lördag 24 mars 2007

Local Government Funding Reform - ignorance or cowardice?

The Lyons Inquiry into local government finance, which reported last week, is probably the most thorough since the Layfield Inquiry which reported in 1976. Submissions were made to Layfield, putting forward the case for land value taxation (LVT) but the final report argued that LVT was incompatible with the operation of the Development Land Tax (which was repealed a couple of years later). This cleared the way for LVT but the mental blockage remained.

And now another Inquiry has produced its report. LVT advocates have made their submissions, and were invited to give oral evidence. And this is what Lyons has to say on the subject.
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Chapter 6 (funding reform):-

Taxation of economic rent
6.42 Most economists would agree that there is a strong case for levying taxes on land. Land is in fairly fixed supply, and much of its value will therefore be what economists call ‘economic rent’, which can be taxed without altering the incentives to use the land. The fact that much of the value of land is the result not of the actions of the owner, but the activity and investment of the wider community – for example, by providing transport connections, desirable schools or accessible markets – makes the case for such taxation even stronger. Taxing only the value of the land, not the use to which it is put, or the buildings and other improvements constructed on it, could also ensure that there is no distortion created by the tax system between the types of activity that might be undertaken on the land.

6.43 Land value taxes have been proposed on a number of occasions in the past, perhaps most notably in the Budget of 1909, because of these advantages. A number of groups, from the Land Value Taxation Campaign to the British Retail Consortium, supported the idea of a land value tax in their submissions to the Inquiry. For example, the BRC argued that:

Land Value Tax (LVT) has a number of advantages. These include not distorting behaviour in the same way as taxes on income and profits do, LVT’s potential effectiveness in incentivising the efficient use of land (as all land would incur a charge even when it was not being used for productive activity) and taxing land values could also enable local governments to profit from some of the increase in value as a result of a prosperous local economy.

6.44 There are also some arguments in favour of taxing the property built on the land, as well as its basic value as land. In general, taxes should be applied to as broad a base as possible in order to reduce the tax rate needed, and thus the potential distortions created. Taxing the value of improvements as well as land values can help to expand the size of the property tax base, and a number of land value taxes used around the world actually levy a tax on improvements for this reason. On the negative side, however, the taxation of the value of property as well as the land value could distort activity by discouraging investment in development and improvements.

[footnote Economic rent is a complex economic concept and definitions vary. Broadly speaking it means the difference between the return made by a factor of production (i.e. land, labour or capital) and the return necessary to keep the factor in its current occupation.]

Chapter 8 (reform of the Business Rate):-

8.15 Chapter 6 showed that other stakeholders have called for the replacement of business rates with tax on land values. As noted there, land value taxes have some clear theoretical advantages. Nevertheless, given that business rates already have some of the attributes of a land value tax, strong arguments would be needed to support a wholesale change. A consideration against the principles of a land value tax can help to suggest areas for reform and suggests that reform, rather than replacement, is the most pragmatic approach.

8.16 One significant difference between business rates and pure land value taxes are that business rates are a tax on property as well as land. As noted in Chapter 6, the taxation of property can have some distorting features, but it increases the width of the tax base, which enables a lower tax rate to be charged (and in practice many land value taxes in other countries include at least an element of tax on property for precisely this reason). Another difference is that business rates are a tax on current use value, rather than the optimum use of the land, which potentially means that they do not provide the same incentives for underused property or land to be redeveloped for another use. To change this would be a substantial alteration in the principles of business rates as they currently stand.
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Thus, paragraph 8.15 indicates that Lyons regards LVT as something of a Gold Standard against which any other taxes should be judged. But later on in Chapter 8, Lyons discusses the possibility of taxing agricultural land and brownfield sites and identifies the problems in implementing this under the present Business Rate system. He doesn't notice that under an LVT system, brownfield land would be taxed at its current permitted use value, thereby dealing with the problem. Nor, incidentally, does he discuss the distorting effect on land use caused by having land in different uses taxed at different rates. Nor again, does he mention the role LVT could have as a replacement for planning (section 106) agreements and as an alternative to the Planning Gain Supplement, which will repeat the mistakes of earlier failed legislation. Nor, under the discussion on Business Improvement Districts, does he appreciate that LVT is a simple, effective and fair mechanism for recouping the cost of infrastructure and local initiatives, as these are reflected in enhanced land values.

The point Lyons makes about taxing buildings as a way of enlarging the tax base is plain wrong, as the tax base is reduced due to the loss in tax base from underused and hence undervalued sites; in any case, people are concerned about the total bill.

In other words, Lyons accepts the case for LVT, can find no substantial argument against it and then walks away. Stupidity, moral cowardice, or what? Since many of the recommendations made by Lyons are flagged "in the longer term", why did he not include LVT amongst them?

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