Deficit? Solution could be a land value tax

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Filling the gaping hole in the Government’s finances is, in George Osborne’s words, the “great national challenge of our generation”. Unwise spending cuts and tax rises could sap economic growth; unfair ones provoke political unrest; inaction a market panic.

Faced with a national crisis, who better to turn to for advice than Winston Churchill? A century ago, the great man — who, like the present coalition, was both Liberal and Conservative — advocated introducing a land tax as part of a bold package of fiscal reforms. In his emergency Budget on June 22, the Chancellor should set up a commission to consider how best to implement that recommendation.

Taxing land values would be a fair way to help to plug the budget gap while stabilising — and even boosting — the economy. Land is routinely valued each year as property changes hands. With all the land in Britain worth perhaps £5 trillion, a 0.5 per cent levy could raise £25 billion a year — as much as a five-point rise in income tax.

Neither tenants nor leaseholders would pay a penny; only freeholders and landlords would, with the owner of a large estate paying a higher rate than someone who owns a small suburban semi. The proceeds could be used to cut the deficit and national insurance, creating jobs, boosting take-home pay and stimulating growth. Over time, the aim would be to shift the tax burden off hard-working families and on to idle landlords — as in Hong Kong, where revenues from land taxes keep income tax low, there is no VAT or capital gains tax, and enterprise flourishes.

When the Government taxes successful effort, people strive less — some work less, others don’t bother setting up a business, a few relocate overseas — and since hiring is more expensive, fewer jobs are created. But taxing land wouldn’t crimp economic activity, as Adam Smith explained in The Wealth of Nations. It wouldn’t reduce the supply of land, which can’t be spirited away to a tax haven. And it wouldn’t push up rents, which depend on what tenants are prepared to pay rather than landlords’ expenses.

A land tax would actually encourage development. Since it would be payable irrespective of how land is used, it would stimulate the regeneration of derelict sites — such as Battersea power station, where David Cameron launched his election campaign and which has lain idle since 1982. Infrastructure investment that raises surrounding land values, such as Crossrail or a high-speed rail network, would pay for itself and thus escape short-sighted budget cuts. And unlike property taxes, people who do up their homes would not be penalised.

Taxing land values could also limit property bubbles — and the inevitable busts — without discouraging mobility (unlike stamp duty) or business investment (unlike interest rate rises). Relaxing planning restrictions, as Policy Exchange, the Prime Minister’s favourite think-tank, has suggested, would help too. The notion that we can all get rich by swapping more or less the same stock of houses at ever more inflated prices is a dangerous delusion. Property speculation diverts funds from productive investment in promising companies — and when the bubble bursts, the economy plunges into recession, home-owners are stranded with huge debts and banks laid low by bad loans seek bailouts from taxpayers. Isn’t it time we learnt from our mistakes?

Above all, a land tax would be fair. Land in Britain is parcelled out more unequally than in Brazil: 0.3 per cent of the population owns 69 per cent of the land. The country’s biggest private landowner, the Duke of Buccleuch, owns 277,000 acres, not because of his talent or industry, but because his ancestors seized vast swaths of Scotland.

These “land monopolists” — as Churchill dubbed them — get richer not through their own efforts, but that of others. The Duke of Westminster owns 300 acres of what was once fields and is now London’s priciest real estate — Mayfair and Belgravia. And because so many people have established thriving businesses in the capital, that inheritance is now worth billions of pounds. Surely it would be better to tax that windfall gain, rather than the employees and entrepreneurs who generate it?

For sure, farmers and big landowners would kick up a mighty fuss. But since the typical family of four shells out £750 a year to farmers in higher taxes and food prices because of the Common Agricultural Policy, which also inflates land prices, it’s only fair to claw some of that back. And while landowners would point to the impact on a poor granny in a big house — a bogus argument that Churchill called the “poor widow bogey” — she wouldn’t be forced out of her home; her tax bill could be deferred, or she could even be exempted.

Source: Philippe Legrain, The Times