Land. Value. Tax.

Over at Lib Dem Voice they've printed a biographical piece from the Directory of Liberal Thought about Henry George, the leading proponent of the "single tax" in the nineteenth century that many of us know nowadays as "Land Value Tax" or "Site Value Rating". Several of the correspondents in the discussion following the article felt that they had never really understood, or had explained clearly and convincingly, what LVT is and why it is such a good thing. So I'll give it a go, though many have tried before me, and no doubt many of them more intelligibly.

Land.

Forget what you might think you know about land. In economic terms land refers to the third factor of production. If "labour" is the work that goes into something, "capital" the wealth invested or expended in producing more wealth then "land", in economic terms, is everything else – "the entire material universe not produced by the application of capital and labour." So yes, it includes the land underneath our feet, but it also includes the air, the electromagnetic spectrum, the cosmos, the mineral wealth of the planet, all in their natural states, natural fertility, self-seeded trees and plants, water and fish and non-domestic animals and so on.

Now, billions that we humans number, for most purposes most of these types of land are either unlimited or of indefinite supply. Some types we don't absolutely need to survive. Others we do need to survive. Others are fixed or limited in supply. As far as I am aware, we are pretty well attached to this planet. Every single human born so far has only had the resources of this one planet to sustain them. And since we need it to survive, then we must all, every one of us, have an equal claim on its natural bounties.

In early human society, hunter gatherer family units or tribes would simply range over as big a territory as necessary to meet their nutritional needs. For some, in fertile temperate parts of the world, this may have been a small area. For others, in less fertile territory, it might be a large area of rough foraging. But of course this sort of isolation, subsistence living, is not very conducive to human development. Through trade we grow, both as individuals and as communities. And as soon as we come together to trade certain locations become more important as places where people meet and we can no longer justly grab as much space as we want without excluding others. It is at this point that land begins to have…

Value.

The value of "land" is its "rent". Just as the cost of "labour" is "wages" and the cost of "capital" is "interest". When natural resources (land) are in infinite supply, so that anyone who wants to use some of it can just take it and there will still be plenty for everyone else, it has no rental value. But as soon as humans get together in clusters, the further we move away from being a agricultural based economy and as our survival is based more on our ability to sell our specialist labour for enough to sustain us those locations where we form our clusters begin to attract rent, because many people are in the scramble to be in the best location for their market.

A landowner might be able to make more efficient use of his location and fit more people onto a particular piece of land, or they might invest in creating a work of art for the discerning occupier who will pay a premium for quality. But the landowner, as a landowner, does not have to lift a finger to contribute to any change in the rental value of that location.

And when we buy our homes, what we are doing is rolling up all the location rent for a number of years and handing it over, together with the capital value of the buildings at that location, to the previous landowner, and usually borrowing to do so. This is a key concept in LVT – we are already paying this rent either monthly when we actually rent, or up front when we buy (but inflated often by the cost of borrowing to afford it). It is this "rent" value that Land Value Tax seeks to…

Tax.

To me, this is a big misnomer, and causes a deal of confusion about LVT even amongst "Land Value Taxers". The Georgist purist like me intends really for the community to share the rent for the locations that are made valuable by that whole community equally with everyone in that community. Shared equally because, remember, we have that equal right of access to the land as our birthright as creatures tied to it for the very stuff of life, and because we all help to create that overall rent value. We more commonly think of a "tax" as an imposition used to fund government spending. The community sharing of rent is really a way of each and every one of us paying everyone else who has just as much right to make as good use of our location as we do for the inconvenience of having to avoid it because we have exclusive rights to it.

The community in question is the area within which land has rental value – technically speaking "within the margin of production". In some cases that may still be just a single town or city – the desert outside Phoenix, Arizona, for example might well tail off to zero in rental value at the end of the irrigation system pipes. In others, it could be an entire country – for example it could be argued that we are such a small country that London creates some rental value almost everywhere in the country.

The effect of this rent sharing is that those in that geographical community, however big it is, whose productivity – ability to earn – means they can only afford to live in the cheapest locations with the lowest rents will get more, perhaps much more, than they pay out in location rent. Those whose ability to earn enables them to commandeer the best locations will be paying into the community rent fund much more than they get out. And the net effect of all that is that we create an automatic, self-adjusting safety net which, if you have nothing else coming in, should enable you to eke out a basic living on the most marginal, cheapest locations.

