One of the more appealing characteristics and strengths of the Liberal Democrats is the room there is within the party for genuine debate, and the freedom members have to hold views which differ from those of the leadership.
There are of course certain principles which all who hold the Liberal banner aloft share however; principles around the freedom of the individual from the unreasonable constraints of the state into their personal lives, and these principles bound us together and make the party the pleasant place to be that it is.
The Liberal tradition goes back to the enlightenment, with figures such as JS Mill revered. Since the accession of Nick Clegg to the leadership of the party, Adam Smith has been placed at the centre of the Lib Dem economic discourse, thanks to the publication of the Orange Book, and the emergence of a group within the party committed to a more classically Liberal economic policy.
That’s why its strange that several of the current leadership of the Lib Dems, notably Nick Clegg and Vince Cable, who co-wrote the Orange book, should then endorse in a policy the idea of a ‘mansion’ tax, as the mansion tax works on the principal that assumes that wealth and monetary assets are the same. This is a characteristic of the mercantilist political philosophy, a philosophy which Adam Smith wrote his books in order to oppose.
Taxing wealth for the sake of taxing wealth is the politics of envy and not the politics on liberalism. Taxing unearned income is reasonable, but the mansion tax does not address this, because the mansion tax does not deal with income when it deals with value of a family home.
A person with an expensive (which is not the same as a big) house, has more than the average amount of assets, not money.
You could have bought a house in a not very fashionable area of London, somewhere like Islington or Notting Hill. These were far from desirable areas of London at one time. But are exceedingly fashionable now, with wealthy young professionals living there.
But a young couple who bought a house in those areas at the start of their married lives in the 1950s, who still live there now, could find themselves liable to a tax it was never within their means to pay, simply because of a prevailing fashion, something which is not in their power to control.
The increase of the ceiling to £2 million has gone some ways to address the inequity at the heart of this tax, but does nothing to achieve a longer term stability and equality in the tax system.
I believe that a land value tax would achieve all of the aims which the mansion tax wishes to achieve. But also act as brake to help overheating in the housing market, and all the fundamental economic problems which that leads to.
A land value tax would aim to tax those individuals or companies which control property or land which is not being put to an economic use. This should not apply to the family home, as the family home is providing a social good, in that it’s a home for a family.
The land value tax would apply to some second homes, and particularly to derelict, or empty properties and to land which is capable of being developed but is not being because the developer wishes to hold onto the land until the housing market boosts its value.
Lands such as these contribute nothing to the economy or to society, and indeed have a negative impact on small businesses and ordinary households as the cost to them of land, whether they are purchasing in renting is higher.
A land value tax would allow the government of the day to use the tax to increase or decrease demand for land and property in the economy, which would help to end boom and bust housing markets, which are damaging the economy, a mansion tax achieves none of this and looks like a populist attempt to attract traditional Labour supporters, and Liberalism should be about more than that.
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27 Comments
Great article.
However, being a pedant, I most point out that you have used “principal” where you, in fact, mean “principle”.
In accordance with the laws of the internet, this pedantic post contains 1 (ONE) error.
David, whilst I totally subscribe to your thesis – that the mansion tax is not very liberal and the land tax is, you have several things wrong in this…
Land tax would apply to everyone (well, I think in our initial policy we exempted agricultural land because it would not be worth the costs of collecting – but as climate change and so on puts more focus on local sustainability that may yet again change) who owns land – family home or not. The land value increase (or, but rarely, decrease) in family homes is just as “unearned” Family homes are just as much in “uneconomic uses” when the family has left home and only the parents remain, for example.
Efficient use of locations suggests that people should be encouraged to make an economic decision about whether to continue living somewhere and paying tax on more than the need or downsize and have a better income.
What you highlight is a transitional issue with land tax which would be temporary but would be permanent with a “mansion tax”. If you live all your life, tax free, on a growing asset that then just as you retire tips over the threshold for mansion tax you do not have the extra to pay. If you live all your life not paying income taxes but paying the rental value of the land under your property, you have a greater opportunity to save for the day when you may very well want to continue in that home but without the regular income to continue paying the tax.
