Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Memoranda


Memorandum by Land Value Taxation Campaign (HOU 13)

CONTENTS

  I  About the land value taxation campaign

  II  General background considerations

  III  Housing, affordable housing, and land value taxation

  IV  Answers to the questions

  V  Appendices

  Appendix 1  Definition of land value taxation

  Appendix 2  Definition of land value

INTRODUCTION

  The "housing problem" has been with us seemingly for ever. We have had a century of legislation circling around the topic—rent control, large-scale redevelopment of public sector building programmes, abolition of rent control, right-to-buy, the rise of the housing association movement. Each measure has either failed to achieve what was hoped or has proved counter-productive. Not only is this an indictment of successive policy makers, there is also a cost in the misery of individuals and families obliged to live in unsuitable and inadequate homes.

  Taxation policy over the last 40 years has turned home ownership into a form of tax haven. In 1963, owner-occupiers were relieved of "Schedule A" tax. The privileged status of owner-occupied housing was further enhanced when the capital gains tax was introduced but a principal place of residence was exempted. Value Added Tax was likewise not put on new buildings (though it was applied to ordinary repair work). In the interlude between domestic rating and the council tax, the community charge actually lifted taxation off housing as property, and placed it instead on its occupants. Inflation has been an additional factor, the family home being seen as the average man's safest hedge against this scourge. The result of all this has been to divert personal savings into housing and away from more productive investments such as equities, while simultaneously helping to bid up house prices generally.

  The Campaign argues that the persistent failures in housing policy arise from refusal to recognise the "housing problem" for what it really is—a land problem. There is essentially no shortage of building materials nor of men and women able and willing to work in building trades. There is not even a dearth of housing overall, the apparent shortage of "affordable housing" being a phenomenon confined to a few areas of high demand. The Campaign's case is developed below, in Part III.

PART I  ABOUT THE LAND VALUE TAXATION CAMPAIGN

  The Land Value Taxation Campaign ("the Campaign") is a non-party organisation established with the aim of securing legislation which will fundamentally change the basis of public revenue in the United Kingdom. It proposes that existing taxes on wages, goods and services, saving and spending, be progressively replaced by a property tax on the annual site rental value of all land[5], including land occupied by residential property and vacant sites zoned for such development. The policy is here referred to as land value taxation ("LVT") and is defined in the attached appendices 1 and 2 in Part V, below. The Campaign recognises that LVT would be implemented in a series of steps, but aims to see (as nearly as is practicable) the full rental value of land collected in this way.

PART II  GENERAL BACKGROUND CONSIDERATIONS

  1.  Confusions arise through imprecise definitions of "land", or rather through use of otherwise precise definitions. At law, land means immovable property ("real property") which puts man-made developments together with land proper. The Campaign, on the other hand, uses the term in its meaning in political economy, namely "the whole of the material universe outside of man and his products". In economic analysis, a landowner is not necessarily a freeholder: anyone with a beneficial interest in land (a holding which could be let or sold at profit) is to that extent a landowner. Popular usage more nearly corresponds to the Campaign's: people do not normally think of houses, shops, factories, or farm buildings as "land". To add to the potential for confusion, however, book-keepers drawing up balance sheets regard land as capital, which in political economy it definitely is not.

  2.  Although the Campaign promotes the case for a national land-value tax, it is worthy of note that, as is the case with all forms of property tax, LVT is suitable for all tiers of government and could be readily adapted to any multi-tiered structure, for example that resulting from devolution in Scotland, Northern Ireland, and Wales, or to the Greater London Authority and any future English regional bodies.

  3.  The Campaign points out that LVT is morally justified, being in accordance with the "benefit principle". Land value is created and sustained by the presence and activities of the community today. Any arrangement made in the past is of little comtemporary relevance, for land value rests on the assumption that public services and a state of civil order will be maintained tomorrow, the week after, and for the foreseeable future.