Of course many of you reading this actually do believe that government is sometimes the best body to deliver "essential" "public" "services" and will recoil from the idea of giving people a basic income for fear it becomes an invitation to idleness. That's fine. For you, the Land Value Tax would be a way of financing those public services. I will tend to try to persuade you to take that one further step and believe that giving people their money to spend for themselves will lead to better and more efficient services in most circumstances.

The single tax.

Now this is the other side of the equation. Nobody who is serious about LVT's benefits wants to add to the current tax bill. LVT must replace other taxes if it is to achieve its most important benefits – of freeing up labour and capital to invest and work in productive wealth creation. And so Henry George called it the "Single Tax" and his adherents were called "Single Taxers". Henry George reasoned that virtually all other forms of taxation constituted tariffs, and therefore barriers to wealth creating free trade. All except tax on land in the generic economic sense affect the resources that can be applied to productive enterprise – labour, capital and, in the end, consumer spending.

And remember, the best thing about all this is that most of us, that is everyone who is still paying a mortgage or anyone who rents anyway from a landlord, are already paying this "single tax" in the form of location rent to our landlord or previous landowner, who have done nothing as landowners to earn that bit of the rent. So reductions in any of these other taxes, such as employers National Insurance, Income Taxes, VAT and capital taxes, feed straight through into more money in our pockets. And not only that, but all the disincentives to work and creating employment created by our complex income tax system and the problems associated with benefits withdrawal rates and tax credits and so on, will be removed.

Nor must you believe that the "Single Tax" only refers to a tax on the rental value of one type of land. There are other finite natural resources that we can rightly claim belong equally to all of us but which attract an economic rental value because they are scarce amongst a given community of users. One can argue for a "Land Value Tax" on the exclusive right to transmit on particular frequencies in the electromagnetic spectrum. Or to fly through our airspace at a particular time and place. You could even describe some mechanisms for taxing polluters as a specialized "Land Value Tax" – though it may not be the best way to deal with such issues.

Common Objections:

"We've already been taxed on the money we bought our home with"

Actually, you've been taxed on what you have paid your rent with – whether you actually rented, or bought from the previous owner by paying over several years' rent up front. Any rise(or fall) in your property's rental value by the time you come to sell it on is mostly accounted for by changes in the location rent, to which you have not actually contributed, as a landowner anyway.

But think of it in a post-LVT world – you'll have paid substantially less for your home, you'll have borrowed substantially less to do so, and you will not be paying all those unproductive taxes on income and capital anyway.

We have plenty of "double taxation" in our current system anyway. I pay tax on my income, but then when I go out and spend my post-tax income on most most goods and services I will pay VAT at another 17.5% and possibly duties. And this is an ongoing double taxation – at least with LVT we're only talking about this effect being felt once – at the implementation date and then not again because all the other taxes will have been ended.

"Land rich, income poor – the "poor widow bogey""

As long ago as 1909 Winston Churchill used to be taunted by the Tories with what he called the "poor widow bogey" – the supposedly unbeatable argument that LVT would be wrong because people who happen to have seen the rental value of their location rise will have to pay more in location rent without necessarily having more income with which to do so.

First, again, think of it in a post-LVT world – you will have borrowed substantially less to acquire the various places you will have lived in your life and you will be paying, if you are efficient in your use of land at least, less in tax in the form of location rent. You will have more to save and invest in productive assets other than housing. If you choose to save for your retirement an amount that allows you to continue paying your location rent till you drop, fair play to you. But the evidence is in fact that there is a huge unmet demand for people downsizing nearing retirement (indeed it is mostly the best off pensioners who are able to do this at present). LVT, because it makes the market in land and locations much more reactive to community change, will more than likely encourage this need to be met.

But in the implementation there is some evidence that a very small proportion of pensioners would indeed face larger bills than they have at the moment. For those Land Value Taxers who would prefer to implement LVT slowly, increasing the rate of the tax over a long period of time, their answer would be to allow such people to roll up their tax bill until they do eventually sell up and move or for their estate to pay. I, preferring the big bang approach, would simply compensate people for the lost land value in bonds which they can use to pay their tax into the future.

