The Case for a Land Value Tax

A recent book ‘Rethinking the Economics of Land and Housing’ explores a number of important questions regarding the UK economy, including “housing crises, financial instability and growing inequalities”.

The book demonstrates that the core problem is the mechanisms of the land market, a topic that is crucial for developers but — surprisingly — is explicitly excluded from modern economic models. Although the book makes recommendations across a number of policy areas: ownership, finance, tenure and planning, it is the case for a Land Value Tax (LVT) that I would like to discuss.

“Location, Location, Location” is the mantra for our times, an acknowledgment that one location is more valuable than another. Locational value is created by the presence of businesses and jobs, shops, the quality of others’ property, parks, transport, infrastructure, etc.

An example: it has been estimated that the Jubilee Line extension increased residential land values within 1000 yards of stations by £13bn; it cost a record £3.3bn to build. Taxpayers from across the country contributed to the cost but only select London homeowners benefited.

House prices across England and Wales from mapped Government data by Anna Powell Smith
Land value or location value differs from house prices. The main factor actually driving the increase in house prices is land value. In the UK it has been estimated that 74% of the increase in house prices is due to land and the remainder due to inflation of build costs. A LVT is better than a tax on the overall house price since the latter discourages people from improving their homes.

 

Indeed, landowners can do nothing, leaving their land empty or under-utilised and still benefit from the efforts of others in improving the locational value of an area. That there is no penalty for the under-utilisation of land means that the problem persists. A LVT would force landowners to seek out the best economic use for their land, or sell it to someone who would do so.

Liverpool City Centre (Apple Maps)
Note the car park at the bottom right of the image, just one block from the UNESCO World Heritage Site waterfront, just down from the Town Hall and, as it happens, right behind my dad’s old office of Mersey Chambers (home of the third Liver Bird). This eyesore of an empty block is, I’m told, a WWII bomb site. Since then the owner has contributed nothing to the surrounding area but has benefited from increasing land values.  Although apparently the Liberal Liverpool Council of 2004 did ask the Government for the powers to introduce a LVT. On a more architecturally interesting note: at the end of the street is the magnificent Grade I Listed Oriel Chambers, the first glass curtain wall building in the world, possibly.

 

David Ricardo (1772-1823) discussed unearned income or economic rent with respect to land and location. His ‘Law of Rent’ explains how land owners are able to monopolise the gains from economic growth. Ricardo, along with Adam Smith (1723-1790), was a classical economist and as such discussed the economy in terms of three modes of production: land, capital and labour. This is in contrast to the modern orthodox ‘neoclassical’ economics which does not explicitly discuss land, merely considering it a subset of capital.

The statue of Adam Smith on the High Street in Edinburgh’s Old Town
My mum’s dad’s side of the family came from Edinburgh and from Census records I know that in 1841 and 1851 various family members lived nearby in Burnet’s Court and Writer’s Court, no doubt in slum tenements. Slums — counter to our moral sense — actually demonstrate the economic value of specific locations: people crowd in because that is where the work is.

 

However, land is not capital. Land cannot be moved and is fixed in its supply. As such, a LVT has immediate benefits: it cannot be avoided and a tax cannot reduce the supply. This last point is particularly important: if you tax capital or labour you reduce its supply, reduce economic growth and distort economic decisions. For example, at a personal level, I may work less than I otherwise would if I’m nearing a tax threshold. If a LVT was implemented, income tax could be lowered or removed entirely.

Adam Smith, the Liberal philosopher and politician John Stuart Mill (1806-1873), and the US writer Henry George, author of ‘Progress and Poverty’ (1879), all argued in favour of a LVT. In fact there is support across the political spectrum for a Land Value Tax: on the left from Joseph Stiglitz and on the right from the late Milton Friedman, who called it the ‘least bad tax’. Martin Wolf, chief economics commentator of the FT has written a number of articles, whilst The Economist discussed ‘Land-value tax: Why Henry George had a point’. The London Assembly Planning Committee have also released a Rapporteur investigation with a particular focus on the redevelopment of Willesden Junction / Old Oak Common.

Whilst a LVT works very well in theory, there are clearly political barriers to its implementation in a property-owning democracy. Furthermore, many now buy property rather than a pension due to the simplicity of understanding the former. However, these are not insurmountable obstacles as The Economist outlines.

What does a LVT mean for developers and by extension architects? A LVT would encourage efficient use of land including greater density, the combination of adjacent sites, and a limit to urban sprawl. Because a LVT would remove speculation in land, significant financial risk is much reduced. If risk was reduced then there could be more innovation in the industry, for example adoption of off-site build techniques or Passivhaus.

Picture of land value over time graph, from ‘Rethinking the Economics of Land and Housing’.
Land speculation can clearly be seen in this graph from the book. In fact there is a strong argument that there is an 18 year land-credit cycle driving the economy (note the change in scale on the x-axis of the graph). An economy not subject to periods of massive speculation and boom/bust would be very welcome.

 

In order to calculate residual land values for a LVT, Local Authorities would be required to produce a master plan of what could be permitted to be built, a massing model for their Borough. That in itself would be no bad thing, adding certainty to the development process. Although clearly such a model would have to be flexible enough to permit good architecture. Given a LVT, developers would need a strict planning timetable to be enforced, else Local Authorities could perhaps pay the LVT for any overrun.

Finally, what would a LVT mean for my adopted home of London specifically? London is unique compared to other UK cities in that social and affordable housing is pepper-potted throughout the city. Thought would need to be given to how a LVT minimised the impact on this necessary housing. Housing estates could be re-developed at higher densities, as long as the original residents could return if they wanted to do so. Furthermore, many of the empty properties that are speculatively owned in London would be sold, making London more affordable and (for certain areas) actually alive again.

 

Christopher Beech is a long-standing client of InsideOut, working with us on two different multi-unit housing schemes, Passivhaus Apartments – Camden and Kilburn Apartments – Camden.