A green land value tax (LVT) can resolve conflicts among meeting climate goals, equity and housing affordability, while reducing intergenerational injustice.
Land prices, reflected in house prices relative to incomes, are near all-time records, pricing younger citizens out of home-ownership and affordable rents. The OECD confirms that annual property taxes linked to recent market values can improve macroeconomic stability and boost long-run growth. The green LVT – effectively a split-rate property tax – would consist of a charge on the land plus a charge on the building minus a discount depending on its energy usage. Regular revaluations discourage speculation and avoid cliff-edge changes. To protect cash-poor but land-rich households, everyone would have the right to defer the tax. To avoid complex interest charges, the tax authority would register a proportionate claim at the land registry equal to the unpaid tax for each year deferred, settled upon the property’s transfer or sale.
In research for his paper, INET Oxford's Professor John Muellbauer found that in the UK, on average, over 70 percent of the value of homes is in the value of the land. This is higher and with a greater rise since the 1980s than in any other G7 country. He also uncovered a major error in Canada’s estimates of housing wealth, now acknowledged by Statistics Canada. This had the effect of grossly overstating the 1990-2000 rise in housing wealth. This matters because it would have led the Bank of Canada to seriously understate how lower interest rates transmit, via housing wealth, into higher consumer spending, and could have led to policy errors.
The paper reinforces the argument of our Resolution Foundation paper Muellbauer and Soskice, 2022 that policies of the 1980s on financial regulation, land, property tax and housing have left a long shadow. They help explain the UK’s low saving and investment rates (balance of payments deficits every year since 1984). I argue that the record rise in UK land prices means that the benefits of economic growth disproportionately accrued to landowners and the financial sector, and diverted entrepreneurship into rent-seeking and overcoming land constraints. A spate of recent international studies, highly relevant for the UK, confirm crowding out of more productive investment in credit-fuelled real estate booms.
In series of talks this year at HM Treasury, the Department for Levelling Up, Housing and Communities, The Royal Society of Edinburgh, the All-Party Parliamentary Group for Land Value Capture and the Money, Macro and Finance Conference, Professor Muellbauer has been able to expand on these themes and discuss policy implications. One of these is to empower land value capture, where society –the tax payer- gets more of the benefit of the uplift of land values from planning permission or public investment, on which I also collaborated with the Oxford Civic Society. This requires repeal of the 1961 Land Compensation Act, which gave landowners exorbitant privileges unlike those in other countries, and a change in fiscal rules away from gross government debt to net value, including land in public ownership. The two other policy implications are reform of the planning system and of property taxes in the direction proposed in his OECD paper.
Read the full paper in Chapter 6 of the OECD publication Bricks, Taxes and Spending (oecd-ilibrary.org)