The particular transitional issues with LVT are simply resolved to be honest, with the possibility of rolling up your tax bill till it can be taken from the estate, or “equity releasing” of some kind to pay it on time. But once that generation has got over that hurdle, everyone else coming through will know that a cost of living somewhere is the land tax (and, ideally, not any other personal taxes).
Also, land tax should not…
It is market driven. If it is seen as a mechanism that government can manipulate it will fail, and neither I nor Henry George would trust the government to make those correct calculations about increasing or decreasing demand for land in any case.
Land tax would automatically rid us of property speculation cycles, because most of that speculation does not reflect a change in the value of the capital goods, the buildings or improvements on that land (indeed they all depreciate over time so quite the opposite) but the value the market places on that particular location. If people decide that instead of paying, say, £10,000 a year (which might, for the sake of argument be made up of £5,000 a year in borrowing costs to buy the building and £5,000 to start with each year to pay the tax), they valued the facilities that location offers at more like £15,000 worth a year, that increase would all be in location value, not a change in the value of the building, so the tax would go up to £10,000. Since people are not borrowing to pay that £10,000 but are having to find that out of current income, and it will change as the location value changes over time, there will be no spare “credit” to pump ridiculous amounts of money into speculative land values.
Similarly, if an area should fall in value, even relative to other areas, say because of some other economic misfortune such as loss of a major employer – then the land values will fall, taxes will fall and new producers and employers be encouraged into that area automatically lured by the prospect of paying less tax.
There are, of course, areas where the market is hampered in its free operation by other state policies, such as planning/zoning, and these have to be incorporated – planning will have to be a much “lighter touch” affair with broad brush local plans for example which then cannot easily be changed by development control decisions – since you could not create artificial scarcity value in land (say on the edge of cities – currently known as “hope value” – as in “hope” that they will one day be rezoned from farming to housing or something), tax it, and then refuse to allow people to develop that taxed land to the level of economic use you are taxing it at!
Anyway – as I say, I am totally with you on the principle – the mansion tax is an “envy tax” whereas the LVT would be a tax on everyone who holds land, at a consistent rate, and it just so happens that those who use most of the most valuable locations would pay more. The mansion tax does not fit with Churchill’s claim in 1909 that we are introducing a new concept into taxation – no longer do we say “how much have you got”, but “how did you come by it” and if it was gained by privilege for example it will be taxed more than by works, for example.
Oh, and as to your criticism of Nick and Vince, of course both are vice-presidents of our land tax campaign group ALTER too. So it’s not like they don’t know about it! Vince seems to think that since one of our other tax policies is to abolish (foolishly) the one remaining tax on domestic property (council tax) that at least the mansion tax maintains the notion that property should not go entirely untaxed and could then be developed, perhaps, into a more LVT like system.
But you are right, I don’t believe it fits with Adam Smith’s principles of just taxation, and I fail to see why we cannot simply move ahead with our suggestions on LVT. Vince, after all, penned the introduction to ALTER’s book about the People’s Budget last year.
David I agree with.I think the ‘Masion Tax’, is really only a headline grabber that joe public can easliy grasp. Land value tax is much more difficult to put across. As the third party I feel we do not get the space to put ideas like LVT . Look at problems we had 5 years ago trying to explain Local Income Tax – which IMO is a much easier one to explain.That said, another push for LVT after this election?
I basically agree.
But…
The mansion tax is only one side of the coin. The money raised by it will be used to raised the income tax threshold to £10K, taking the lowest earners out of income tax. Which is very liberal.
So the net change is relatively liberal.
That could be a more accurate name for our party… the Relatively Liberal Democrats.
Jock,
the council tax is not a property tax.
I rent. I pay council tax.
The council tax is a faux-proportional poll tax.
No Duncan, you are just wrong on that. Council tax is a property tax. Admittedly with some tinkering to reduce the bill to make it a bit more “income proportional” where one person is there. But it is definitely a property tax (and, for example, your local authority gets compensation in its annual settlement from central government to cover the discounts and exemptions such as student only households). Not a very good one to be sure, and now grossly disfigured by the charging bands.
With Land Value Tax you will also effectively be paying the tax, because you are already, assuming you are paying a full market rent at the moment anyway, paying the economic rent on the location to your landlord as well as the fair rent for the building/improvement capital.
