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A case for taxing land Samuel Brittan Financial Times 09/12/05 Of all the three traditional factors of production – land, capital and labour – land is the most obvious object for taxation. The ownership of land is by far the most arbitrary contributor to differences in wealth and income. As long ago as 1817, the economist David Ricardo distinguished "the original and indestructible powers of the soil" from "interest and profit on capital". Winston Churchill put it more eloquently in 1909 when he said: "Roads are made; electric light turns night into day; water is brought from reservoirs a hundred miles off – and all the while the landlord sits still?...He contributes nothing to the process from which his own enrichment is derived." When the London Jubilee Line was extended, the increase in property values attributed to it was privately estimated at £10bn. The government estimates that the value per hectare of "mixed agricultural land" averages £9,287 in England but rises to £749,000 if it is used for business development and to £2.46m if it is switched to residential use. Land taxation should also be regarded as the least evil kind by believers in competitive free enterprise. Land differs from both capital and labour in that the quantity of it is fixed. Taxation should not lead to a reduction in its supply as it can of business enterprise (including North Sea oil exploration) or work. Anything developers gain from its increased value is a bonus. David Lloyd George, the pre-1914 Liberal chancellor, was well on his way towards a land tax when the first world war intervened. After the second world war, Labour governments made four successive attempts to tax the unearned increments due to the appreciation in value of pure space. But they all ran into the ground. This is well described in a book of essays, Time for Land Value Tax?, published by the Institute for Public Policy Research. The main explanation there is that they were taxes on transactions rather than on value and therefore penalised development. At least as important in my view was the justified expectation that future Tory governments would repeal the levies. When Kate Barker, the economist, was asked by the Treasury to look into the problems of housing supply, she shied away from a pure tax on site value and instead advocated a levy on the "land value uplift" resulting from development permission. In his pre-Budget report Gordon Brown, the chancellor, took up the idea as a suggestion to be discussed with interested groups. Predictably, some of these have already vigorously protested. Turkeys do not vote for Christmas. The chancellor's planning gain supplement (PGS) is obviously far short of a full site value tax. There is no taxation of land that has already been developed. The very limitation of PGS to planning gain will work against it because of the difficulty of separating the uplift caused by planning permission from all the other factors at work. Moreover, the fact that it is a one-off levy impairs its value as a revenue source. Its best chance lies in the unpopularity of the council tax and the review of local government finances now taking place. The chancellor intends conferring on local bodies any PGS revenues. It is unfortunate that the Liberal Democrats, who are the political progenitors of the land tax idea, have abandoned it in favour of a local income tax, which is a disincentive to activity and less redistributive. The PGS should be welcomed as at least a small step in the right direction. It is reminiscent of another idea, buried away in a Brown fiscal statement, namely the child trust fund or "baby bond", which is a very small step towards what Anthony Eden called a property-owning democracy and is now being implemented. Any change in the balance of taxation is, of course, a blow to legitimate expectations. The reason both the old rates and council tax have been so politically unpopular is that long-delayed revaluations lead to sudden increases in the relative burden paid by some people. The modern income tax began with William Gladstone levying it at a very few pence in the pound. Similarly, any variety of land tax should start at a modest rate as the government proposes. It would also be coupled with a lightening of so-called "section 106" obligations, under which developers negotiate to provide a variety of local services in return for planning permission. To my mind, the key to success on land tax is a degree of cross-party consensus. I am not one of those always calling for coalition or for parties to sink their differences in the national interest. Those who do so neglect the value of competition, which is as important in political as in commercial life. But there are certain structural policies that are only effective if they are expected to last. If the promised policy re-examinations of both opposition parties mean anything at all, they should be prepared to examine land taxation on its merits.
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