All the really silly arguments against LVT are debunked here. No doubt they will be trotted out at tomorrow's second reading of Caroline Lucas's Land Value Tax Bill.

We have heard more than a few times that we already have LVT in the form of the UBR. We have even come across this statement in government responses when we have put the LVT case.

True, the Uniform Business Rate is a sort of land value tax, but a very poorly implemented one. Land in residential use is substantially exempt, being subject to the Council Tax instead. Vacant land is exempt. Agricultural land is exempt. All of these things promote mis-use and under-use of land and introduce damaging market distortions. They prevent rents and property prices from dropping to market-clearing levels, thereby promoting both booms and slumps, the latter becoming unduly prolonged when they happen.

Experience with the Enterprise Zones shows, however, that it is not a cost borne by businesses but by landowners. When the tax is relieved, the rents rise to compensate, taking away all of the intended benefit to business. This is why the implementation of LVT could usefully begin with reform of the UBR.

From a discussion group on the Guardian's Comment is Free
"A design office in the UK designs a widget. They have a three room office in Hull. It sells all over the world for £500 a go. It is made in China, where the vast factory is paid £10 per unit over costs. The UK company makes £300 profit per unit.

Explain to me how land value tax works on this, given you want to get rid of corporation tax and income tax?"

All taxes must be evaluated according to their likely side effects. The well-known effect of the windows tax was bricked-up windows. But the reasoning behind this tax was the assumption that the number of windows in a property was an indication of the owner’s ability to pay.

Those of us who in favour of LVT would not seriously argue that the so-called “sin taxes” should be got rid of. And many existing taxes are in reality land taxes eg parking and congestion charges, mineral extraction dues, receipts from leases of radio spectrum. However,

This question arrived by email. "Every now and then I research this and still find no answer: How does somebody pay Land Value Tax if they have no income?"

The answer to this question is very simple if you imagine yourself in the situation of a landlord.

As a landlord, I already charge as much as I can obtain for my property. I may decide to charge a bit below top rate so as to avoid it being empty, or I may stick out for the last penny which means I must accept that the property will be empty for 10% of the time. Either way, I am getting as much is I possibly can.

Once LVT is introduced, then I am liable to pay the tax whether the property is occupied or not. So I have a stronger incentive to set the price competitively so as to ensure that it is vacant for as short a time as possible.

This article on the principles of valuation by Christopher Glover is commended as an introductory guide and is reproduced by kind permission of the author. It is published on this website in order to promote discussion on the subject, and although it is broadly in line with the Campaign's own views, does not necessarily reflect its views in detail.

1. In order to tax land values, the value of the land has first to be assessed. In any system of LVT the way in which land values are assessed will be of critical importance to taxpayer and Government alike. From the taxpayer’s point of view, the method of valuation should be logical, transparently clear and fair. From the Government’s point of view, the tax base should be stable and the revenue from it predictable.

Capital or rental values?

2. The value of land can be expressed in two ways – what it would fetch if sold, i.e., its capital (i.e., market) value, and what it would rent for, i.e., its annual rental value. For the reasons explained in this paper, it is important that LVT be levied on the annual rental value and not on the capital or market value.

3. At first sight, this seems odd, even perverse. Apart from farmland, bare land is rarely, if ever, rented. There is little or no evidence of land rents. On the other hand, building land is constantly being bought and sold and it is not difficult to find good objective evidence for capital values. The problem with capital values, however, is that they are subject to the vagaries and vicissitudes of market sentiment and can fluctuate considerably. The yield of LVT based on capital values is likely to vary considerably. This lack of stability and predictability in the yield makes the capital value basis unsatisfactory from the Government’s point of view. It is also unsatisfactory from the taxpayer’s point of view, as the tax he has to pay may well fluctuate from year to year.

4. If rents are fairly stable and land prices reflect rental values, why should land prices be unstable? One obvious reason is interest rates. Land prices are very sensitive to interest rate movements given that most land transactions are financed by borrowing. It is not just actual interest rate movements which are relevant here, but the expectation of interest rate changes. Land prices are also subject to speculative surges. When these over-reach themselves, land prices can fall dramatically. It would be inappropriate to import this frothy overlay into the LVT valuation base. It would be a serious error, therefore, to base LVT on capital values. Annual rental values alone can meet the necessary requirements for stability and fairness.

Assessing the annual rental value of land

5. If bare land (other than farmland) is hardly, if ever, rented, how can land rental values be assessed with confidence? If annual rental values cannot be assessed with confidence, how can they meet the criteria of fairness and transparency?

6. Although land is hardly ever rented on its own, it is constantly rented with a building on it. The rent of a property, i.e., land and building, therefore has two components – the rent of the land and the rent of the building. In this country there is an efficient market in the rental of all categories of land and buildings, i.e., commercial, retail, industrial and residential. The annual rent for all these types of property can be assessed with confidence. The question then is: does there exist a sound technique for assessing how much of the rent is attributable to the building and how much is attributable to the land? It is argued here that there exists a proven and acceptable technique for doing just this.

