Debate Magazine

The (moral) Case for Funding Public Services with Taxes on Land Values.

Posted on the 24 June 2018 by Markwadsworth @Mark_Wadsworth

Like most LVT-ers, I have got bogged down in fairly nuanced economic and philosophical arguments for LVT, which the Homeys always counter with "I paid for my house out of taxed income, why should I pay a bit more every year just to keep it?" and so on. Like most LVTers, I leave it vague what the proceeds should be spent on, short of reducing other taxes and/or dishing it out as a Citizen's Dividend. And we all get bogged down in trying to explain the interaction between LVT and the planning system.
Somebody invited/challenged me to put the 'populist' case for funding public services out of taxes on land values (put farmland to one side, the value of farmland, excluding farm subsidies is negligible so not worth taxing), so here goes...
The short, non-intellectual, non-economic answer is "Because to a large extent, it is government spending which creates land values in the first place.". What's wrong with apportioning the cost of public services proportional to the actual value of the benefit that people receive? So the reply to the Homeys is: you are not being asked to pay for land you already 'own', you are being asked to contribute towards the cost of all those things that maintain the value of your 'property', the same as paying a roofer to fix your roof or an electrician to fix your electrics.
Let's start with the core functions of the state, the most public of 'public goods' - defence, law and order and the fire brigade.
What would UK land have been worth in 1939 if we hadn't had an army, air force and navy? Everybody who could would have emigrated, and people would have waited for the Germans to redistribute the land to themselves before buying any from the new overlords. Or put it this way, who had more to lose - a tenant worker or the various Dukes? And who benefited most from the 1945 outcome, tenant workers or the various Dukes?
The same goes for law and order and fire brigade. We know that house prices and rents are higher in areas with lower crime rates; and lower in areas with higher crime rates. Let's take that to the extreme and ask what would the house you live in be worth if they released everybody from prison and sacked all the police officers? Not much. How much would home and contents insurance or car theft insurance cost? How much extra would you have to pay on your home and contents insurance if there were no fire brigade to put out a fire in your neighbour's house?
The total budget for all these is about £67 bn a year, which is coincidentally about the same as total revenues from Council Tax (less discounts and allowances), Business Rates and Stamp Duty Land Tax. Would it not seem reasonable to replace these three taxes with a new tax specifically earmarked for defence, law and order and fire brigade, calculated as a certain low percentage of the value of land (or of land and buildings)*?
Next, what about the education budget?
Education is not really a core function of the state, it is more of a 'merit good', but seeing as just about every developed country has a taxpayer funded system of universal 'free' education, we can safely assume there are good reasons for this, and that it leads to better outcomes overall than simply 'leaving it to the markets'. I accept that the UK state school system performs badly in international comparisons - and not for lack of cash - but the basic principles are sound.
At present, most of UK tax revenues are taken from the productive sector (in income tax, corporation tax, VAT and National Insurance), so it is businesses and workers who are paying for education. On the whole, people get their money back, but there is one group who benefits particularly - landowners. We know that homes in the catchment area of a good state school sell (or rent) for a huge premium. So somebody who sells (or rents out) a home in such an area is cashing in on expenditure that 'somebody else' is financing; and people who buy or rent a home in that area is paying twice over for their children's education - once via the tax system and again in higher purchase price or rent.
The situation is even clearer with universities, which are all taxpayer subsidised (tuition fees notwithstanding). Universities and university education benefits landowners directly and indirectly.
Rents - paid by students - are much higher in Oxford, Cambridge and London because there are thousands of students who need to live there. Those universities act as a magnet for high tech and research based businesses, who have to pay higher rent to be able to tap in to all the qualified people in the area. Half of all graduates from any UK university end up moving to one of these three towns (because of the job opportunities), meaning higher incomes and more demand for housing, pushing up prices and rents further still.
Seeing as higher earners are currently expected to pay considerably more than the cost/value of their children's state school and university places (and are more likely to send them to private schools), would it not make sense for the education budget to be funded out of a tax on land values, like school districts in the USA?
The total budget for education is about £87 bn a year. If there were an earmarked 'education tax' based on land values, we could just about get rid of the most economically damaging and regressive tax on the value created - or 'value added' - by private enterprise - Value Added Tax.
The National Health Service
The UK's health system is almost fully nationalised and funded out of general taxation, but this is not completely different to the system in all other European countries, where there is heavy state regulation of the medical system and the prices they can charge; these are all funded out of 'compulsory insurance', which is another word for 'taxes on earnings', as the contributions are usually set as a certain percentage of people's earnings up to a set amount.