"Confiscating the value of our biggest asset"

It is true that implementing the full rent sharing I outline above will wipe out the capitalized rent values that one is accustomed to seeing as part of the "sale price". And it is also true that this will hurt those most recently on the ladder and having just borrowed to pay for that up-front location rent.

But the home you live in is not really "wealth" in the conventional sense. Until you are at the stage of downsizing or selling up completely, the value of your home really only matters in respect of its relationship to the price of your next one. For most of us, for most of our lives, our shelter is a cost of living – either in rent or mortgage payments. And if we have slashed the cost of buying by removing the land value, then we have also slashed the cost of your next home in similar proportion.

Again though, in transition from one system to another, with my big bang approach, those who lose out can be compensated with bonds with which, for example, they could pay off any outstanding mortgage over the new land-free market value. If you take the slower incremental implementation mechanism, again, the loss will be less all at once; indeed you could structure implementation such that it effectively only capture future rises in rental values.

"Impossible to value"

This is the "experts' objection" that it will be too cumbersome to invent a system that values the rent for each plot of land every year. And more than that, that it will be arbitrary. But we know from evidence in on the ground pilot studies that we only actually have to value about one in ten plots that share common characteristics in the form of access to services and infrastructure say. It's also not really too different from the current system of self-assessed income taxes. A game is played out every year with taxpayers trying to minimize their liability and the HMRC trying to catch people out hiding some of their income. And here there is no market to help.

The average mortgage lasts eight years. That means that somewhere around 12.5% of our owner occupied housing is valued every year just to get a mortgage valuation. More in recent years where people have been encouraged to chop and change their mortgage even though they are not moving home.

And then there's the rental market. There will always remain benefits to renting for some in the population – short term workers and so on. So there will remain a rental market. This presents yet more, and really very accurate, evidence on which to base valuations- more accurate once you take away the capital gains aspect of land ownership as landlords will only be investing in a rental stream.

And ultimately the market will still highlight areas where the assessed location rents are higher or lower than investors think they should be. If buyers think the current rents are too high, they are going to offer a discount on the capital value of the buildings themselves and if assessed rents are adjudged too low by the market, buyers will offer a premium over the building values in order to get the more desirable location at a lower location rent until the location rent is adjusted the next year.

And finally, let's not pretend that this is new – we had Schedule A imputed rent on our homes on our tax returns until 1963.

"Concreting over surburbia"

There is often concern that when Land Value Taxers talk about our system leading to more efficient land use we mean that every available inch of land will be developed. There is no reason to think this in reality. It will first bring into use completely unused land – that mouldering old factory that's been sitting empty and becoming more and more of an eyesore for a decade for example.

But there's no reason why Land Value Tax would not be subject to a similar planning regime as now. It would change – because a community decision that they would prefer housing to a factory on a particular site for example will lead to that factory being redeveloped a deal sooner than it might today, because its owners are going to be seeing their location rents rise to the point that running a factory there would be inefficient compared with developing it for housing, say.

Personally I would also like to see many planning controls repealed anyway and have most (ie small scale) developments make their peace privately with its neighbours through mediation rather than state control.

Overall though, there is little evidence that people would suddenly settle for a squashed apartment instead of a suburban semi with garden and garage just because of LVT. It will encourage people to consider whether their continuing use of a particular location is cost effective for them and it will make the market more efficient and so there is likely to be more rebuilding, but that doesn't need to be at the expense of amenity.

In conclusion

So, there then was my now not so concise explanation of Land Value Tax and some brief responses to some of its most common objections. It is quite important to get across just how land gains its value though. That helps to explain why some of us see LVT as such a just and equitable way of doing things. If we had Star Trek style free instant transportation systems, land would again be worthless but while it take time (which is money opportunity lost) and money itself to get from A to B the land in between A and B is absorbing some of your hard earned income (and that of everyone else who has to pass it by every day) for doing precisely nothing.

Land values are effectively a tax on all production and one we already pay anyway. Getting rid of all those other taxes on production and capturing for the community the rental values of land will create such a different more equitable economic playing field on which we all continue to ply our various trades.