It is true that we usually say LVT “cannot be passed on” and that remains true – in the case of council tax the tax is paid by the occupier and in the case of LVT by the owner and the owner cannot pass that on by charging you both a full market rent including land value and passing on his tax bill to you on top because he would then be out of step with everyone else in the market.
Both LVT and Council Tax (and Mansion Tax) are property taxes, only the first taxes only the value of the plot to which the owner made no contribution, as owner and so doesn’t deserve to monopolise that value, and the others tax both the plot and the capital which is the fruit of one’s labour and is value that is created by the owner, or builder.
Jock, David,
Mansion tax is not an envy tax.
Non doms can own expensive property in the UK. They need not contribute a penny in tax to the exchequer. We, the UK taxpayers, fund the system of physical and legal protection that gives this property value: the police, the army, the goverment, the fire service, the legal system, the civil service and the education system that makes this possible. We finance transport infrastructure and sanitation. The value of the property increases as a result of our, the taxpayers, efforts.
Why on earth should we provide such a valuable service free of charge?
No one believes in taxing wealth for the sake of taxing wealth. The purpose of taxation is to provide revenue to fund public services. The Liberal party and the Liberal Democrats have a long record of taxing the rich more simply because they can afford to pay more. On the other end of the scale, we want to tax those on low incomes less because they are struggling to make ends meet.
There has been a necessary shift in Lib Dem thinking on economics towards a more Keynsian approach because the previous economic orthodoxy – in some ways one that could be described as economic liberalism – has proved to have serious flaws. Had the government not taken the advice of Vince Cable and nationalised some of the banks as an emergency measure, and provided an economic stimulas, we would have had the same economic disaster in this country as in the Republic of Ireland.
The “mansion tax” is a very modest tax which will harldly make any difference at all. The real choice for the Liberal Democrats is between the Land Value Taxation and the Local Income Tax, and for now the party has decided to support the latter.
There is a very compelling economic case to redistribute wealth. Those who are rich will never get round to spending all their money. Those who are poor do not have enough money to spend. Redistribute the wealth, more money will get spent and the economy will grow more.
There is a social case to redistribute wealth. The book The Spirit Level shows that countries that have greater disparities of wealth have more social problems. California spends more money on prisons than on colleges, whilst in Sweden very little gets spent on prisons and more on colleges. Clearly by this criteria Sweden must count as a more liberal society, as well as being more equal.
To relate levels of taxation to freedom is a very narrow definition of freedom. Currently as an IT worker I pay a lot of taxation. But if suddenly the work I do can be done cheaper in India, then market forces will dictate that no matter how hard I work, my job will disappear and my income will disappear completely. I would feel a lot more robbed personally if that happened than if my taxes went up by 5%.
David (Cooper):
The Mansion Tax has nothing to do with non-doms per se. I would suggest that the vast majority of those who will be hit by the Mansion Tax will be domiciled here anyway. Equally, the vast majority of non-domiciled residents are not millionaires, a common misconception though that is, and are not “non-doms” for the purposes of tax avoidance, but because they are simply expat workers away from home.
So, it has nothing to do with what other taxes they may or may not pay. Nor has it to do with the source of the housing wealth, because the source of all location value is the social interactions and investment that goes on around every location, not merely the £2m plus locations – indeed, here in Oxford, one might make a cogent case that many of the £2m plus properties do not receive the same benefits as most properties where, for example, they are situated on private roads that receive no state investment.
Now, what we *could* say reasonably is that Council Tax does not take enough from the highest value properties because of the ridiculously skewed banding system and that the Mansion Tax addresses some of this, but then it is being expropriated for other causes not local authority finance, and I would argue that if that were the argument, then it should kick in at a much lower value, such as a “band J” means everyone with a property above that value, being “band H plus the difference between band G to band H” pays a percentage rate instead of a flat fee tax.
So why I can say that the Mansion Tax is an envy tax and LVT is not is that under LVT all locations are taxed and yes, it so happens that those who can afford the best locations pay the most tax, but it is merely the valuation of the economic rent for those locations that they have no right to, whereas the Mansion Tax arbitrarily simply picks on households with a certain value of property (in both location value and capital value of course which makes it doubly iniquitous since they do own the capital value even if they don’t rightfully own the location value).
