Land Value Taxation, part 2: Why arguments for the LVT don’t work

In a blog earlier this week I explained how changes to the tax regime can create windfalls or immediate costs to owners of the types of property affected by the change. For example, a tax on housing will hit the owners of housing at the time the tax is announced as their asset will immediately drop in value in line with the newly increased tax.

I’m sure those of you who have read my previous post explaining the LVT can all work out where I am going with this. If an LVT is introduced it will reduce the expected income on rented land; more of the rental income than expected will be lost to the tax. Similarly, for people who own and use land their cost for continuing to use the land will immediately rise. Buyers will not be willing to pay as much as they will now expect to pay the tax in order to enjoy the use or investment income from the land. These future owners will not pay anything as the result of the introduction of the tax, nor will the past owners who sold up before the announcement.

For this reason, a big question for supporters of the LVT is whether to compensate owners of land upon the introduction of the tax. This was considered, for example, by J.S. Mill back in his 1848 economics textbook. A pure version of the LVT would provide this compensation in order to ensure that the tax only falls on those who might benefit from increases in the value of land. However, if the government compensates landowners it will suddenly need to find a huge amount of revenue which will only be repaid over a number of years. Government revenues will take a huge hit in the short and medium term and the LVT will not bring in any substantial revenue for many years. This leaves the government to rely on loans and other taxes in the short term.

This also means that all the increases in land values that occurred up to the introduction of the tax are not taxed by the pure LVT. To make matters worse, if land values don’t increase after this point, then it will take ever longer to repay the debts taken on. Supporters of LVT tend to assume land will always increase in value, but this is much more likely if there is an overall increase in productivity and population (or that the increase in one over-rides the drop in the other).

The “pure” version of LVT would therefore raise much less revenue than the “impure” version, which can be considered a wealth tax. I have argued in a previous post that wealth taxes are generally regrettable, though they might be acceptable in some cases. However, the impure LVT is even more troubling than other forms of wealth tax. This is because it is a discriminatory wealth tax. I refer to it as such because the tax only falls on those who hold a particular kind of wealth, namely land.

Consider a group of imaginary people to see the problem. Take four economically fortunate individuals who have various forms of investments, and two less economically fortunate individuals who have scrimped and saved in order to purchase some land. Anna, Bernie, Celine and Daryl all receive a significant inheritance (in an unjust society where inheritances are entirely untaxed), while Enid and Fred are diligent savers investing for their impending retirement. Anna and Bernie inherit a large amount of land while Celine and Daryl inherit money. Bernie sells his land to Fred and invests in other things, while Daryl decides to purchase land with his inheritance. Enid, meanwhile, invests in the stock market. Then the government suddenly announced an impure LVT.

Anna, Daryl and Fred face an immediate loss in the value of their investment. Meanwhile Bernie, Celine and Enid are entirely unaffected. This imposes a wealth tax on those who are unlucky enough to have chosen to invest in a particular kind of investment. Some of those taxed were economically fortunate, but Fred was not. Furthermore, some of the most fortunate people are unaffected, even if their good fortune arrived in the shape of gifted land. The introduction of the impure LVT is like a game of musical chairs, whereby those left holding the land at the time in question lose out.

One argument that I have seen in favour of a land tax is that land should not have been privately owned in the first place—it has been stolen from the community and those who benefit from this theft can have no complaint if their investment loses value. The problem with this argument is that Bertie gained from the supposedly unjust theft of land—his family were landowners for centuries—but he did not pay any of the tax. Bernie sold his land to poor old Fred. Fred did not gain from the land; he merely lost his retirement investment. Meanwhile Bernie got away with a land-based fortune intact. I don’t agree with the idea that landowners are in a morally more questionable position than others (though it is true that most of the landowners in England and Scotland in the past centuries got it through very questionable means).

If we wish to tax the previously undertaxed wealth of the economically fortunate a more comprehensive wealth tax would be much more principled than an LVT. The pure LVT will raise very limited revenue and fail to tax those who benefitted from land and economic fortune in the past if it is pure. Furthermore, the impure LVT should be rejected as a very blunt and discriminatory wealth tax that will also fail to fall consistently on those who have benefitted from either land or good economic fortune.

This only leaves the argument for the LVT that in the longer term it will tax those who benefit from the increased prosperity of the whole community. This occurs because the increased wealth in the community will translate to more valuable land. However, if this is the basis for taxing land then a comprehensive acquired income tax of the kind I propose in chapter four of my forthcoming book, Rethinking Taxation, is much a better option. This would take into account the profits that people make on any investment. It would therefore fall on all those who gain from increased prosperity, not just on the landowners who benefit from it.