Capital or annual values?

Sunday, 06 July 2008 18:47

This question is an old one amongst advocates of LVT. Henry George himself argued for a tax on rental values, preferably 100%. At some point since, the concept has been shifted and many LVT advocates argue, or will settle for, a tax on capital values (selling prices). This is a mistake.

The case against capital values is that they are a derivative value, being the capitalisation of the uncollected rental income stream, plus a bit added on to take account of expectations of future growth. The "bit added on" is part of the trouble. Not only is it is a bubble value, but the size of that bubble depends on where the land market is within the economic cycle. Approaching the top of the cycle, land titles are traded with expectations of future increases in the land price, using borrowed money. The bubble component is large. That is not all. The bubble also includes other expectations such as the possibility of planning consent.

With rental values, matters are clear cut. The annual value of a site with expectations of plannning consent is still only the current optimum use value. A piece of farmland is still assessed as such until consent has actually been granted for some other use. Expectations do not come into consideration.

Tax will be payable at the previous full rate if someone purchases a site with a house on it and demolishes the house. Once the consent has been granted for some more intensive use, then the assessment is based on that use. This gets rid of the argument often used against LVT, that the optimum use is uncertain. Where rental values are used for LVT assessments, then the valuation is based on the actual permitted use, permission meaning full planning consent. In most cases this will be existing use unless a site has been abandoned, in which case it would in most circumstances be the previous permitted or established use.

A major problem with capital value assessment is that these values are volatile and could change quickly even during the 12 months or so it would take for the valuation process. Had this begun at the top of the market, for example last year, the valuation list would have been full of inconsistencies. Rentals, on the other hand, have shifted hardly at all in the same period.

The fact that selling prices are the capitalisation of the uncollected rental income stream is equally serious. It is rarely the case the no land value at all is being collected. Council Tax and Business Rates are a tax falling on land rental value. But land in different classes of use is subject to different rates of tax, with vacant agricultural land being free of tax. A valuation list compiled on selling prices will be distorted by these differences. To establish annual values, on the other hand, it is necessary only to add on the amounts of tax actually being paid at present, which would be replaced by LVT. A further conceptual objection to LVT on selling prices is that the price is diminished by the capitalisation of the tax actually payable. At a theoretical rate of 100%, land has no selling price.

Of the proposed UK legislation, the 1931 Finance Bill was to have been levied on capital values but the 1939 London County Council Bill was on annual rental values.

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