Here seems a good pont to ask – something that has worried me about LVT – which is the environmental effect. Holding land for the purpose of parks, woods, fields and gardens have importnat non-market benefits to the environment, and which contribute to quality of life. Why do we want land to be used for morer economic reasons per se? I can see disused buildings are an obvious example, but what about all the green-belt land and gardens in cities? Why would we wantt o make it harder to keep land like that – it seems to be enforcing people to ignore public goods and positive externalities in their decision making even more than at present. I can’t see how that is liberal.
There may be a simple answer, or I may not have understood LVT. I have other issues but I will leave to this one for now.
Geoffrey, a few quibbles with what you say…
First you state that the purpose of taxation is to provide funding for public services, but then you go on to add a second “purpose” of redistribution – I’ll come back to this, because I think this is absolutely central to the apparent disagreements you and I usually have (that is, and forgive me if I am confused here, assuming you are “Payne of Hackney” not “Payne of FPC” – I get confused as to which one I am supposed to call “Geoffrey” and which “Geoff”!).
Second, there is not a simple choice between LVT and LIT. We could have both – indeed what we are doing with the Mansion Tax of course is creating a national property tax where there isn’t one as such at present (NNDR being, albeit “national” in rate setting and so on, primarily for local government financing). We have decided, wrongly of course in my opinion, on LIT for *local* taxes. We could have national LVT. They are not mutually exclusive (except insofar as some of us subscribe to George’s “Single Tax”).
Now, this business of redistribution of wealth. Where you see a process of people somehow accumulating more than they can use, and that being reasonable grounds for confiscation of it to help those who cannot accumulate enough, what I see is a process whereby the actions of governments and states throughout history collude with those wealthy to enable them to accumulate unjust wealth. So the way you would “do” redistribution appears to me that you would allow the *unjust* accumulation of wealth and then arbitrarily take some wealth, justly *or* unjustly acquired – it only matters that it is above some arbitrary amount that you think “they will never spend” – to help others.
The way *I* would do it, and, I would suggest, the inherently more *liberal* way is to identify those processes, privileges and so on by which the state helps people accumulate wealth unjustly, and try to prevent that happening in the first place. That might involve actual money transferring, such as in the Land Tax/Citizen Income circle, but it is not *re-*distribution because the wealth has not actually been *distributed* first for it to be clawed back (and with post-distribution taxes it is an inexact science since you are not necessarily taking only the unjustly accumulated wealth but a portion of all wealth just and unjust). The LVT/Citizen Income circle is simply instead of letting people expropriate the value they do not create (land value) you make them pay rent.
This is *far* more efficient, *far* more just and *far* more liberal I would suggest. And of course as a tax in itself LVT has many advantages over other sorts of tax in the way it avoids distorting economic processes. Not only can we prevent the unjust accumulation of wealth which the state *causes* at present, but it brings the costs of living down, has all the benefits of encouraging the efficiency of use of scarce resources (i.e. land, locations, sites) and, when accompanied by a similar reduction in employment or investment based taxes greater incentives to create jobs and greater incentives to work.
What gets my goat about this great “battle of ideas” between so called economic liberals and so called social liberals is that we are in my opinion not so far apart in our *aims*, it is just that for the economic liberals we believe we have a far better, far more just, far less interventionist, and far less dependency creating, way of doing it – by thoroughly looking at removing the things the state already does to foster *in-*equality rather than allowing that state fostered inequality to flourish and then try and do something about it.
HarryD, a perfectly reasonable question, and indeed one of those “frequently asked questions”. LVT does not do away with the need for planning and land use policy – or at least not necessarily. You could have an absolutely free market and then you are right, you would have to find other, market mechanisms to deal with those spaces you wanted to protect.
But normally it is seen as complementing land use policy. In fact it can help to take the uncertainty out of it too. So your urban park would be excluded from development in the local plan and so would be worth little or nothing in terms of a tradeable rental value and so your park trust or local authority would hang onto it without the encumbrance of having to pay a market tax on it as if it were competing with, say, housing. Of course what actually happens, and is right that it should happen, is that the market value of locations that have the most direct benefit from the existence of the park would tend to rise and so the tax would rise.
