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Baby Steps to Wealth Tax - by Dr Tony Vickers, Hon Sec Professional Land Reform Group

March 8, 2012 8:32 PM

www.plrg.org

Vince Cable is a consummate politician. Tuesday's mention of Mansion Tax to a reporter, as a possible bargaining chip in negotiations to scrap the 50p tax rate, was always bound to stir up the Tories. And keep Labour in the margins.

But discussion among three Tories on Newsnight that evening soon took us onto a higher plane: the benefits of wealth taxes, especially a land value tax. That's exactly where Cable wanted it to go.

Because we now have the intriguing situation where some Tories, like Tim Montgomery and Nick Bolan, see what Cable and his whole Party - as well as the Green Party and the Co-operative wing of Labour - have realised for some years: that taxing wealth accumulation is good for growth. Not only good in its own right, since it incentivises land to be developed in accordance with local plans, rather than being held out of use; but also good because it allows other taxes to be reduced.

The Treasury's own economic model acknowledges the 'deadweight burden' of taxes on earnings and profits to be equivalent to around 20% of GNP. That means there could be potentially one fifth more economic activity than there is, were income tax and corporation tax to be scrapped. Others put the deadweight burden as high as 40%. Not that anyone is suggesting Land Value Tax become the "Single Tax" that Henry George (the 19th century American philosopher and author of Progress and Poverty) espoused.

But link Mansion Tax or Land Value Tax (LVT) with the raising of the income tax threshold - as Liberal Democrats explicitly do in their 2006 tax policy paper Fairer Simpler Greener, which Cable helped write - and you have the makings of a formula for economic recovery which thoughtful politicians and commentators across the political spectrum now find has potential electoral merit as well.

Of course we soon hear of the mythical Poor Widow living in a Mansion! How will she pay the tax? Simple: she won't have to. The tax bill will be rolled up as a charge on her estate, until she dies, sells to move into a care home, or re-mortgages.

As the chair of the Lib Dems' only economic pressure group ALTER (Action on Land Value Taxation & Economic Reform), I can go further with claims for the ease of implementation and fairness of LVT. With Vince Cable's encouragement (also that of Chris Huhne, another trained economist and shrewd political operator, who is ALTER's President) ALTER developed ideas on LVT since Party Conference approved it "for the longer term". Our ideas have now been taken up by the cross/non-party campaign group Coalition for Economic Justice (CEJ), which formed in the wake of the credit crunch of 2008. CEJ's LVT Implementation Plan is based on ALTER's 'ten point plan', boiled down to six stages.

  1. Enact a National Land Rent Bill, establishing a Vision for Tax Shifting;
  2. Reform Business Rates onto a site value basis - already Lib Dem policy, to be achieved in a single Parliament;
  3. Replace Council Tax with a Housing Services Charge (the name, not the tax, taken from Sir James Mirrlees 2010 report on taxation for the Institute of Fiscal Studies - Mirrlees supported reformed Business Rates being extended to agriculture, as 'business');
  4. Introduction of UK-wide national LVT, i.e. not local government finance;
  5. Annual revaluation of all land for tax purposes;
  6. Phasing our remaining property taxes (Stamp Duty, Inheritance Tax in particular).

ALTER also now favours merging LVT with income and corporation tax so that, as happens inSweden, the 'notional rent' (annual value to them of property occupied by owners) is counted as income. Only unlikeSweden, it would only be the land value that was taxable. This was how Schedule A income tax worked until the 1960s.

Within this notional income (to property owners only) would be an additional 'homestead allowance', which could be transferable between earned income allowance. This would not only benefit income-poor asset-rich homeowners, like the Poor Widow; it would encourage landlords of buy-to-let properties to offer an equity share to their tenants, so as to reduce their tax bill. So far from being 'anti-homeownership', LVT could be a tool for spreading home-ownership even wider, helping people who earn enough to pay the rent on small 'mansion' (some shoe-box in commuter-land) but not enough to buy it to at least become part-owners of a 'homestead' with which comes added 'income' allowance.

What about something far simpler: a few extra council tax bands? For a Party wedded so long to Axe The Tax (to be replaced, dare I say it, by an extra dollop of Local Income Tax), any tinkering with Council Tax is out. Having said that, being in Coalition might help us axe Axe The Tax - and I wouldn't mind betting Vince never favoured Local Income Tax.

If Council Tax is to stay, then it certainly needs a revaluation. Failure to revalue the old rating system for 17 years was largely what led to its unpopularity and the Poll Tax. It is now 20 years since Council Tax was introduced and Cameron has promised not to revalue in this Parliament. But he also promised, in the Coalition Agreement, to review local government finance. He hasn't promised not to scrap Council Tax! Depending on what replaced it, scrapping Council Tax could easily be a policy both Coalition parties could agree on.

As a national tax, LVT would level the economic playing field as between rich and poor regions: it would fall much more heavily onLondonand the South East than the North. This in turn would help attract business out ofLondon, easing the pressure on infrastructure: from roads to water supply.

Scotlandcould implement LVT, without reference to London, as the soon as the Scotland Bill completes its passage through Parliament and is taken by the nationalists - with or without independence. The Bill has survived the Commons with clauses that allow 10% of income tax to be varied, Stamp Duty to be scrapped in Scotland(with no requirement for a new Scottish property transaction tax) and, crucially, any new tax to be introduced. All Parties in the Scottish Parliament, except Conservatives (who scarcely matter), either already support LVT or have a substantial number of MSPs who favour it.

What about the practicalities? Preparing the land ownership and valuation registers is a non-trivial task but studies have shown that carrying out site valuations need present no great difficulties. Such valuations are done every day when sites are redeveloped and buildings on them are no longer wanted. Modern computer-aided spatial analysis methods, in use for property taxation across North America and elsewhere for some 20 years, can enable the land value element of gross property value to be extracted and displayed in 'value maps' with relative ease and frequency. My own research indicates that the benefits of better property information would offer sufficient benefits to the development and insurance industries that they might finance the necessary computer systems, making the tax reform cost-neutral to Government.

My research also indicates that property tax reform is extremely tricky politically - but that when governments are faced with little choice to avoid economic (and hence electoral) disaster, then they often do it. Take the three EU countries most recently to have faced bail-outs:Ireland,Italy andGreece. Every one has included a new property tax among its emergency fiscal measures.

So I don't hold my breath. But I will my telling my colleagues at this weekend's Lib Dem Conference to forget the 'baby steps' of a Mansion Tax or extra Council Tax bands and keep our minds on the big prize: a totally transformed British tax system, which favours enterprise, jobs and sustainable growth, rather than the banks and the landlords.

Dr Tony Vickers is Chair of ALTER (Action on Land-value Taxation & Economic Reform) and Secretary of the Professional Land Reform Group

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