An Englishman's home is....another pot of cash for the Government
The Perfect Tax was envisaged to replace other (less-than-perfect) taxes. But Labour can't resist double- and triple-dipping. And this will compound the damage from Corbyn's Tax.
Henry George was one of the founding fathers of “left-libertarianism”. I’d quite like to meet a left libertarian one day but I think they’re extinct. George argued for a “perfect tax” or “single tax” on land and enjoys a degree of support from economists across the political spectrum. Here’s his Wikipedia entry:
He inspired the economic philosophy known as Georgism, the belief that people should own the value they produce themselves, but that the economic value of land (including natural resources) should belong equally to all members of society. George famously argued that a single tax on land values would create a more productive and just society.
Today, it’s rumoured Council Tax could be transformed from the 1991 8-band system into a straight 0.5% on the value of the home. Fans of massive taxes are wetting themselves with excitement about the prospect of Rachel Reeves loading up Home Counties homeowners (£1m for a 2,500 sq ft 4-bed, in many areas) with a walloping tax.
I’m going to start by outlining Henry George’s case (he had a point), and then argue that the Labour Party implementation will, by contrast, be an immoral car-crash.
Today: land taxation in Rachel Thieves’ first budget. I’ll only touch on how this relates to my favourite subject: Corbyn’s Education Tax.
Why a Land Value Tax?
For a full explanation, read here. In brief: the supply of unimproved land is physically fixed. As Mark Twain said “they don’t make it any more” with the exception of a few feet of Monaco and the occasional drained marsh. Regardless of price, the quantity can’t change, so landowners can extract 100% of the rent from increased demand. Landowners also freeload on neighbourhood improvements whether from private sector (a pub, a nice cricket team) or public sector (a free taxpayer-funded school, a good railway connection).
This means a few things:
price is entirely determined by demand
a higher price does not stimulate the socially-useful expansion of supply seen in other industries
the owner of unimproved land does nothing to “earn” their increased rents
To be clear, we’re talking about unimproved land, whose value is substantially determined by the neighbourhood. A comparable terraced house could be worth £2m in London Zone 2, or £400k in Huddersfield - the materials and labour costing near-enough the same - because the land and neighbourhood are more valuable.
George’s view was that society’s needs should be funded by a Land Value Tax - a tax on the use-value of the unimproved land. The rationale is to tax non-useful activity while preserving incentives to use and improve land most efficiently. Rent remains set by the market and, because of the vertical supply curve, the land value tax is paid entirely by the landowner not by the tenant.
If you want to make money from land, do something useful like invest in the property (you can still earn rent by having a better, or larger, building). Or just do something else, get a job, start a business - because those activities are, in Henry George’s vision, tax-free (the single tax, remember?)
A Georgist tax does suffer from a few problems: (1) it’s tremendously hard, in practice, accurately to break out the value of improved vs. unimproved land in use (2) landowners themselves can contribute to their “neighbourhood” value and a heavy LVT is a disincentive for them to do so (3) the transition to a Georgist tax implies a sudden correction in land values. I’ll come back to (3).
UK property prices and taxes
The UK has never had a Land Value Tax. Historically:
stamp duty (SDLT) was for the management of the land registry, and set at 1% until Gordon Brown and George Osborne couldn’t resist the temptation of walloping it on the sole basis that house transactions are easy to tax;
council tax (or poll tax, or rates) was for the provision of council services.
UK housing has featured strong price increases over recent years driven by (1) artificial scarcity-of-supply via “green belt”, conservation areas and other planning constraints; (2) population growth due mainly to immigration; (3) colossal quantitative easing and near-zero interest rates, which have fuelled credit-driven demand for housing and other assets.
Henry George would be horrified. Look at all those unearned and untaxed gains from homeowners given government-backed privileges (literally, “private law”, as in “I own my house on my land, and I get to stop you building anything on your land"). Look at the unsatisfactory rental market where landlords have all the market power and tenants have none. Look at all the other taxes on labour and investment that discourage productive activity.
The only land tax that raises meaningful revenue - stamp duty, at modern rates - trashes productive activity by
discouraging labour market flexibility
discouraging people from “right-sizing” their homes for different stages of life
So in the status quo we get high house prices which have been terrific for long-term owners selling up, and terrible for recent buyers and would-be buyers; we have SDLT that is economically ruinous but the government can’t give up.
Disclosure here: I paid a lot of SDLT last year to buy an unspectacular 4-bed home in the Home Counties, with a big mortgage. I’m not feeling very privileged by my housing “wealth” or that I, personally, haven’t paid enough property tax to be left alone. But I’m not a NIMBY, I’m a libertarian-leaning classical liberal, so I want the market to provide homes for people.
An Englishman’s home is his castle (but only up to the fence)
I’ve always liked this saying, about live-and-let-live liberalism-with-property-rights. I pretty much abhor anti-development Nimbyism. I don’t, however, think an Englishman’s castle literally allows him to project power beyond his boundary, like an actual medieval Frankish castellian. I don’t think a homeowner should be allowed to block housing on the fields he overlooks, unless he’s willing to pay the farmer for non-development, or buy the field himself.
Who is existing Homeowner A to deny homeownership to would-be Homeowner B?
Henry George would observe the artificial limits on land, and the money that’s been made by long-term homeowners whose asset-price is boosted by government intervention. He’d have called for substantial taxes so that those homeowners compensated society for the severe cost of their general Nimbyism and, like I said, he’d have a point.