A very good example of where this would be a good thing we have just had in Oxford. There is a field owned by the local NHS mental health trust which was in the local plan allocated for housing. The trust would have been able to rebuild their hospital on the proceeds of selling it. The council would have got a new set of council tax receipts from the new housing on it. And so on.
The neighbours, naturally (NIMBY) did not like the idea. They have mounted a big campaign and got, so far at least, the land designated as a town green (though I think it still has to go to appeal). Net result, no capital receipt for the hospital, no additional council tax (and the need to find a new site for four hundred homes which of course the lack of for longer will present the council with an even bigger homelessness bill as it would have got two hundred social homes out of it as well), and the people who continue to benefit from the field have paid nothing extra, and if there is a marginal increase in the cost of the adjacent housing because of the field remaining a field it will of course at the moment be captured by the home owners when they sell.
Same with the gardens issue – your density policy should cover that in fact.
The principle is known as “highest and best use” – so the land value is assessed at the best use allowed for that land by other policies like the local plan. The market knows that, and sure, just as there is now, around the time when they are discussing a new local plan there will be some jostling to allow this or that on my land or his land, but a developer is not going to focus on sites where there is policy not to allow, say,a density increase by building on gardens.
The *most* important aspect though, and it is much underestimated, is the bringing back into use of previously developed land lying idle. Because that will be taxed as if it is already being used at its “highest and best use” few people could afford to hang onto a derelict site with the planning potential and actual tax bill reflecting that it could hold a hundred new homes or whatever.
In that sense it really does complement planning policy – in that once that policy has been made, for a higher value use on a particular site, it is actually more likely to be delivered because otherwise the owner is paying tax for nothing.
Jock, thanks for the reply. Before I am absolutely convinced on LVT I’ll probably have to think through more of the consequences for myself – it’s one of those things that I want to work, but feel uneasy about it, for some reason.
Thanks for the response guys.
Harry,
I would envisage that forrestry etc would be exempt from LVT as it is providing a social good.
I would generally see the LVT not applying to fmaily homes(they provide a social good) or farmsteads(provide an economic good, but would apply to second homes.
The aim of the LVT is to regulate the property market, the owner of land subject to LVT is not luikley to leave it idel for long periods and pay the tax for nothing, when he can develop something on it, soemthing which creates value, either socially or economically. The government of the day can regulate this by, at periods when the housing market is overheating, and too much land is being developed for housing, reducing the tax with the aim of having people more likely to pay the tax than develop the land.
When the market is dormant, increase the tax to spark development.
In terms of redistribution, we must aspire to incentivise people to invest their wealth rather than hoard it, as its this which creates, economic or social goods.
Well then, it’s not worth having. That is, to all the proponents of any land value tax scheme I’ve ever seen or been involved with, its main purpose.
Whilst as I said in the first place, I agree personally with your assessment that “real” LVT is liberal and Mansion Tax is less so, I can see now that you are not really talking about LVT as it is generally understood by any campaigners for it I know of.
Proper LVT is not a “tax” in the true sense of the word. It is the collection of the rental value of land by the community. The rental value is a market value, not something the state dictates. If land is in short supply spare land will be bid up by the market, the tax rises naturally to reflect this and more land is released anyway – no government intervention is necessary *or desirable*.
By the way,m the housing market does not overheat because too much land is being developed for housing. Quite the opposite, the housing market overheats because supply is not meeting demand (amongst other factors, but certainly not because too much supply is coming onstream)
Im more talking about the overreliance that comes with excessive development, and I do stand by the view that VRT hsould not apply to the family home, we shouldnt tax people for doing soemthing we want
Like I say, it seems you don’t understand this bit of it. The point is that land value is something that nobody, as owner or occupant, actually contributes to.
By collecting this as “rent” it means their housing will cost less in the first place, but that they are not accumulating something that they are not really entitled to.
There is no question – you will not find any LVT advocates that I know of who would exempt houses merely because they are family homes. A few suggest that, as a transitionary relief a person could have a tax free “homestead” allowance effectively to offset the tax due on a certain basic minimum housing cost.
In other words LVT produces a Social Good. The family home is not a “Social Good” in and of itself – it could be all about hoarding.
thebfamily home is a social good in the sense that if a perosn/ dpesnt/cant have their own home privately they go onto the social or council housing lists, taking space from people in more genuine need.