PART III  HOUSING, AFFORDABLE HOUSING, AND LAND VALUE TAXATION

  1.  A house consists of a building sited on a plot of land. The building is man-made. The land is not. The value of the land depends on its location and its natural endowments, but, above all, on the intensity of the economic activity of the community as a whole and its consequent demand for livng, working, and recreational space.

  2.  The cry for affordable housing does of course presuppose that for a good number of people housing is unaffordable. Why? Presumably it will sometimes be a poverty problem—in which case one should be looking for a solution to involuntary poverty. The Campaign will gladly advise. Housing provision itself is best tackled by assessing and collecting site rental values to bring more land to the market at progressively lower cost. Full LVT will eliminate the buying/selling price of land (sites) and allow taxation to be taken off labour and capital and their products. It will no longer be necessary to buy land but only the building, fencing, driveway, and other improvements such as those made to the garden. Mortgages will therefore be much smaller. More and better housing will become available, and those who want it will be able to afford it, as buyers or tenants. All that officialdom need do is ensure planning permissions respond to demand (in which task guidance will be available from evidence in the land value maps and registers).

  3.  Provision of affordable housing means provision at a subsidised cost. Workmen will not accept less than the going rate. The going rate of interest on capital will have to be paid. Therefore it is the beneficial owner of land who has to give. This has recently taken the form of a section 106 agreement—a "planning gain" deal, in which planning permission for a project will be made dependent on provision of "social" housing, meaning housing built at below full land acquisition cost. This treats individual landowners arbitrarily, and some will prefer to draw back, waiting for what they perceive will be more profitable times. Furthermore it can work only where that land value gain is so high that an owner cannot resist the "half a loaf" argument. Where land value is low, there is insufficient gain to bother about sharing it. In any case, the game cannot be played in the many instances where planning permission is not required, for example where sub-standard housing is already in place and a stimulus is needed to redevelopment. LVT assessments assume optimum site use within planning and similar constraints. There is thus a compelling incentive to appropriate use and to periodic adaptation of redevelopment in response to social and economic change. The present system of property taxation rewards inaction and speculation whilst penalising development in line with its extent and quality—the better the building the higher the UBR or council tax! It is amazing that anything so absurd can have survived into the 21st century.

  4.  The Government was allegedly (and presumably still is) "under pressure to raise public sector pay levels in London, where homes cost 79 per cent more than the national average" (Barry Riley, "Financial Times," 13 January 2001). Why is this? Plant and machinery are the same to buy and run. Materials such as cement, bricks, stone, tiles, slate, wood, and glass cost the same, and so do items like sinks, lampshades, carpets, and refrigerators. The wages of architects, building tradesmen, and general labourers are not greatly out of line. The big difference is land. No more is being produced, and it cannot be moved from where it has little or no value to where there is great call for it. All that can happen when demand rises, is an increase in price, followed by further increases as demand persists. Land is, literally, a natural monopoly.

  LVT is the leveller, securing the rental value of land for the public exchequer. This accomplished, similar houses would in general command similar prices everywhere. The outgoings on a home would exclude taxes on the house and other improvements, and would be limited to the annual site value. " The amenities provided by natural surroundings, society, and government, make some places so obviously more congenial than others. Justice demands that those who enjoy these amenities should pay for the privilege according to the degree of benefit accruing to the position they occupy" (Sir Kenneth Jupp, "Land and Liberty," Spring 2000, quoted in "Practical Politics," bulletin of the Land Value Taxation Campaign, Issue No.103, February 2001).

  5.  Offering affordable housing to maintain a workforce on expensive land is a hidden subsidy to businesses operating in the vicinity, who would otherwise have to pay more to attract labour from a broader catchment area. This is distorting what might be a tendency to disperse work activities to the periphery, or elsewhere entirely. Adding public transport subsidies aggravates the problem, because a supply of labour at below true cost enables city centre landowners to keep raising rents. Do those formulate public policy ever follow through to examine the consequences of their actions?

