Scrap 50p to introduce a land tax


The Fabian Society organised a policy Dragon’s Den earlier today under the title ‘Change or No Change: What do we ditch from New Labour‘. Since all the other speakers had argued for change, I suggested “No change with a purpose”.

My argument – which was somewhat cobbled together due to stepping in at the last minute – was that the Labour party should retain the post-1992 orthodoxy on tax by scrapping the 50p rate. But that it should do so only in order to introduce a land tax.

The inequalities in wealth in the UK far outstrip inequalities in income. As the Political Climate blog points out, “recent data from the ONS show that the top 10% of households own more wealth than the rest put together”. Meanwhile, land – which is to save the least hard to move – is concentrated in an even more extraordinary way: 0.3 per cent of Britain’s population owns 69 per cent of its land. As economist Philippe Legrain argued in an article of Prospect, a land tax is the “only efficient and fair way to bring Britain’s finances back into line”.

My back of the envelope calculation (open I’m sure to challenge) suggests that you could raise £10 billion in tax revenue from an average levy of around £400 per hectare (2.5 acres). The rate would, of course, have to be graduated in order to tax urban land at a higher level than farm land.

In return, the Government could afford to cut the 50p rate and take a penny off the base rate of income tax with billions left over for deficit reduction or public spending. The Treasury estimated that the 50p rate would bring in around £2 billion but the IFS expressed concern last year that it could encourage tax avoidance. In any case, the 50p rate will do little to address income inequality. A focus on a living wage at the bottom and financial sector remuneration at the top are a far better means.

The three panelists – pollster Deborah Mattinson, journalist David Aaronovitch, and Tottenham MP David Lammy – supported the idea but, as Mattinson said, “the devil’s in the detail”. To test the popularity, she asked how a middle-income family with a combined income of £40,000 and a house in Surrey would fare. With a chance to do some proper number crunching, I can report that they would gain £270 from the income tax reduction but lose £160 on an acre of land – a net gain of £110.

There are clearly lots of details that would need fleshing out and this is very much a ‘starter for 10′. But it must make sense to consider a shift from taxing income to taxing unearned income. In the words of David Lammy: “it’s an idea whose time has come”.

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  • silburnl

    LTV is an interesting idea but… details, details.

    One of the effects is that it incentivises the intensive use of land – this has upsides (eg. encourages the release of ‘banked’ land by housebuilders, reuse of urban plots etc) but also downsides (penalises land that is economically less productive such as extensive agriculture/stockholding, woodland, nature reserves etc)

    I’m intrigued by how a household with a combined income of £40k came by an acre of land in Surrey mind. Pensioners I suppose.

    Regards
    Luke

  • Simon

    That doesn’t make sense. Homeowners don’t make money from the land they own, indeed it costs them if they have a mortgage. To tax land would have negative consequences for conservation and agriculture and isn’t related to income or ability to pay.

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  • Adam Smith Fan

    @Simon, Householders do make money from the land they own. In fact they generally buy a house and land so that it is as close to their job as they can afford to be. If I can buy a house on a plot of land within walking distance of my workplace, I can keep a lot more of my wage than if I buy a house on land that requires an hour’s commute by car, bus or train at vast cost. So homeowners like me absolutely do make money out of our homes. The price of land (and hence the level of LVT) is very much determined by the number of paying jobs in the vicinity of the land. And the better paid those jobs are, the higher the price of the land will be. That’s why LVT is very much related to income. Sure the price of the house depends on how fancy it is. But the price of the land the house is built on depends on the level of wages for jobs close by. And that’s what LVT is based on.

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