Should we tax housing more? An alternative argument for land taxes

Supporters of a Land Value Tax (LVT) usually argue on the basis that land is either morally or economically special. I disagree with both of these contentions, as once land is owned it has effectively the same moral and economic features as all other forms property.

Nevertheless, I will present an alternative argument for placing additional taxes on residential land in a country with planning rules such as those found in the UK.  This is because in the UK land use and development restrictions reduce the stock of housing available.

The green-belt is the primary example of such restrictions, but other planning restrictions also play their part. After all, we would expect in a highly urbanised country to have less spread-out suburban housing and more high-rise accommodation.

I am not against these rules and restriction (though perhaps the precise extent of things like the green-belt should be reconsidered from time to time).  After all, we all value our heritage, countryside and desire a pleasant urban environment. There are disadvantages to US Sprawl and the Hong Kong high-rise. However, it is important to be aware of the impacts of such building restrictions, which is a reduction in living space.

Put simply, the policies increase the cost of housing—one of the reasons housing is so expensive in the UK. Those who do not own urban land are made additionally worse off and those who own urban land are better off than they would otherwise be. Non-owners have to pay more for where they live, while owners will have more valuable land at their disposal. These are extreme distributional consequences and we need to consider ways to ameliorate the effects of them on those who are worse off as a result.

This creates an additional argument for taxes on land because the value of the land to those who own it is increased and those who do not own land in urban areas will have to pay more than they would. The tax would attempt to redress the imbalance, and perhaps encourage more effective land use.

One immediate complaint against a land-value tax (that I have made myself) is that people have bought and sold land at prices that take account of the policies above. If someone has just paid a huge amount for a house they have a good cause for complaint – they paid a large amount and now they have to pay an unanticipated tax as well that.

In an ideal world, therefore, a tax on realised land profits would be more appropriate. Taxing the capital gains on primary homes (as any other houses are, in theory at least) would do something to ameliorate the distributional imbalances between home owners, and do so in a way that was targeted at the real winners from land value increases. However, it does not provide much incentive for people to make more intensive use of the existing stock.

A more progressive housing tax could therefore also be an important tool, albeit not at the kind of rates that Land Value Tax proponents would tend to desire. Revaluing the council tax in order to add more bands, or imposing an additional mansion tax, are therefore potentially justified as a response to the distributional impacts of development restrictions. It would hopefully discourage people from taking up a lot of space and thereby free up more space for others. Even if it did not have such strong behavioural effects it would at least raise tax revenues that would be spent in a progressive manor that would compensate some of the losers from development restrictions.

I think that this argument should have some traction even to those who do not believe that land has any special moral or economic properties with tax implications. It even appeals to those with a strong (but qualified) belief in the free-market as the restrictions on the free-market are the reason for needing a correction.