"The Organisation for Economic Co-operation and Development, the International Monetary Fund and the Institute for Fiscal Studies have in the past couple of years concluded that only an annual tax on land can end the obsession with property. Once landowners face a tax, they will free up land they are sitting on, rather than wait for a rising market to make a killing."I have been an enthusiast for annual site-value land taxation for more than twenty years. This enthusiasm grew out of my involvement in housing policy, which was my main policy interest for thirty years or so, until it was eclipsed by global warming.
It seemed to me plain common sense that as long as housing was subject to enormous subsidies and favourable tax treatment, the housing market would be subject to boom and bust - to the disadvantage of people needing a home. For the past forty years or so, we have been pouring in subsidies to enable people on low incomes to afford housing that was otherwise too costly for them - because of house price inflation boosted by the favourable tax treatment. It has always seemed to me reasonable that housing should move some way towards self-sufficiency, with subsidies to low-income people largely paid for by taxation on housing consumption by richer people.
Housing price inflation is really land price inflation and it seems logical to base property taxation on the site value of the land rather than on it's developed value. Taxing at site value would discourage wasteful use of land - particularly the practice by developers of delaying development in order to capture the rising value of land. It would also discourage under-occupation of property and help dampen the demand for second homes, so freeing housing for people lacking a first home.
There is a sizable movement of people who think as I do about land taxation, but unfortunately, in the world of politics, we seem to be a minority. Good ideas that promise to solve real problems don't always get much of a hearing. Lots of people have offered their opinions that the idea is "totally mad" or "totally impractical". Others have offered strange arguments such as "you couldn't raise enough revenue from it" - as though we were proposing to eliminate all other forms of taxation.
A common response is to assume that all the questions that it raises are unanswerable - such as "What do you do about land that has negative value?" (Answer: don't raise any tax on it), "How do you value the land?" (Answer: that's what valuers are for and they should be quite capable of separating the value of the land from that of the building that sits on it by estimating the replacement cost of the building and deducting it from the overall value of the development), or "Are you going to force elderly people out of large homes?" (Answer: No - an equity release scheme can be devised so that the tax is rolled up with interest as a debt charged against the property and repayable following death).
Back to Inman's article: he refers to three sources of support for land taxation. Of these I have only managed so far to look at one, Chapter 16 of the Mirlees Review, which was set up by the Institute of Fiscal Studies and which comes across as a brilliant piece of work. It advocates business rates with a site-value land tax and the abolition of Stamp Duty Land Tax (SDLT), with the resulting loss of revenue made up by the new site-value land tax and a new "Housing Services Tax". Interestingly, though, it doesn't come out in favour of pure site value land taxation for housing. It argues instead that occupying a house is a form of consumption and should be taxed at a similar rate (but not in a similar way) to other forms of consumption, which are generally taxed through VAT.
SDLT has always struck me as a grossly inefficient tax that needs to be replaced. The proposed housing services tax, being closely related to the value of the property, would be a big improvement on the present Council Tax. It would certainly be a step in the right direction. It would, of course, only apply once a house was built. Undeveloped land would presumably attract the site-value land tax under the Mirlees proposals and hence tackle the incentive for developers (or perhaps we should call them non-developers) to speculate in land rather than to build homes.
My attachment to the idea of site-value taxation for housing is, I hope, not dogmatic and were I to look more closely at the Mirlees proposals I might well be persuaded that the proposed Housing Services Tax is preferable.
Am I being a bit off-topic in discussing land and property taxation in this blog? Perhaps, but this is an area of long-standing interest to me and the links to sustainability issues may be less tenuous than they might first appear.
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