Taxing Times
A land value tax could help reform Britain's broken economy - but tackling inequality will require a broader overhaul, argues Joe Wright
In the run up to the last budget, there was a surge in speculation about what taxes the chancellor might introduce to strengthen the UK’s sclerotic economy, fund our crumbling public services and tackle the spiralling wealth inequality that has damaged our country. In the end, most of the taxes on wealth reportedly considered by the Treasury were absent from the final budget.
One crucial change was the introduction of a marginally higher top rate of council tax – better known as the mansion tax. But Britain faces a crisis of inequality which the mansion tax is wholly insufficient to tackle. Equality Trust research shows that billionaire wealth has grown by 842 percent since 1990, and the 50 richest families in the UK currently own more wealth than the poorest 34 million people.
It’s clear that action needs to be taken –and fast. But the question remains – how? Many people talk up the potential of a land value tax (LVT) – a tax on the unimproved value of land – which is often commended for promoting economic efficiency. Unlike business rates and council tax, which have very abrupt cliff edges and tax penalties for improving buildings, LVT has a smoother tax path, meaning it has less potential impact on behaviour. Since land is finite, taxing it is accompanied by little ‘deadweight loss’ on the economy and largely incentivises its best and most productive use. All this would promote economic growth, and, by and large, be progressive.
However, LVT is no silver bullet. If the government did want to introduce an LVT, it should be clear about what it is trying to achieve. As the Institute for Fiscal Studieshas explored, the case is strongest for LVT to replace business rates as part of a wider strategy to promote economic growth, but for replacing council tax the economic case is weaker. The Welsh government noted that the benefits of LVT are contingent on a wide range of factors, concluding: “outcomes vary and appear to depend more on tax rates, valuation, planning systems, and market conditions than on the tax base in land itself”.
So while Tax Justice UK supports a LVT in principle, when it comes specifically to reforming council tax, we instead support the introduction of a proportional property tax. This would achieve many of the same equity and economic benefits while being easier to implement and administer.
The truth, however, is that a government concerned with meaningfully improving living standards and tackling inequality must look beyond land and property towards wealth in its entirety and most extreme. Land and property dominate the wealth profiles of the middle class, but forms a fairly small share of the wealth held by the richest 0.01 per cent’s wealth, whose assets are concentrated in business and financial assets.
LVT would shift the tax burden away from the poorest households, but would do little to increase the tax contribution from the super-wealthy or curb inequality. If the government’s goal is to reduce inequality, then, an annual wealth tax would be the most effective tax tool, as the2020 Wealth Tax Commission found. This is why we are advocating for an annual tax on net assets over £10m, which would impact just 22,000 people in the UK but raise a huge £24bn a year – 60 times what the government’s mansion tax is set to bring in. An annual wealth tax isn’t just a way of raising revenue from the ultra-wealthy, but also a political and social signal that wealth should be redistributed through investment in public service, rather than hoarded by an elite few.
So how close are we to seeing reform of council tax and business rates? The recent local election results suggest some movement. In Wales, the Green party pledged to replace both with LVT, whilst Labour promised a root-and-branch reform of business rates. Labour and the Greens, along with Plaid Cymru, have also pledged a vacant land tax that applies to undeveloped land with planning permission. In Scotland, the Liberal Democrats have called for LVT to replace council tax, with the SNP and Greens promising comprehensive reform of the system.
With no clear majority in either parliament, and the Greens and Liberal Democrats holding the balance of power, LVT is well within sight in the devolved nations – especially in Wales, where much of the technical work has already been done. In England, the picture is less bright.UK Liberal Democrat policy is for LVT to replace business rates, but Labour’s huge majority makes it unlikely to be implemented in this parliament. Last year, the Treasury dismissed rumours that comprehensive council tax reform was on the table, saying that it would take too long and making change contingent on Labour winning a second term in office.
To unlock real, transformative change for people’s lives, a fundamental rewiring of our tax system is required. It isn’t clear that the current government possesses such a vision, but politicians of all stripes are increasingly recognising that a comprehensive overhaul is long overdue – and a unifying issue that voters care about.
