Land value tax has had a bit of an airing this year, usually associated with the idea that wealth ought to be taxed more. We are absolutely opposed to the taxation of wealth. Although so-called wealth taxes are in operation abroad, the proposal is unworkable since it fails at the first hurdle - that of definition. What is wealth? Does it include pictures on the wall, jewellery in bedside tables or forgotten treasures in the loft? How does one value, for example, a racehorse? And if racehorses are exempt from the wealth tax because valuation is considered too difficult, then it does not take too much imagination to predict that millionaires will invest in lots of racehorses in order to enjoy the exemption. A mansion tax could also give a boost to the horse industry as millionaire owners might be able to convert their west wings to stables (in the best of taste, naturally, to satisfy English Heritage), so as to bring their properties below the threshold.
Some LVT advocates have promoted confusion by advocating that the tax should be levied on capital values, which makes it look as if it is some kind of wealth tax. It is not. LVT is a tax on a revenue stream, not a wealth tax. The selling price of land titles is a derivative value. To levy LVT on these selling prices is to give out the wrong message - it makes people think they are paying a tax on their wealth. Land is not wealth, but that land ownership is a claim on wealth - a subtle but crucial difference.
To be an effective source of revenue, land value tax must be about 30% of rental value at the outset. This is between 1% and 1.5% of selling prices, and that is part of the difficulty.
- First, selling prices include an element of hope value.
- Second, a tax on selling prices is "lumpy" because it is a percentage of a large figure - small variations in the tax rate produce large differences in both the amounts payable and in the yield.
- Third, it is a tax on a value which cannot be realised except on sale, and therefore unfair in principle. (unlike a tax on rental values which can either be realised immediately or are an imputed income).
- Fourth, the tax results in a reduction in the capital value of land, and so to tax it is like sawing oneself off the log one is sitting on.
Capital values or annual values
This is probably one reason why LVT - when levied on selling prices - is always fought hard over even when it is in operation. It is perceived as unfair because in a sense it actually is unfair - it is the rental value that is constantly being sustained by the community, day by day. That is the value we want to tax. Not the hope values built into speculative expectations, reflected in the price of land titles, of what will happen to this rental income stream in the future.If one is starting LVT from scratch, or where existing property taxes are on annual values, as in the UK, why use selling prices for the assessment when they are a derivative and secondary value?
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