A Land Tax For Britain

This essay was written as an entry to the TxP Progress Prize. The prize is run in partnership with Civic Future and New Statesman Spotlight to encourage blog posts responding to the question ‘Britain is stuck. How can we get it moving again?’.

The result is a bit more ‘argumentative’ than my usual style, so do skip if that’s not your thing.

The British economy is stagnating. Tax levels are the highest they have been in 70 years, with 24% of tax revenue coming from income taxes. Many people are struggling to pay rents and the proportion of income spent on rent by private renters has increased from less than 10% in 1968 to over 25% in 2020. Pubs and music venues across the UK are closing due to high rents. Housebuilding, which would relieve these problems, has consistently fallen below the required levels. At the same time, vast brownfield sites which could be developed are left unused and many of the properties that are built are simply left empty, and held as a speculative investment [1]. It may be surprising to learn that there is a single policy which addresses all of these problems. It was first proposed over 100 years ago by Henry George and has been endorsed by figures as diverse as Albert Einstein, Milton Friedman, Leo Tolstoy and Joseph Stiglitz .

The solution is to tax the unimproved rental value of land, at a rate close to 100%. Then, to use the revenues from this to reduce taxes on economically productive activities by reducing income taxes. Under this proposal, each year, landowners would pay in tax the amount it would cost to rent the land (minus any improvements, such as buildings) for that year.

Landlords make their money by owning property, and charging people to live or work there. Some of their income comes from work they do maintaining the property or capital investment they put in to creating the property, which are both economically productive activities. But a large proportion of their income comes from something else. This can be seen by that fact that many landlords choose to hand their properties over to letting agents who perform all maintenance and investment in the property, while only taking a fraction of the rental income, leaving the rest to the landlord. If the letting agents are performing all of the capital investment and labour, where is the rest of the landlord’s income coming from? The answer is land. A landlord can be successful simply by buying land in a desirable location and renting it out, leaving someone else to do the productive work of building something there. The landlord does not produce land: he just owns it. The value of the land itself (again: not any improvements, such as buildings which sit on the land), is created by the work of others. Land next to a good school is valuable because of the work of the teachers and the investments in the school made by taxpayers, land in a bustling cultural hub is valuable because of the work of the artists and musicians who contribute to it, and fertile agricultural land is valuable because of the work of farmers who preserve the surrounding environment and the ecosystem which supports the soil. None of the value of the land itself is contributed by the landlord. In short, landlords make themselves wealthy by virtue of the fact that they are already wealthy enough to own land.

Contrast this to an entrepreneur who puts her own capital and labour into making a successful business, a construction worker who builds new houses, a researcher who finds new medical drugs, or a cleaner who mops floors. These four people all earn money by actually doing something: creating, working, or investing. The landlord (primarily) makes money by owning, not by producing or doing.

Yet those who do the productive work which improves our world (like the entrepreneur, the construction worker, the researcher, or the cleaner) are punished for their work by being forced to pay taxes on their income. Indeed, they pay the same rates of income tax as the landlord, who primarily makes his money without producing anything. Income tax disincentivises the exact kind of productive work which our country needs. Taxing the unimproved value of land shifts the burden away from productive workers and investors and onto those who exploit their ownership of land whose value they did not create.

Landlords may be unproductive, but at least they allow people to live and work on the land they own. Some land owners do not even rent out their land: they simply sit on it and wait for the price to increase. This behaviour is known as speculation and as a result, there are almost 700,000 empty homes throughout the UK, and over 150 million square feet of unused retail space [1]. Furthermore, Britain has over 30,000 hectares of unsightly and undeveloped brownfield sites-enough to accommodate 1.2 million homes. Having buildings and brownfield sites sitting unused artificially reduces the housing supply, thus increasing house prices at the same time that many are struggling to afford either buying or renting a home. But the landowners are not incentivised to do anything productive with the land, or sell it to someone who wants to live or start a business there. This is because they are confident that the land value over time will increase, due to the increasing population all wanting a piece of our finite land and the contribution of the others to the surrounding area (which, again, the landowner does not contribute to). Taxing the unimproved value of land would mean that, every year, the landowner pays in tax the equivalent value of renting the land. This wipes out any profit obtained simply by sitting on the land and incentivises the landowner to do something productive with the land or else sell it to someone who will. Thu, the availability of housing and retail properties is increased, increasing supply and reducing rent for those who wish to use them.

It is well-established both theoretically and empirically that taxing land rent causes its selling price to decrease and that the taxes do not get passed on to renters in the form of increased rent. For reasons of space, I refer the reader to Lars Doucet’s excellent book and blogposts for a comprehensive argument to this effect as well as excellent explanations of all other facets of land value tax.

The total value of land in Britain is estimated at £6.3 Trillion. Using a very conservative capitalisation rate of 2% to estimate the rental value of the land, and taxing this value at 85% would raise approximately £107 Billion in tax revenue every year. Council taxes and business rates (with combined revenue of £67 Billion) are based on property prices, and in this regard already capture some land value as taxation. But even if 100% of these tax revenues came from land value, introducing a land value tax would still raise enough to completely abolish these taxes and reduce the income tax burden by £40 Billion, equivalent to a 16% income tax reduction. I emphasise again that this is a conservative estimate. On top of this, a land tax would reduce the high rents caused by speculation and encourage efficient and productive use of land.

A land value tax is not a new idea. But it is a radical idea and an idea that works. And it is an idea that Britain needs now.

  1. ^

    EDIT: The story about unused homes is more complicated than I make out in this post. Brendan Long has a good comment which explains why. Read it here.