The simple case for taxing land

Samuel Brittan

[A speech delivered in the U.K. House of Commons, 24 March 2009]

The difficulty in stating the case for taxing land is that it is so simple; and simple things are often difficult to put across. There are indeed some who see land taxation as the basis of an entirely different economic order replacing market capitalism. Maybe. But it is also possible to see it as an improvement in the tax system of a normal capitalist mixed economy. Thus I do not believe that it will cure cancer, abolish war or even eliminate boom and bust. But it is still well worthwhile.

Most forms of direct taxation are inevitably a disincentive to enterprise and work. So are most forms of indirect taxation, although this is less obvious. The advantage of a land tax over other kinds of tax is that it is in principle based on pure space and need not be a disincentive to either capital or labour. If you are religious you can say it was given by God. In more secular terms land has a zero elasticity of supply. Indeed it provides a positive incentive to use land wisely and not to hoard it. It is also one of these rare things: a redistributive measure with few adverse kickbacks. (Land ownership is far more concentrated than wage income or even capital ownership.)

These features were noticed as long ago as the early nineteenth century by the classical economist David Ricardo. Towards the end of that century the American social reformer Henry George advocated a single tax on land ownership as the main source of government revenue. The Attlee government attempted to nationalize development values, but its plans floundered in a morass of legal and political complication.

The present Labour Government tried to nibble at the problem with a Planning Gains Tax, proposed in the 2005 Pre-Budget Report. Unfortunately all the vested interests affected immediately joined forces to lobby against it; and it was withdrawn in the 2007 PBR. Instead there was a return to the old vague exhortations to local authorities to deals with developers to provide social infrastructure and so on.

A hackneyed contrary argument is that you cannot separate the portion of land value representing pure space from that representing man-made improvements ranging from simple drainage to the erection of commercially useful buildings. Can't you just? Valuers are doing it every day. A clear example is the increment of land value resulting either from planning permission or the extension of public facilities, such as the Jubilee Line in London. Not far from the Financial Times in Southwark, South London, a property developer named Don Riley has an office which looks out over a site that was available for purchase in 1980 for £100,000. In January 2000 it was sold for £2.6m. The gain was 'money in the bank' for the owners but nothing was contributed to the general welfare.

I suspect that the main reason for popular lack if enthusiasm for a land tax is the suspicion that it is not a genuine tax reform but an addition to the total tax burden, if not a stealth tax at least a backdoor tax. And who is to say that popular opinion would be wrong? It is therefore very important that some other highly visible tax is removed or reduced at the same time. A land tax should not be introduced in the context of a general tax-raising budget. And whatever your hopes of its ultimate yield it should start of in a small way, as income tax did under Pitt.

Meanwhile let me commend a not very novel simple halfway house practical proposal. Why not auction planning permission? Many local authorities have approached this piecemeal by making such permission conditional on the provision of services such as leisure centres, approach roads and so on. Why not instead use the proceeds of auctions as a contribution to local authority revenue; or better still return this windfall to the local taxpayer in the form of asset distribution and let citizens decide how to spend it?

Finally, let me make a very general point. It is one I make to supporters of other unconventional reforms I support such as a basic income for all. This is that the reformers should not retire into a corner and talk to themselves, but should participate in general fiscal and economic debate. Of course they should submit their ideas to bodies like the Barker Review or the ongoing IFS Commission on the tax system. But I mean a little more than that which they are more or less doing already. They should examine proposals already in the air, like the Planning Gains Tax, and instead of simply underlining their shortcomings, consider how they might be improved and become a step to the final goal. A half a loaf can be better than no bread.