Wealth inequality is skyrocketing and the housing market is out of control. It’s time to tax the land.

Luke Murphy writes that wealth inequality, a poorly functioning housing market, an economy focused on unproductive investment and macroeconomic instability are all negative consequences of our current treatment of land within the UK economy

September 27, 2018 · 7 min read
Kensington & Chelsea. Photo by Tahir Hashmi (Flickr)

The UK economy is not working for everyone. As IPPR’s Commission on Economic Justice landmark report found, the UK’s economy is failing to produce sustainable prosperity for all its citizens. A key driver of this failure is land.

Land has long been regarded as a unique factor of production – alongside capital and labour – on the basis that economic activity requires all three. Because of land’s unique characteristics – it is immovable and fixed in supply – an increase in demand for land tends to drive an increase in its price rather than in its supply, unlike other forms of capital. This means there is a much greater propensity for the price of land to rise through no effort on the part of the individual who owns it. Landowners are therefore much more likely than owners of other types of capital to benefit from what is called ‘an economic rent’ – a financial return that they did not earn.

Classical economists such as David Ricardo, John Stuart Mill and Adam Smith recognised this, and that highly concentrated landownership leads to rentier behaviour and a whole host of economic and social problems. But it is a lesson we appear to have forgotten.

Land now represents over half of the UK’s total net worth. At £5trn, it is worth more than all the homes, commercial property, machinery, equipment, and all other non-financial assets in the UK  – combined. In 1995, the value of land held by households, largely which is beneath people’s homes, made up a fifth (£600bn) of UK households’ net wealth. Today, it has risen had risen to over two-fifths.

However the wealth held in land is unequally held across the country. The top 10 per cent in the UK own property wealth averaging £420,000 in value, compared with the bottom 30 per cent who have no net property wealth. The total value of housing stock in London is now greater than the housing stock of all of Wales, Scotland, Northern Ireland and the North combined. But the vast majority of housing wealth – 70 per cent – is held not in the property itself, but in the land that lies underneath.

The soaring cost of land is also a driving force behind England’s broken housing market. In 1995, the price paid for a home was almost evenly split between the value of the land and the property, but today it has risen to over 70 per cent. Since the most significant cost involved in building a new home is the land it sits on, the price of a new home is driven by the cost of land, and the high cost of land makes it more expensive, difficult and risky to build homes at affordable prices. This then reduces the rate at which new homes are built.

Land also plays a key role in the UK’s woefully poor productivity. Due to the excessive returns that can be gained from land, banks now direct far more of their lending to real-estate loans (over 78 per cent of all loans to non-financial UK residents). The sheer scale of the credit directed at land and property has driven up the price of land, rather than increasing the productive capacity of the economy, or raising wages or GDP growth.

To tackle these issues, we need to get serious about tackling the underlying causes, and one of the ways to do that is through a land value tax. Taxes on land have long been favoured by economists. Because it is fixed in supply and hard to avoid, it – and the economic rents it earns – can be taxed without distorting behaviour. However, the main taxes on property and land in the UK – council tax, stamp duty land tax (SDLT) and the national non-domestic rate (business rates) – are abjectly inadequate to the task.

Council tax is highly regressive and is still calculated on the estimated value of homes in 1991, leaving those whose homes have gained most in value since then significantly under-taxed. Business rates do not apply to undeveloped land, creating significant distortions in the incentives to hold and develop land. Stamp duty adds undesirable friction to the property market and makes home ownership more expensive, especially for those on low incomes. None of these taxes adequately capture increases in land values, including those which occur when planning permission is granted.

A land value tax is based on two principles. It taxes the value of land, not the property standing on it. And the value of the land is calculated based on its ‘optimum use’ under existing planning permission, not its current use. These principles confer several advantages over the taxation of property, such as our current business rates. By taxing undeveloped land based on its use value, it penalises those who hold land without developing it, and incentivises development.

IPPR has argued that the government should introduce a land value tax to replace business rates. It would support, rather than deter, productive investment; it would capture some of the unearned windfalls from the ownership of land; and it would reduce incentives for further speculation. It would also help rebalance the economy geographically, making disadvantaged regions with lower land values more attractive locations in which to do business. Introducing a land value tax for commercial land offers offers particular benefits because the value of a property is excluded from the valuation of the land, it does not penalise those businesses which improve their properties, as business rates do today.

We have also argued that the government should consider replacing council tax, and eventually stamp duty, with an annual property tax which would be far more progressive than council tax. It would also effectively capture increases in land values and house prices in a way the current system does not.

Wealth inequality, a poorly functioning housing market, an economy focused on unproductive investment and macroeconomic instability are all negative consequences of our current treatment of land within the UK economy. A land value tax, and a more progressive domestic property tax are essential to securing an economy that produces sustainable prosperity for everyone.

Luke Murphy is the author of ‘The Invisible Land: The hidden force driving the UK’s unequal economy and broken housing market’ and is an Associate Director at IPPR. He tweets @LukeSMurphy

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