Against Land Value Tax

Gerald Cavendish Grosvenor is the richest Briton. How did he become so? It's not through intellectual effort - he has a grand total of one O level - nor is it through hard work or successful entrepreneurship.  He's a man startlingly lacking in personal achievement. No, his wealth is due entirely to the fact that he inherited a great deal of land in the west of London as well as Oxford, Cheshire and Scotland. But it's the London lands - Mayfair and Belgravia among others - that I particularly want to consider.

They've been in the family a long time. They were improved, it's true, by his ancestor Robert Grosvenor in the early nineteenth century. But essentially their current huge value is down to two things: first, the growth of London, to which the Grosvenors made no special contribution; and second, improvements in infrastructure - roads, railways, sewers and so on - that have been paid for out of the public purse.

This is the case for Land Value Tax. Landowners - like the Grosvenors - make windfall profits out of public works and out of pure luck. This is just one among many ways that the rich are rewarded purely as a result of being rich, and without making any reference to the desirability of the equable distribution of wealth there is a clear public interest in profits generated as a result of works paid for out of the public purse returning to the public purse.

Land Value Tax is a tax on the 'underlying' value of land, disregarding any improvements made by the land owner. It attempts to capture this increase in value which is not a consequence of the landowner's diligence. It's clearly a good thing.

So why is this essay against land value tax?

Land Value Tax is, in the first place, a misnomer. It does not tax land. Nor does it tax the value of land. It taxes a notional, uncertain element of the value of only some land. It imposes no tax on marginal lands distant from public infrastructure. And because that element of the value which is to be taxed is notional, it requires sophisticated assessment and is open to contest by people who by definition have access to the best, most devious accountants and lawyers in the land. In short, it would be an extraordinaily expensive and inefficient tax to collect, and would be the cause of interminable court-room battles fought at cost to the public purse.

But the chief issue about which I am concerned is land reform; at present, in Scotland, it is proponents of land reform who are promoting land value tax. And they shouldn't be; it is at best a distraction, at worst actively counter-productive.

Gerald Grosvenor's ancestors did not create the lands of Belgravia out of the void. Nor were those lands created with title deads attached. Rather, at some point in history some person siezed the land, excluding his neighbours. If stolen property does not become the property of the thief, nor does stolen land. There is not and can never be any title in land (polders in Holland excepted) which is not based ultimately on theft. I'm not defending the heritable, transferrable ownership of land.

There is a public interest in land being well managed, to produce food and timber and to maintain the ecosystem on which we all depend for our survival. Timber production, especially, needs consistent land management over long periods. Allowing individuals to manage a piece of land over a long period and to profit from the usufruct has proved over the period of recorded history to be an effective way of satisfying this public interest. But this is not and is distinct from the private, transferrable ownership of land. I would argue that the private, transferrable ownership of land is in all cases against the public interest, but that is what we now have and what we must work with.

There is no public interest whatsoever in allowing the very rich to cream profits as rents off the folk who have usufruct in the land. That is clearly an abusive practice which contributes to inequity in wealth. Nor is there any public interest in allowing the very rich to mismanage huge tracts of marginal land to facilitate the slaughtering of animals for sport. Somehow we must move from a position where six hundred and twelve people own half the land in Scotland to a position in which land is held either in common by the local community, or else as private land directly by the people who work it. To a Scotland in which those who aspire to produce food or timber from land can find land which they can work.

Land value tax does not address these issues. The land value tax on ten thousand hectares of remote highland estate is precisely nil. There is no incentive provided by the land value tax for the estate owner to divest themselves, to break up their estate into smaller holdings. Land value tax essentially subsidises grouse moors and deer 'forests'.

Land value tax on a thousand hectares of lowland arable is the same whether that land is held as one holding or as ten; but as one holding, there will be economies of scale, so again the land value tax militates against the breaking up of larger holdings into smaller ones.

Land should be taxed. Ownership of land is a good, and it's a monopoly, since only one owner can own any piece of land. Land owners, just by owning land, exclude others from the full enjoyment of that land. Of course it should be taxed. But land value tax goes about it in precisely - diametrically - the wrong way.

Land value tax discourages the use of the land on which the public has invested infrastructure. If oil refineries are to be built, it's in the public interest that they should be built near deep water ports and railways. If factories and warehouses are to be built it's in the public interest that they should be built near transport infrastructure. If the land which is appropriately serviced for industrial development is so taxed that there's no incentive for industrialists to use it, they'll build their factories elsewhere; which means the public expenditure on infrastructure will be wasted, and the overall efficiency of the economy will be reduced, benefiting no-one.

But it's worse than that. One of the problems Scotland now has is the overgrazing of steep hillsides, leading to loss of scrub, loss of topsoil, downstream flooding, degraded landscape and further problems. A land tax ought to discourage people from over-exploiting marginal lands. But under land value tax, valley lands, closer to public roads, will be taxed more, and hill lands taxed less, giving an incentive to farmers to move from lands which are suitable and convenient for grazing, but are taxed, to lands which are less suitable and less convenient but are not. In other words, land value tax will inevitably contribute to the further over-exploitation of marginal lands.

So is there a better solution? Of course there is.

A flat land tax - the same tax levied on every hectare of Scotland - would make it uneconomic to own marginal land. Landowners would not want to pay the tax, so the land would revert to common. Of course that raises the issue of the management of common lands, but I suggest that should be a matter for local community councils. At the same time, it would relatively subsidise - because tax far less - the economic use of land in which we the public have invested by providing infrastructure. Both those things are wins, and the reversion of marginal lands to common seems to me a very big win. It's also extremely cheap to collect. We know who owns every hectare of Scotland, so we know who owes exactly how much tax. Furthermore, as, if tax is not paid, land reverts to common, there's a very big incentive for landowners to pay the tax. The cost of collection would be minimal. Relative to land value tax, it's a very much better solution.

However, the flat land tax does not address the issue of large holdings. Fortunately, income tax already provides us with a model for how to deal with this. If you have a small amount of income, you currently pay a small proportion of tax on it. If you have larger income, you pay proportionately more. The same principle should apply to land tax: a larger holding should be taxed more per hectare than a smaller one. I've suggested, as a mechanism for this, an exponential land tax, because I think having a continuous scale (rather than the stepped one we currently have with income tax) produces fewer quirks and anomalies. But in any case, if larger holdings are proportionally more heavily taxed than smaller ones, there's a positive fiscal incentive to break up larger holdings into smaller units, and that's precisely what land reform ought to be setting out to achieve.

Of course neither of these proposals handles the issue of the undeserved windfall profits which acrue to a land owner when, for example, a road is built or planning permission is granted. I agree that there is a case in good old fashioned equity that that windfall profit should be captured for the public purse. I agree that the land value tax provides a mechanism for doing that. There are virtues in land value tax, I'm not denying it.

But it does not promote land reform, and those of us seeking to promote land reform should not allow ourselves to be side-tracked.