How a land value tax could solve many economic headaches
Opinion: the introduction of a Land Value Tax would force people to be efficient with their use and ownership of land and help alleviate many of the Irish economy's current woes
How do we solve the housing crisis? Ask the average person and they’ll say ‘build, build, build’. Urban planners are saying we need higher density and they argue this can be achieved without towers in the sky. They detest urban sprawl, describing it as a cancer on communities, identities, and the liveability of urban areas. They point to the plentiful areas of unused and vacant brownfield sites and are protesting to government to sort out land hoarders.
The Minister for Housing says we need to build upwards and remove height restrictions in Dublin. The millennial generation are looking for assistance on rent and housing affordability associated with the rise of expensive cities. The suburbanites suffering from the leapfrogging planning policies between cities and counties of the Celtic Tiger era are shouting for transport improvements and greater connectivity. And, with the rise of urbanisation, rural areas are saying do not let rural Ireland die.
It really is a problematic time and a period of roundabout policy-making. With population increases forecast for the next 30 years and the overwhelming importance of cities in driving future growth, these problems will get bigger. But no one person is responsible and the underlying incentive model is broken.
The problems being created in our modern economy due to the misalignment in our underlying tax system need not continue
Taxes act as disincentives to productive activities. Income tax is a disincentive to be productive, VAT is a disincentive to sell and buy and stamp duty is a disincentive to buy assets. Capital gains tax is a disincentive to sell assets, while property tax is a disincentive to make home improvements.
But a tax which has been introduced in a small number of countries which does not tax productive acts fails to get a look in. Milton Friedman referred to land value tax (LVT) as the least bad tax and the tax is one which most economists favour in sorting many of our problems.
The benefits from rising land values are currently being captured by land monopolists that arise primarily from the community development around them. For instance, there are stark differences between location costs for individuals and firms in Dublin, Waterford, and Kerry. The most expensive house last year sold for €8.4 million on Shrewsbury Road in Dublin 4. Purchased in 1987, it was reported that this eight bedroom property with an outdoor swimming pool required a lot of investment to bring it up to the standards of other properties in the area.
The bricks and mortar of that house would not have changed considerably in that period. It does not cost millions to maintain a house like this over a thirty year period so most of the cost to the new owners is the land value of its location (in 2007, Shrewsbury Road was the sixth most expensive street in the world).
Most of this is down to speculation, the investment by taxpayers in local transport and amenities, the general community development in Ballsbridge and the agglomeration effects of firms and populations to Dublin, which makes the central location of Ballsbridge highly sought after. Hence, everyone should benefit from this value capture and not just the owners. This is the principle of land value tax.
Consider the 0.9 acre plot on on Shrewsbury Road that went on sale this year for reportedly €10 million, with planning for seven houses. To date, this would have escaped property tax.
But LVT would cover every piece of land that has productive potential on the island of Ireland (including agriculture) and would replace the present property tax. It would have no impact on most people, but would bring unused and under-utilised land, such as the Shrewsbury Road plot and other inefficient land uses, into the net and ensure land is employed for its best use.
LVT’s introduction and application to all activities on land would shift the underlying incentives of the system and help solve many of our present problems. Each site would be taxed on a proportion of the current annual rental value of the land. Obviously, this would be low for agriculture and higher for businesses and residents. With an effective rate, less tax would need to be collected on the productive improvements made upon sites in terms of labour, VAT, corporation tax, and so on. This shifts resources from unproductive to productive activities.
People will be forced to be efficient with their use and ownership of land. Marginalised, more rural areas would benefit as the value of land in rural areas is much lower and residents here would benefit by reductions in other taxes. In effect, it would stimulate economic activity away from the centre and provide natural subsidies to those in rural areas and where it is needed most - farmers and people dependent on rural communities should certainly not fear the LVT.
The Land Value Tax is one which most economists favour in sorting many of our problems.
Over time, a gradually increased LVT rate would replace the need for stamp duty, capital gains taxes, property taxes and business rates. This would reduce the bureaucracy associated with tax collection, with the added bonus of less evasion in our tax system. Remember that it is not possible to hide land.
There are also many other benefits. Urban planners will not be able to point to vacant brownfield sites as they should disappear so urban sprawl will be reduced.
Most importantly, it is also fairer. Our current system enables land monopolists the opportunity to capture enormous rental value from the productive activities of others, particularly in cities with the competing demands of land for living, working and leisure. The problems being created in our modern economy due to the misalignment in our underlying tax system need not continue. Time for change?