Britain’s reputation as a rentier economy on the global stage continues to solidify with Chancellor Hunt’s decision to soak the productive wealth creators with higher taxes without going after the property hoarders and unproductive wealth extractors. Examining ways to tackle unproductive rent-seeking behaviour is crucial to rescue the British economy from its managed decline that has defined the last decade and will likely continue under this government. The Land-Value Tax aims to achieve just that. Described as the ‘least bad tax’ by Milton Friedman, is taxing property fairer – and most importantly, likely to promote long-lasting economic growth?
Income Tax Failure
Income taxes and National Insurance taxes are levied in the UK on the productive, wealth-creating population. Those on higher salaries tend to add more value to society (hence the higher income) – although, this isn’t an absolute rule for all professions (think NHS middle management and accountants). As such, encouraging individuals to take entrepreneurial risks to boost their income and take-home pay is vital to ensure productive potential growth within an economy. Capitalist economies rely on innovative individuals to establish goods and services that benefit the rest of society. Unfortunately, income taxes and other taxes that are levied on the working population distort this reality. In many cases, high-income taxes create a disincentive mechanism whereby risk-taking and entrepreneurialism are discouraged.
More fundamentally punitively high taxes cause individuals to deliberately reduce their working hours. The marginal utility gained from additional income becomes less than the marginal cost of working more hours with a larger government wedge cutting into your pay. The NHS is a prime example of this. Consultants and GPs earning around the £100,000 annually restrict their working hours to avoid falling into the £100k to £125k tax range, due to the 60% marginal rates levied on this. Over three quarters of GPs in 2019 reduced/intended to reduce their working hours due to tax changes that made doctors paying more for additional work.
As a result, the NHS plugs this gap by hiring more doctors and consultants than necessary – to compensate for existing staff who are working fewer hours than they would otherwise be able to. In 2015, around 20% of NHS staff were consultants. This far exceeds that of healthcare systems in the rest of Europe and Asia, leading to huge waste and inefficiencies that could instead translate to better quality care.
The Laffer curve best illustrates this phenomenon. Above a punitively high tax level, individuals opt for leisure over work – as exemplified by the GPs and consultants in the NHS. Since 2010, marginal taxes on high income individuals have risen substantially; Brown’s Labour hiked the top income tax rate from 40% to 50%, introducing the taper of the personal allowance that has contributed to the 62% marginal tax rate on earnings between £100k and £125k. When the top rate was cut from 50% to 45% in 2012, tax revenue from higher earners subsequently increased from £38bn to £46bn (far higher than analyst predictions that forecasted a fall) due to the more competitive rate driving more output and work.
Land Value Tax
Unlike income taxes, a progressive property tax doesn’t create inefficiencies and disincentivise work through the aforementioned substitution effect. A land value tax will redistribute wealth away from unproductive to the hard working wealth creators. Gains in income and productivity should be encouraged through a lower tax burden on income; at the same time, property hoarding and land speculation should be heavily discouraged – achieved through a land value tax. Property speculators and hoarders currently do not face substantial enough taxes to discourage this unproductive behaviour. This has created hundreds of empty industrial sites across the UK that could otherwise be used for housing as with the absence of comprehensive property taxes, these select interests can use property as a speculation vehicle – as a pose to benefitting the economy.
A Land Value Tax drastically reduces the failure of economic rents that plague the British economy. Land owners and speculators will be forced to sell surplus property that isn’t productive, freeing up land for housing and for small businesses that would benefit the economy. Similarly, the introduction of a LVT will allow for income taxes cuts, further encouraging productive work that adds to the economy while discouraging property hoarding and rent-seeking that detracts from the economy. In Pennsylvania, the introduction of a Land Value Tax in 1975 was a success. The number of vacant properties fell from 4,200 to fewer than 500 by 1982. Singapore’s high land value taxes enable income taxes to remain extremely low. By 2026, the top marginal tax rate on land will rise to 46%; the top marginal income tax rate remains at 22%. This further promotes the efficient use of land and resources, while encouraging individuals to be productive and add value to society.
The efficiency of a Land Value Tax cannot be understated. The burden entirely falls on the producer as the land supply is fixed. This means landlords cannot pass the Land Value Tax onto tenants as rents depend on what tenants are willing and able to pay. Unlike property taxes, land value taxes don’t discourage construction and property improvements, as the tax isn’t determined by how the land is used. This creates no deadweight welfare losses, with a LVT more likely to induce social benefits as land use improves and is allocated more efficiently.
Ultimately, the land value tax is a fairer and more efficient tax that would greatly benefit any economy. Unlike income taxes which distort the economy and reduce output through disincentives, land value taxes ensure land is used productively by discouraging property hoarders that deprive productive individuals and businesses of adding to society; land owners must remain productive to retain ownership.
Free Marketeer 