But remember: George argued for a Single Tax or Perfect Tax. Not just “another tax”.
What’s Rachel Thieves going to do?
It’s strongly rumoured that the Government is poised to wallop homeowners with a revaluation of council tax, so that we pay 0.5% of the value of the house every year. Here’s a few reasons why Henry George will keep turning in his grave:
The 2024 house price includes both the building and land value.
You shouldn’t be penalised for the extension you built (like me), or the efficiency you invested in (like me), for which you probably paid VAT already (like me).
You shouldn’t be penalised for living in a nice house on a small plot, compared to somebody hogging a big plot with a house that “needs improvement” for a similar valuation.
The 2024 house price, and the taxation of it, are dependent variables. In other words a 0.5% house value tax will wipe something like 10%-15% off the value of housing, because the next buyer will price it into his best offer. Then 0.5% will actually be 0.6% IF we assume (which is bold) that cash-poor owners unable to pay several thousands of extra tax don’t suddenly sell up, driving a much deeper house price drop. I’m not confident about Reeves agreeing to write down taxable values if they fall.
The rumoured council tax hike is not going to be a “single tax” aiming to replace income tax, VAT, CGT, stamp duty and all the rest. It’s just going to add to the “screwing over everything in the private sector” so Reeves can do Really Good Stuff like public sector pay rises.
It will hammer anyone who budgeted to buy their house (at whatever price) and just live in it. All this talk of “redistributing property wealth” suggests everyone can just cough up, but lots of homeowners don’t have the spare cash sitting around.
A Georgist tax was supposed to support the local community. The proposal just to snatch property wealth from the Home Counties and spray it around Labour constituencies in the North wouldn’t have washed; George would have noted how disadvantageous that would be to the not-particularly-rich recent homebuyers (like me) and hard-pressed tenants of the South.
The 2024 value is based on 2024 government-imposed housing scarcity. But if the Government suddenly turns on the housing taps (which, as I said, I can’t really disagree with) then there’s downward price pressure. And if Reeves really lives up to expectations, she’ll chuck as many new houses as possible in the attractive, highly-prized home counties villages (like mine) where the only reason housing is so expensive is that the villages are small and characterful, so if they stop being so, the land value will plummet.
Transition pain
There’s also significant beef in transition. For people who bought their quite-nice Home Counties houses recently (like me) it’s a double-whammy:
As noted, we already paid a HUGE chunk of stamp duty for outright home-ownership. It would be reasonable, in my view, for that to be rebated in recognition that we’re now going to be paying monster council tax. But it won’t happen.
…and we paid the stamp duty based on the 2020s price, before a correction relating to both the HUGE council tax hike and the government’s development agenda.
Oh hell
It’s one thing to note (as Henry George would agree) that a low-tax, highly-constrained market has (1) unfairly favoured longer-term owners and baby-boomers, (2) encouraging unproductive investment and driving up prices at the expense of generations that followed behind, while (3) government was paid for by foolish levels of tax on productive work and investment. It’s reasonable to prioritise allowing those generations to join the housing market, by removing artificial supply constraints. And it would be pretty good to consider rolling back taxes on productive activity in favour of Georgist taxes on land use. I’m philosophical enough to get behind all the above.
It’s another thing entirely to throw in a substantial tax on (1) both the unimproved and improved elements of land, (2) taking the overvalued baseline that will then immediately go out-of-date, (3) diverting the taxes away from your local area to pay for less-productive parts of the country, and (4) ignoring very large SDLT contributions from recent buyers while also (5) layering this enormous tax on top of a desperately overtaxed economy, counter to all Henry George’s best advice (6) launching a huge housebuilding programme that destroys the housing “wealth” you’re so keen to grasp.
Perfect storm
Finally, to bring it back to my favourite subject.
The Reeves version of land tax, if the rumours are true, will be pitched alongside other tax hikes: CGT, pensions, IHT, dividends, banking taxes are all strongly rumoured to be in the frame. And, marvellously, these all fall on the euphemistically named “broadest shoulders” of “the richest in society”. With less spin and more science, we’d call these the taxpayers. The top income decile, perhaps top two or three.
Not the super-rich, not the non-doms, and not the globally-ultra-mobile, who, by the way, I’m not for taxing more anyway.
And guess what, these are the same shoulders that are confidently expected to pay the Education Tax. Along with, of course, a good number of lower and middle earners. What could possibly go wrong?….
….for next time.
We bought our house almost 50 years ago and its price tag, but not its intrinsic value to us as a home, has roughly increased sixty-fold which is a function of the government policies (inflation, immigration and so on) that you mention.
Many people of our age tend to be asset-rich and cash poor and a ½% tax would force lots of similarly circumstanced folk to sell up with a concommitent element of market disruption. What sort of fools would we be to then buy a less valuable property in the UK rather than to decamp overseas?
As with energy policy, early prisoner releases, arms embargos on Israel and VAT on private education, it's hard to believe that the Labour party have the intellectual heft to peer beyond extreme left ideology to grasp the practical ramifications of their dogma and discern the second order effects.
There is also the small matter that, other than for people who are now mortgage free, the gross value of their property is vastly different from their equity in it. Someone who bought a house in the south east this year for £1m with a 90% mortgage would suddenly be faced with a £5k tax on their house to add to their repayments on the £900k loan. Any benefit from falling interest rates would be wiped out.