is kept.
It’s called land value tax – LVT. And it’s extremely difficult to explain in a pithy way that people understand – which is one of the reason no politician who wants to get elected has ever really made it their cause.
It’s based on the thinking of 19th-century American economist Henry George. He called it a ‘single tax’ because it replaces all other taxes.
You’ve heard of the mansion tax. That derives from LVT. But the proposal was that it be in addition to other taxes. LVT – in its purest form – should replace other taxes. So there’s no income tax, no NI, no VAT, no fuel duty and so on.
The philosophy behind ‘Georgism’ is that wealth you earn or create is yours. You do with it as you see fit. But the wealth that nature has given us, in particular land, is unearned. No individual or company made the land; there is no cost of production to it: nature gave it to us, so it should belong to everyone. By building or farming or mining on it, many have improved it, but the land itself was always there. LVT ignores the house, the farm or the factory, whatever is on the land. Tax is paid simply on the rental value of the land itself. If the annual rental value of the land is £100, the tax payable would be a percentage of £100.
Some land is more valuable than other land, it has a higher rental value. But as it is the needs of the community that push the value up, the land value should go to the community and not the individual.
The 17th-century proponents of LVT were known as the physiocrats – physiocracy meaning ‘government of nature’. The ‘unearned wealth’ given to us by nature – the mineral wealth, the airspace, the broadcast spectrums, the space orbits – belongs to the community. Why should the oil under the sands of Saudi Arabia belong to a few princes? It is unearned wealth that should have been spread among all its people.
Of course, there are huge costs and expertise that go into finding and extracting minerals, just as building and flying a plane or transmitting through a broadcast network involves great expense and technological innovation. Such endeavours, if taken on successfully, are compensated commensurately by the reward of profit in the market.
But if you want the right to exclude others from a plot of land – i.e. for it to be ‘yours’ – and you want government to protect your title to that land, then a rent needs to be paid to the community that reflects the value of that land. Once you’ve paid that rent, the profits of your endeavours are yours.
A simple explanation of how LVT would work.
Every parcel of land in the country is assessed for its rental value – not the buildings, crops, drainage or anything else – just the land. If the land is undesirable scrubland in a remote location with no planning permission, it will have low rental value. If the land is in a prime area, is very fertile or is rich in minerals, demand for access to these features will be high, so the land’s rental value will be high too. Valuations are based on current market evidence. If there are two parcels of land in the same street, both the same size and with the same planning potential, yet one is developed and the other not, they are still both given the same rental value. Tax is then levied as a proportion of the annual rental value of that land.
A four-bed family home of around 2,000 square feet in a pleasant part of London, might have a rental value of around £35,000 per year; similar property in an undesirable part of the country rents for £10,000.The difference between the two, around £25,000 per annum, gives you a rough guide to the premium that the London land commands, i.e. the land value of the London property. You would then pay a percentage of that land value of £25,000 in tax each year. That is the only tax you would pay.
What percentage? That depends on how much government needs for its spending. And again that depends on your view of what government spending should be. I believe in small government and individual or family responsibility, so I tend to argue in favour of low spending. There are others, particularly on the left, who thinks government should spend more. That’s fine.
Total governmentt spending last year was about 750 billion. To levy £750 billion in LVT, you would add up the annual rental value of all the 60 million acres of land in the UK.
You then divide the annual rental value by the amount government needs.
If the total annual rental value of all the land in the UK is £7.5 trillion and the government needs £750 billion, then the rate of tax payable will be 10% of annual rental value.
If the total rental value of all UK land is £1.5 trillion, then rate of tax payable would be 50%.
If a government is going to try to levy a 50% LVT, then good luck to it in trying to persuade its people to agree to that. That is one of the many beauties of LVT. It is direct and transparent. There is no concealment. The cost is felt directly by those that pay it. A government spending too much will find itself quickly pressed by its electorate to stop doing so.
In the UK at present, 50% of land is unregistered, according to Kevin Cahill in his book Who Owns Britain. 50%!
A generation of people – now known as generation rent – cannot afford a house. Yet there are over 600,000 homes sitting empty. Many companies are sitting on potential building plots and not developing them, instead waiting for its value to appreciate.
LVT will pressure existing landowners either to put the property to good use, or to make way for someone who will. It might cause dilapidated inner-city sites, for example, to be redeveloped, which in turn reduces strain on green-field and other environmentally sensitive areas. LVT makes for more efficient use of land and existing resources.
Inheritance tax has failed to redistribute the ‘unearned wealth’ of 70% of the land that is owned by 0.6% of the population. If those lucky people, companies or trusts who own this land want exclusive rights to it, pay tax on it to the community. If they don’t want to pay tax on it, sell the land to someone who is happy to. This is a quick, efficient route to redistribute this ‘unearned wealth’ through the community via natural market forces, rather than by the incompetence and moral minefield that is state reallocation.
It one that should appeal to the left – as it redistributes unearned wealth throughout society – as well as to the right. Milton Friedman described it as ‘the least bad tax’.
