The Case for a Land Value Tax in Wales

Dr Rhys ap Gwilym is Senior Lecturer in Economics at Bangor Business School and a member of the welsh agenda Editorial Board

The poorest nation in western Europe needs to implement some transformative economic policies if it is serious about making up ground on its affluent neighbours. Here’s one proposal for such a policy.

From April 2019, the Welsh Government will have some influence over income taxes. At first glance, the powers that will be devolved appear to be very limited. The UK Government will continue to determine the overall architecture of the income tax system – the size and scope of tax-free allowances, the number of different bands of tax rate and their thresholds will all continue to be determined in Westminster. The powers that the Welsh Government will gain roughly equate to those that the Scottish Government have held for the past 18 years, and have chosen not to utilise.

Most of the discussion to date around how, and whether, the Welsh Government should exercise these new fiscal powers has focused narrowly on the revenue-raising implications of changing income tax rates in isolation (see, for example, here).These debates, however, miss the biggest opportunity that the (albeit limited) devolution of income tax powers presents – the opportunity to radically alter the tax mix in Wales.

We need to remind ourselves that the Welsh Government already, somewhat indirectly, has the power to tax property. When the UK Government imposed freezes on Council Tax in England between 2011 and 2016, the Welsh Government did not follow suit. Furthermore, under the Wales Act (2017) “local taxes to fund local authority expenditure (for example, council tax and non-domestic rates)” are explicitly excluded from the UK Government’s reserved fiscal powers. Given that a quarter of the Welsh Government’s budget currently passes directly to councils, there will clearly be scope for the Welsh Government to reduce the Welsh Income Tax across the board and make local services more reliant on local taxation. The key, of course, is that this local tax must be more efficient, more equitable and more progressive than those taxes which it replaces.

The clear candidate for this tax is a Land Value Tax, which taxes the ‘unimproved’ value of land – the value of the land, but not of any buildings that may occupy it. Such a tax is efficient because it does not distort economic incentives. The supply of land is fixed, and cannot alter in response to changes in the tax rate. Whilst income taxes disincentivise paid work, sales taxes discourage consumption and corporate taxes deter investment in enterprise, a Land Value Tax cannot alter the amount of land that is available.

In terms of equity, the Land Value Tax wins again. The value of land (as opposed to buildings on the land) is rarely dependent upon the actions of its owners. It is driven primarily by two factors – how easy it is to access various amenities from the land, and what the land can be used for. Both of these factors are determined by the actions of wider society, rather than the actions of the land owner. If we look back at the way in which land values have increased over the last half-century, it is impossible to justify why that increase in value should have been captured exclusively by the landowning classes, and disproportionately by the wealthiest amongst them.

In common with income tax, but in contrast to other wealth taxes and corporate taxes, a Land Value Tax has the advantage of being difficult to avoid or evade. Land ownership is clearly defined and a comprehensive register of ownership already exists. The valuation of land is not without its complexity, but it is an area where there are already well-developed methods and expertise.

Economists of all political hues favour the Land Value Tax because it’s efficient and difficult to avoid – Adam Smith, Henry George, Milton Freedman and, more recently James Mirrlees have all been proponents of a land tax. Some of us also like it because it’s progressive, it raises more revenue from the wealthier in society.

Given the advantages of a land tax, the natural question to ask is why so few states have attempted to implement one. The answer is relatively straightforward – that the initial implementation of a such a tax has potentially significant redistribution effects. There is a significant one-off cost to landowners as the introduction of such a tax will precipitate a fall in land values; and in most countries landownership is highly concentrated and landowners have a powerful political voice. This is where Wales has an advantage. Not only is landownership less concentrated, but the big landowners have less political clout in our young democracy than in the more established corridors of power in Westminster.

So here’s my proposal for a radical reform of the Welsh tax system that complies with the post-2019 devolution settlement, is revenue neutral in the short-run (of course, the efficiency of the Land Value Tax is likely to drive faster economic growth and hence higher tax revenues over time), and is more progressive and more efficient than the status-quo:

1. Set the Welsh Income Tax at zero.

2. Reduce the transfer from the Welsh Government to Councils correspondingly.

3. Get rid of the current regressive Council Tax.

4. Get rid of the current iniquitous Business Rates.

5. Replace both of these taxes with a Land Value Tax.

6. Introduce a fiscal compact which reallocates locally raised taxes from affluent Council areas to poorer Council areas on the basis of need.

[Here’s a quick back-of-the-fag-packet evaluation of the proposal: Poole et al estimate the ‘Welsh share’ of income tax receipts in 2014/15 at £1.877bn. Council tax and business rates receipts in 2014/15 were £1.277bn and £0.854bn respectively. A new local Land Value Tax would, therefore, need to raise in the region of £4bn. This is twice as much as current local taxes, but still covers less than 75% of council spending (the remainder would continue to be funded via a transfer from the block grant – at present over 60% of council revenues come from this source). Under these proposals, the Land Value Tax represent a relatively modest 17% of total tax revenues in Wales.]

This is a proposal which should be able to gain support from across the political spectrum. For those who want to see work pay, the reduction in income tax is a clear strengthening of the incentive to work. For those who are concerned about inequalities in society, a land tax is not just progressive, but it also represents a significant shift in economic power. The concept of land as a common good from which all of society should benefit becomes enshrined in the tax code, and it is society as a whole that benefits from increases in the value of land. For those concerned with the right of self-determination of our communities, a locally implemented land tax redresses the democratic deficit by returning the control of land to local democratic accountability.

To quote the most notable advocate of a land tax, the 19th century American political economist Henry George,

There is danger in reckless change, but greater danger in blind conservatism.

April 2019 provides an opportunity for the Welsh Government to reject blind conservatism by implementing a change that is radical but far from reckless.