  6.  Affordable housing in areas of high land value exacerbates the problem of regional imbalance. Such a policy in effect favours London and the south-east of England against the rest of the Kingdom. The present tax system takes no account of locational disadvantage, the same rates of PAYE, VAT, and automotive fuel duty being payable everywhere, for example. At and close to the economic margin, these burdens tip potentially viable businesses into unprofitability, destroying jobs and promoting migration to the already most densely populated parts of the country. LVT, as a replacement tax, by definition falls more lightly, lightly, or not at all on such areas, in effect creating tax havens precisely where they are most needed.

  Meanwhile there are reputedly some three quarters of a million empty homes, many of them rundown or even derelict, and disproportionately to be found in geographically disadvantaged locations. Something is wrong if there is no incentive to redevelop and no penalty attached to misuse of land on this scale. LVT is both stick and carrot. It is a payment based on the annual site value of the land, regardless of whether or how well it is used. Withholding land from use of seriously under-using it, does not save the landholder from having to meet the full LVT bill, so in effect he is obliged to make good use of the site. LVT, though, is a replacement for existing taxes, so that the returns to labour and capital are progressively untaxed and the rewards of redevelopment correspondingly greater. Of course if there really is no demand for housing of any sort, and no alternative use for the site, then the duty payable will be nil, for this will be marginal of sub-marginal land.

PART IV  ANSWERS TO THE QUESTIONS

1.  Whether the funds in the Comprehensive Spending Review will achieve the Government's target of a decent home for everyone by 2010

  No. LVT is the essential underpinning for all economic and most social policy.

2.  How spending of the new resources should be balanced between social housing and options for owner occupation for those who cannot afford to buy (including shared ownership) and the mechanisms to be used for their distribution

  LVT, fully and correctly implemented, would lead to resolution of the problem without market intervention. A determined start, accompanied by a published programme of progressive extensions, would have an effect far beyond the immediate implication of the percentage levy at introduction of the measure.

3.  The role of planning obligations in providing affordable housing

  Planning obligations should be met through LVT, as increases in land value released through grant of planning consent would automatically be recouped by this means.

4.  The effectiveness of the Housing Market Renewal Fund in tackling housing needs in areas with low demand

  By creating what are in effect tax havens where they are most needed (disadvantaged locations of low land value), LVT and its concomitant, the significant replacement of existing taxes, reduce regional imbalance—the underlying reason for areas of low demand. The removal of taxes targeted at labour and capital and their products, encourages enterprise and effort and penalises withholding and wasteful use of land.

5.  How the quality of new affordable housing can be ensured and the poor design of previous housebuilding programmes avoided

  The quality of new affordable housing cannot be ensured by any measure; however, where housing is allocated rather than selected by the occupants, mismatch and dissatisfaction are more likely, and the seeds of future trouble thereby sown.

PART V  APPENDICES

APPENDIX 1—DEFINITION OF LAND VALUE TAXATION

  LVT is a tax on the annual rental value of land. The valuation is the current annual market rental value of the land alone, disregarding buildings and other improvements.

  Each unit of land is assessed at its unimproved site value, with all surrounding land taken as being in its existing condition.

  All land, including vacant and agricultural land is subject to the tax, and the valuation is on the basis of optimum use within whatever permissions and constraints apply.

  In practice, LVT would operate in much the same way as the present national non-domestic rate, with the difference that no land would be exempt and buildings and other improvements would in effect be de-rated.

APPENDIX 2—DEFINITION OF LAND VALUE

  The following definition of land value is that given in Section 3 of London Rating (Site Values) Bill, 1939.[6]

    "The annual site value of a land unit shall be the annual rent which the land comprising the land unit might be expected to realise if demised with vacant possession at the valuation date in the open market by a willing lessor upon a perpetually renewable tenure."



5   The term land is used here not in its legal sense but is given its meaning as defined in political economy, ie "that part of the material world other than human beings and the products of their labour." Thus it includes, for example, fishing and mineral rights, and radio spectrum. Back

6   Copies of the full text of the Bill are available on request from the Campaign, which distributes it following consultation with Messrs. Dyson, Bell & Co., and Mr J. Hastings, Clerk of the Journals, House of Commons, confirming that there was no objection to distribution. Back


 
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