After wasting the opportunity to make transformative change after the financial crash, a perfect storm of high house prices, decentralisation and modernisation is presenting another one. It is forcing us to think about what types of institution we want society to have, how we raise funds for them and who should manage them.
And this thinking should take centre stage in upcoming elections. A forward looking and modernising candidate for the Labour leadership or London mayoralty should by asking these tough questions. Whatever type of institution we want to form—or reform—it needs to be run differently. It needs to have a much larger local and regional perspective.
Is the current tax system fit for purpose? Indeed how can decentralisation really work without greater revenue raising powers at the local level? Is retaining only council tax and half of business rates really suitable for local areas in a decentralised world?
But while the decentralisation desire has forced politicians to sit up and listen, another question should be asked: is the current tax system fit for purpose? Indeed how can decentralisation really work without greater revenue raising powers at the local level? Is retaining only council tax and half of business rates really suitable for local areas in a decentralised world? Spending money is only ever one side of the issue—raising cash is crucial.
Maybe the tax system as a whole is facing a crisis. Is income tax really the best way to contribute to funding those modern institutions? Is council tax—a charge on the value of the property (based on 1991 values) paid by the occupant—really the best way to contribute to local services? Are the plethora of other taxes—the overwhelming majority of which go straight to HM Treasury—efficient and do they still serve a purpose for the future?
There is no better place to develop this thinking than in London. London should absolutely push for more powers. And as such push for more revenue retaining powers. It is a global city with global demand. And while this brings opportunities, it also brings higher prices—particularly in house prices, residential rents, business rents and transport costs.
Indeed, house prices are now 40% above the pre-crash peak meaning you have to be richer and have help from home to get on the ladder. In turn, this has attracted investors to sink their money into property in London as the returns are high without having to do any work. Effectively wealth is privately captured by capital investors (or heirs to land) as they cash in on desirability and public investment into services. It is precisely this unearned wealth a modern society should take its share of in order to fund the institutions we want to build.
A London Land Levy would replace a variety of existing taxes in London with a single tax on land value* with the revenue going to a central body such as the Greater London Authority. Effectively, it captures a proportion of that wealth that is created through public investment in order to fund services.
Currently, London boroughs can retain revenue from one and a half taxes—all of council tax and up to 50% of business rates. The revenue this generates is £3.5bn and £3.3bn per annum respectively across all boroughs. To estimate the level at which a levy on land would generate the same revenue, I have calculated the total value of property (private homes at full market value, social homes at 30% of market value, commercial property at full market value at existing use) as a proxy for land cost*—this comes to £1.8 trillion (or £1,800bn).
This therefore means that in order to replace all of council tax and half of business rates, the average levy (charged to the owner) on London land per year is 0.4%. With this, we can scrap one and a half taxes in London.
But the story doesn’t finish there. Depending on what revenue raising powers London gets (and how far we push reality), we could throw in more taxes that could be replaced by the London Land Levy. Let’s hypothetically add in the other half of business rates and add in stamp duty, inheritance tax and capital gains tax. We could effectively scrap the bulk of property taxes in London for an annual levy on land of under 1%.
How about one more stage? Let’s add income tax on to the London Land Levy too. When we do this, we are more comprehensively shifting the burden of tax from earned income to unearned wealth. As it can be seen, we’d need a London Land Levy of under 3% to cover this cost too.
Of course, there can be exemptions—you could exempt any land that has sub-market homes on. Or exempt charitable or community institutions or community land trusts. Or, instead of exemptions, you could enforce the charge but then ensure they get a public grant to reimburse them—i.e. it won’t cost those owners revenue but it allows the state to actively and consciously decide what should receive public money. Of course, in these situations, there would be a higher tax charged on all non-exempt land in order to fund it.
Moreover, making the London Land Levy progressive is vital. The rates can vary by area or zone and the charge would only be on the owner (who can’t hide land in an offshore account). And there are huge gains to be had from capturing value more widely, improving the efficiency of land and increasing density where possible.
There is a real opportunity to develop these ideas in order to reshape our society. Of course there is a lot of detail to sort out—land valuations, time periods, exemptions for asset-rich but cash-poor households, how the planning system will work alongside a new market incentive, behaviors and price changes, to name a few. But the debate on shifting away from taxing earned income and towards unearned wealth is worth having.
It is bold and potentially one of the most transformative.
* Strictly I am only interested in land value as I don’t want to tax and therefore deter someone improving their property but I use the property plus land price as a proxy here for ease.
Source: Comment Today by Joe Sarling | Jun 18, 2015
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