7. By way of illustration, take the case of a newly built three-bedroomed house with garden in a suburban South Eastern location. Its sale value is £300,000. The house cost £150,000 to build including the builder’s normal development profit. It follows that the balance of £150,000 – half of the total - must be attributable to the site. If the rent is £1,000 a month, i.e., £12,000 per annum, it is fair and reasonable to impute half of this to the land. The annual rent for LVT purposes would therefore be £6,000, i.e., half of £12,000.

8. The relationship of land to buildings – 50:50 in the above example – will vary across the country and even within a particular locality. I the North, for example, the land element in property values will tend to be lower. In very depressed areas it could even be close to zero. By the same token, in particular areas of the South East, e.g., Central London, land values may well account for considerably more than 50% of property value, perhaps even as much as 80% or more.

9. Most properties are not new and many in fact are very old. As any home owner knows to his cost,
a building deteriorates with time and requires increasing maintenance. This should be taken into account on a depreciated replacement cost basis in allocating the property value between land and buildings. Admittedly, working out the depreciated replacement cost of a property requires skill and experience but this task is well within the competence of surveyors and valuers. Done as a matter of routine in an LVT environment, the technique would be refined and standardised across the country, thus ensuring consistency and fairness.

10. The land rent thus assessed would properly be described as an imputed or attributed rent. This technique of imputing a land rent from the property rent would account for the vast majority of land value assessments whether it concerned industrial, commercial, retail or residential land. There would nevertheless be instances where this technique would not be applicable or where it would require modification. Obvious areas where special arrangements will be needed include parkland and open spaces, churches, schools and hospitals. It would be out of place in a paper of this general nature to detail these special arrangements.

Property (i.e., land and building) rents

11. In view of the above, the way in which property (i.e., land and buildings) rents are assessed is clearly of prime importance. What is sought is the open market rent, i.e., the annual amount it is reasonable to suppose that the property in question would rent for if advertised in the normal way. This is a task which is carried out all the time by chartered surveyors and estate agents across the country. The process takes into account the age and condition of the property, its location and suitability for its purpose. The annual rental is then assessed by reference to the rental being paid on comparable properties, taking into account differences between the subject property and the comparable properties.

12. In coming to his assessment of the annual rent, the valuer would naturally have to take into account all relevant factors, i.e., factors which affect the rent. This would be a matter of professional judgement on the part of the valuer. It would be a mistake to hem the valuer in by specifying relevant or non-relevant factors. There would be one exception to this rule. In assessing the market rent for the property, it should be assumed that the tenant has the right to renew the lease (at the then market rent) indefinitely.

13. It would be vital for the credibility – and, hence, acceptability – of any LVT scheme for there to be regular periodic valuations. Valuations under the old rating system were done every five years. As LVT would be a far more significant impost than local rates, valuations would have to be updated at least every three years. The aim should be to achieve even greater frequency.

14. Land rental value assessments would be subject to appeal by the taxpayer. In the case of an appeal the valuer would have to justify his rental assessment and show the evidence of market rents on which he has based himself. Annual rents that cannot be justified by reference to market evidence cannot stand.

15. As with any new tax there are bound to be circumstances not envisaged by the initial legislation. This will no doubt be the case with LVT. However, as regards valuation, the generation schema set out in this paper should provide a feasible framework.

There is more information on valuation in these reports by the professional valuer who conducted land value surveys in 1964 and 1973.
Whitstable 1964
Whitstable 1973

Wealth taxes are a very bad idea, and this example shows why. There is an old woman I know who lives on a small state pension and disability benefits, in sheltered accommodation. But her great grandfather was a well known Victorian painter and she inherited a couple of pictures. They need expensive conservation which she cannot afford.

But under wealth tax someone would have to check to see what pictures people had on their walls and in their attics, value them and clobber their owners. My friend could I suppose try to charge people who wanted to come and look at them, but in principle, the ownership of wealth as such does not necessarily provide the means with which to pay a tax on it.

This is the trouble with levying a tax on a value that cannot be realised except by sale of the item or items. Precisely the same objections apply to LVT levied on capital values. And a further disadvantage is that people get the idea that LVT is a wealth tax, which it is not. LVT must be based on annual rental values and it must be made clear that this is a revenue stream or imputed revenue stream exactly like earned income, with the difference that it is not earned by the owner but created by the public at large.

Henry Law

Rothbard put the case against LVT in Critique of Georgism and Reply to Georgists They are demolished in A Critique of Murray Rothbard's Critique of the Georgist Argument

How land value tax should be applied to land subject to a mortaged was discussed in a talk given by Gavin Putland to the International Union for Land Value Taxation at its conference in April 2010. The text can be downloaded here