While the NHS does not do well in terms of outcomes, it does perform well in terms of universal coverage and - administrative waste notwithstanding - is actually good value for money.
There is a premium for homes in the catchment area of good state schools or universities. The NHS has little such effect, either because standards are much the same everywhere or because statistics on the relative performance of local NHS trusts is simply not made public. But all things being equal, being near a GP surgery or a hospital with short waiting times must push up land values in that area.
Think about the opposite extreme, what if they shut down all GP surgeries and hospitals in the entire county of Kent - what would happen to selling prices and rents if people who lived in Kent had to shell out for private health insurance, which is always works out more expensive than the NHS because insurers have to make a profit and involve extra layers of admin. And payers would always have the realistic worry that private insurers find some loophole or other and simply never pay up.
This ties in neatly with another traditional argument advanced by the Homeys - what about a Poor Widow who still lives in the family home which for reasons beyond her control has rocketed in value? How will she be able to afford to pay the tax?
The commonsense solution is a roll up and defer-until-death option, but the logical rebuttal is, the average cost of NHS and social care is about £5,000 - £6,000 per pensioner; private health or social care insurance would cost twice that, so most Poor Widows In Mansions would still be getting reasonable value for money. This is considerably more than today's Poor Widows were paying for the care of the generations before them, so there is no particular moral entitlement to it (unlike the state pension, which they were always promised in return for paying National Insurance contributions while they were working).
The total health and social care budget is £144 bn a year, if that were funded out of an earmarked tax on land values, this means we could scrap the second most economically damaging and regressive tax on earnings/private enterprise - namely National Insurance contributions and reduce the basic rate of income tax. State pensions could just be paid out of income tax in future.
Environment, housing, utilities such as street lighting, roads and transport
The list goes on, quite what kind of expenditure the government includes in these minor categories - and how much of it is actually worth doing - I do not know. But they are the type of expenditure that maintain land values, and benefit landowners in some areas more than others, total cost £52 bn a year.
What does this mean for an actual household or business?
The total cost of all the above categories is about £350 bn a year, we can earmark duties on fuel towards the cost 'environment' and transport; earmark duties on tobacco to the health budget: and split duties on alcohol between the budgets for health, transport and law and order, meaning that the total combined cost to be allocated between landowners would be about £300 bn a year.
A quarter of that would be paid on the most valuable land in city centres, which is largely commercial premises (shops, offices, restaurants etc), leaving £225 bn a year to be collected from the value of housing. As a rough estimate, this would average out at about 3.2% of the current value of each home.
So the tax on a median home would be paying about £6,000 a year. That's clearly a fair chunk of change, but that is just what public services cost. If that home is owned by a working-age household, then they will also be saving twice as much as that in lower VAT, National Insurance and basic rate income tax. These savings apply all the way up the scale - the tax on an average home in London would be about £15,000 a year, but so what? Wages in London are a lot higher as well, so most working-age owner-occupiers would be saving a lot than that in lower VAT, National Insurance and basic rate income tax.
Tenants and first time buyers would also be treated fairly - they would only have to pay for public services once over (their rent would include the tax on that home) instead of having to pay for the cost of public services once through their taxes and then being forced to pay for the value of those public services in rent of mortgage payments.
The banking system
I shall bore you with one final supposed argument against taxes on land values - it would push down selling prices, which would lead to negative equity and endanger the whole financial system. Well, we are where we are and we can't magic away these huge mortgages - which make up 80% - 90% of total bank lending in the UK. Recent purchasers have the most to gain from future net tax savings, so it all evens out.
But is this not madness? An average UK home was built decades ago for £100,000 in today's prices. The bricklayers, carpenters and electricians were paid what they earned and the property developer made a mark-up to reflect risk and finance costs; that house was paid for long ago. If that average home is sold again today for £300,000, with a £240,000 mortgage, then the lending bank and its depositors will collect as much again in mortgage interest (£100,000) over the next twenty-five years as the house originally cost to build; and the seller has made a capital gain of £100,000. I have hopefully shown that it is taxpayers' money which underpins land values in the first place, so when we say that mortgages are 'secured on land and buildings', what we really mean is, 'mortgages are secured on the value generated by spending taxpayers' money'. Is that not an insane way to run an financial system or economy?
Here endeth.
* Let's not get bogged down in the subtle difference between basing the tax on the current value of land (or land and buildings) and basing it on 'site premiums', i.e. the total rental value minus the capital cost of teh building and other improvements.


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