A natural source of public revenue – and an efficient tax
It is also a simple tax to administer. Once the system is in place, revaluation of land, which would probably have to take place annually, is the only issue.
Not only is there less bureaucracy, there is very little evasion. Land cannot be hidden or moved offshore.
It could also stimulate economic activity away from costly city centres towards depressed, remote areas, where land has little or no value, thus bringing all sorts of badly needed revitalization. Again, the effect would be to spread wealth and power.
Speculation in real estate, often a consequence of loose monetary policies, is probably the single biggest driver of the boom-bust cycle. While the unequal distribution of land is the most obvious manifestation of the wealth gap not only here in the UK but everywhere.
‘Tax land, not labour’, runs one of the LVT campaign slogans. It is a tax on consumption, not production. I see it as a morally preferable use of the coercive force of taxation to income tax.
See it as a fee, based on the current market value, for the right to occupy exclusively a piece of the land that belongs to everyone.
The idea of the proceeds of LVT going into a central government pot may seem contradictory to some of the other minimal-state views I go on about. What does government then do with its revenues from LVT? This raises the question, ‘What is the state for?’
Government should spend that money on whatever is deemed right at the time: it might be spent on roads or infrastructure; it might be spent on the protection of people’s private property rights; or it might simply be returned to shareholders – the people – in the form of dividend. Now that really would be socialism!
Pure LVT is unlikely to happen. But LVT in conjunction with a low, flat-rate of income tax is achievable and that’s what I think should happen
Here are nine reasons to like LVT:
- Unearned wealth is shared by the community.
- Productivity is not penalized through taxation, but incentivized
- You are taxed on the land you use: on what you consume.
- It is transparent. Costs are felt, not hidden.
- Once the system is in place, it is simple to administer.
- There is little tax evasion or avoidance.
- It makes for more efficient use of land than we have now.
- It disincentivizes speculation in houses.
- Taxes are lower; people are empowered.
The philosopher John Stuart Mill said in 1848 ‘It is not the fortunes which are earned, but those which are unearned, that it is for the public good to place under limitation.’
Ain’t it so.
1. As Land by definition has no cost of production, its value capitalised into selling prices/rental income merely represents a transfer of wealth and wellbeing from producers to non-producers. Bad for equality, bad for economic efficiency.
Which is why, even if LVT didn’t replace a single penny of bad taxes, it would still be a good thing in itself.
2. Taxing produced factors relies on coercion. Which is why they distort incentives and lower output.
Occupying a productive location is a choice. By always paying the full rental value of for your right to exclude others from that fixed opportunity, Land is only ever occupied by the person putting it to it’s highest productive use. Paying by choice thus aligns incentives.
3. The wealthiest person, with the highest income does not owe the community a penny in compensation if their property only occupies marginal location.
By producing capital, they have already made a contribution to the wellbeing of the community.
By owning capital, they are not reducing the ability of others to do the same. Quite the opposite.
However, because Land is unreproducible, occupying valuable land is reducing the fixed number of opportunities to access the productive surplus derived from it.
It is thus a burden on those excluded, for which with they should all be equally compensated.
So, far from being a Communist conspiracy, LVT is about as hardcore as Capitalism gets.
4. By having a fair distribution of the factors of production, incentives are aligned. So, there is no more beggar thy neighbour. What is good for you is good for me.
Equal shares in land values is as much of a pre-requisite for peace, prosperity and equality in an Anarchy as any modern State.
For example, if the Israelis and Palestinians stopped fighting over physical land and became equal share landlords over the whole of former Palestinian, it wouldn’t matter who occupied what. They’d be paying rent to those who didn’t.
Therefore they’d want each other to prosper. Bombing the other side only lowers your own rental income.
This then also becomes true of the relationship between government and its citizens.
In order to maximise income, aggregate Land rent, instead of GDP would be the economic target.
This is good because unlike GDP, well being is capitalised into land values.
So, the State has to provide not just a thriving economy but the right balance of protecting amenity and development.
A good example of this is NIMBYism. As all externalities in the economic and spatial environment are capitalised into rents, people affected by developments like a new airport causing noise pollution are automatically compensated, and those who gain from projects like crossrail pay more.
If NIMBYs block development, they pay more (assuming to protect their amenity levels) in compensation for that privilege.
5. Most importantly it ends our culture of envy and resentment. Those with higher income/capital will have earned it.
By being equal share landlords, we will all have an interest in encouraging the conditions by which people can produce capital.
6. The YPPUK is the only party advocating a full LVT, and flat tax system.
Simple calculations show that this would benefit the average UK household by £11,500 net.
It just needs support.
Very interesting thoughts Dominic, thanks for the effort spent for advocating it.
Sounds brilliant until you realise the whole requires accurate economic valuation, which is flaky at best. What about the value of things that cannot realistically be quantified, such as public amenity, biodiversity, etc? And please don’t suggest that economic sleight of hand such as contingent valuation is going to help. The danger with these public goods is that they’re ignored or guessed at, wildly. Either way there’s a big hole in the argument which is a pity in my view, because it’s a nice idea.
What’s your opinion on modern monetary theory?
Don’t understand enough about it to have one