In my recent essay on land reform - written in haste for a consultation that was closing - I wrote briefly about the merits of an exponential land tax. The exponential land tax is a variant on a flat land tax which scales exponentially rather than linearly with the size of the holding.
"A variation on the flat land tax which I personally would prefer, but for which I do not believe it would be at present possible to build a democratic majority, would be the exponential land tax. Under this tax, a land owner would pay one penny on the first hectare of his holding, two pence on the second hectare, four pence on the third, eight on the fourth, and so on. This eminently reasonable scheme would see tax of about ten million pounds on the thirtieth hectare. As before, land on which tax was not paid would revert to common. Such a tax would drive rentier landowners and private sporting estates out of Scotland within a decade.
Obviously the starting point and scaling factor could be adjusted, but the principle that larger holdings should be taxed more seems to me socially beneficial."
Clearly, there is merit in the idea that large holdings should be taxed more heavily, pro-rata, than small holdings. This would have the effect of breaking up larger holdings and engaging more people on the land. Equally obviously, the exponent of two, described in the brief statement above, is too high (although it makes the principle of the system easy to understand).
BackgroundScotland has some good productive agricultural land. I would not want any taxation scheme to deter positive economic agriculture on good land. But even on good land in Scotland, the minimal economic holding (by which I mean, not a holding which can necessarily provide sufficient financial income to support a family, but which can provide an income equivalent to at least the minimum wage for the hours taken to farm it - I don't see anything wrong with part-time farming) is about ten hectares. Anything smaller than that and you are essentially messing about (full disclosure: I have less than five hectares). It does not, in my opinion, make sense to have a deterrent tax on holdings less than one hundred hectares, and I know a lot of people would say that a larger holding size is desirable.
But, for me, part of the reason for introducing a land tax is precisely to take Scotland's marginal and vulnerable lands out of agriculture. Grazing sheep on steep hillsides just is not sensible and is not good use of land. Over only a few generations the land degrades into eroded wet desert, and the destruction of scrub and erosion of topsoil contributes not only to the despoliation of our hills but to the flooding in our valleys.
Equally, the extensive drainage which is going on now on wet land across Scotland is a real cost to our environment and our biodiversity. The green plovers and curlews which were distinctive creatures of this landscape in my youth are now largely gone, and though they are among the most obvious of our losses they're by no means the only ones. Food production is a good thing. More, it's essential, and will become more essential over time. We need productive agriculture in Scotland.
It doesn't entirely follow from that that we need capital intensive agriculture, with large inputs in fertiliser, feed, diesel fuel and drainage. Yes, intensive agriculture can produce more calories of high-value food per hectare, but only at the cost of more calories of both diesel and imported cereals, which could otherwise be used for human consumption. In short, I'm not persuaded that intensive agriculture produces a nett increase in food. This thought is relevant to the issue of holding size, since larger holdings are required to support the capital overheads of more intensive farming. Taxing to deter large land holdings will have the consequence of deterring more intensive agriculture, except perhaps on the very best land. It's important to be aware of this. As far as I'm concerned, that isn't an unintended consequence.
Calculation and possible valuesSo, holding that in mind, what are the sensible bounds between which an exponent for an exponential tax might be set? Recall, the tax payable on hectare N is N times the basic taxable amount c raised to the power e, where e is the exponent, so the total tax on the holding is
1c^e + 2c^e + 3c^e... Nc^e
Suppose the exponent is 1.01, the basic taxable amount is £1; then the tax on a holding of one hectare is one pound and a penny; tax on twenty hectares is £22.23; and tax on 100 hectares is £172.18. This is, essentially, too low to have any realistic effect, and in fact, too low to be worth collecting. Tax on a thousand hectares would be only £21,131.34, which, while high, is not deterrant. At an exponent of 1.05, however, still with a c value of £1, tax on a twenty hectare holding is £34.71 while tax on a 100 hectare holding is £2740.52. This is tax worth collecting, but at the same time not unaffordable on a holding on productive land.
But for a thousand hectare holding, still on that same 1.0 constant and 1.05 exponent, the tax would be £150,000,000,000,000,000,000 - yes, that's right, 15 followed by 19 zeroes - more money than in the whole national economy. Large estates would simply vanish overnight - cease to exist. No large landowner could possibly afford to pay the tax, so the large estates would either be broken up into smaller holdings, or would revert to common. This is the desired consequence.
Obviously the government would from time to time fine tune the exponent, but values between 1.02 and 1.07 seem most reasonable to me. A constant of 1 seems to me simple, and the only reason to change it would be if the government wanted a higher starting point for the tax - which I would not see as desirable.
CollectionThe exponential land tax would be very cheap and simple to collect. The land registry means that who owns how much land is unambiguous. Because the tax takes no account of improvements or of market value or of land quality, it is unambiguous how much tax should be paid. Finally, because in default of payment ownership of the land ceases and the land reverts to common, landowners who wished to maintain their holding would be highly motivated to ensure the proper tax was paid.
Avoiding avoidanceWhat large landowners, faced with this scheme, will do, of course, is to set up hundreds of separate limited companies each holding a small amount of land, and the scheme will not work unless this evasion is explicitly designed around. Therefore, two or more holdings which are found to have substantially the same beneficial owner will be counted for the purposes of the exponential land tax as the same holding. This must be so whether or not the holdings are contiguous; every beneficial owner must be taxed on the entirety of their holding. Where a land-owner, through anonymous overseas trusts or however, manages to evade tax for a number of years, the tax authorities must be empowered to levy back tax when the evasion is discovered. As the back tax on large holdings would bankrupt any entity on Earth, no-one is going to take the risk of doing this, so avoidance should not be very much of a problem.
ApplicationLocal government in Scotland is horribly over-centralised. There is an enormous democratic deficit, and to address this we need to put large amounts of discretionary public money at the base of the pyramid: in the community councils. Therefore it seems to me that the beneficiaries of land tax should be the community councils. Such a transfer of taxation income to community councils and by implication away from the existing over-centralised councils (since I envisage that land tax would to some extent supplant the existing council tax) would require, obviously, some transfer of responsibilities and powers, but that should probably be the subject of a separate essay.
It's obvious that introducing an exponential land tax as outlined above would mean that some land simply became uneconomic to hold in private hands, so some land would revert to common. Common lands need to be managed locally, so once again the simple solution is to make community councils the authority responsible for managing common lands in their area. Some community councils might not feel competent, and some community councils might not wish to manage common lands, so there should be a state appointed common lands factor to whom community councils who wished so to do could delegate management of common lands in their area.