I would argue that your vision for a LVT also runs counter to liberal principals.
If you have LVT on family homes, less people will be able to buy their own, putting them on the social housing list, which means more expense for the government, so no fiscal benefit would accruye to the government from the tax, whilst more people would rely on the state to provide their houysing and the government would be a bigger player in the porperty market, expanding the governments role in the economy for no good economic or social reason.
Creating bigger government.
Its for this reason I oppose LVT accruing on family homes(the first one, if they have a second home that should ahve LVT) and the mansion tax, but wouldnt oppose the lvt not applying to family homes
No David, LVT on all houses or not at all. It simply cannot work if you exempt 70% of all property wealth.
Having LVT would make housing MORE affordable to buy. Look, a simplistic example:
House costs £200,000 today. But £100,000 of that only is the value of the building and £100,000 is the value of the land. You have to raise £200,000 to buy the whole lot – say that’s £10,000 per year to the bank in mortgage costs, but crucially you have got to get approved for £200,000 which mean, like, having a £55,000+ household income.
LVT removes the £100,000 from the capital value of the property and taxes it annually at, say 10% of that capital value (the economic rent is likely to be something around 10% of the capital value so if you tax the economic rent at 100% it’s gong to look like 10% of that initial capital value).
Anyway, so now you have to get your mortgage for £100,000 (for which you will need an income of more like £30,000), on which you will be paying say £5,000 per year.
But you also have a tax bill, let’s say starting at £10,000 per year, across the whole household. Since LVT is usually intended to *replace* other taxes, over the entire economy you could suggest that your other tax payments for that household will have fallen by c. £10,000 (in fact you might reduce taxes cleverly so that perhaps personal taxation was the deepest cut to households would see more of a benefit perhaps).
Your overall cost of housing and tax has gone from £10,000 for mortgage and £10,000 in various taxes, to £5,000 in mortgage and £10,000 in taxes. Your housing is cheaper and you are better off whilst still paying roughly the same amount of tax into the system.
But there is no two ways about this David – if you think you can exempt about 70% of property wealth from LVT and still describe it as LVT you are *fundamentally* misunderstanding it, its mechanism, its effects and its purpose.
Oh, and “my” vision for LVT is exactly the one that has been proposed by liberals for the best part of a century and a half now. Yours is the aberration I’m afraid, no question about it.
As to liberal “principles” well, the core one LVT addresses is the unearned accumulation of wealth by privilege. Yours permits 70% of that to continue. Mine eradicates the privilege. I know which I think is more rooted in liberal principles.
I have no doubt that mine is the aberration.
BUt I do think that it is more socially just, it may reduce the one off costs of the property, but it increases the yearly costs..as they pay the tax and the mortgage, and homeowners(and the banks lending to them) will factor that in.
The developer will imcrease his costs, or exit the market if there is no margin in it for him, caysuisng prices to rise.
A family home is not unearned wealth, it requires maintence to gain or hold value, and the more you incentivise this the better
Sorry – in my example above, the household is £5,000 *better* off when you take into account housing costs and taxes.
Land value, which makes up the bulk of a property’s value in most places nowadays, *is* unearned. As you say, the property itself is a *depreciating* asset on which you have to spend to stand still. Only the land value is, largely, appreciating.
It is *not* socially just to allow that land value to accrue to the owner. Not only have they not earned it, but it *causes* others to have to pay more for less convenient locations – it is a private tax from everyone who cannot use a particular location to the one monopolist who owns and occupies it.
Developers will *benefit* from LVT as it means, effectively, that they will not have to finance the capital cost of land, only the tax while they develop it – the whole cost of financing a development will, therefore, fall significantly. If developers were solely dependent on rises in land values to turn a profit, they would all be bust, because it is only ever a paper rise for them – their next development site will cost a similar proportion more than they have “made” on the previous one. Developers make money in an ordinary healthy land market by producing a capital good that someone wants to pay more than it cost them to produce.
You “incentivise” the continual improvement of the buildings precisely by taxing land and not the buildings – hence “land value tax”.
but the value of the land rises for having houses on it?
also I agree somehting should be done about taxing at the point where land is zoned for development……
so you have outlined who benefits…who loses out…