The failure of the land value tax in the UK

From the article:

Britain in the early 1900s became a case study in how administrative complexity can derail land value taxation. The tax cost more to administer than it collected, and it was so poorly worded that it ended up becoming a tax on builders’ profits, leading to a crash in the building industry. As a result, David Lloyd George, the man who introduced the taxes as chancellor in 1910, repealed them as prime minister in 1922. The UK has never fully reestablished a working property tax system.

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Not all countries failed as spectacularly as Britain, dooming not only the land value tax itself but also the existing property tax system it replaced, but few countries have successfully implemented a land value tax. Most countries that claim to have land value taxes, like Australia and Taiwan, exempt the two biggest uses of land: agriculture and owner-occupied housing.

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Following landowners’ mass defection from the Liberals in 1886, the Liberal coalition was able to unite around land value taxation. Land value tax fervor became increasingly dominant on the party’s left and among the grassroots, in part because of its potential as a tool to weaken the power of their political enemies, the large landowners, and in part to fix the growing crisis of local government funding. Starting in 1888, party conference attendees passed successive proposals for land taxation, leading to the inclusion of a land value tax proposal in the Liberal Party’s 1891 Newcastle Programme.

Although Britain already had two property taxes – an income tax, which included rental income, and a property tax with rates for residential and business properties – they appeared to be unable to cover local governments’ obligations.

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In 1900, three quarters of funding for local government activities – poverty relief, the police, education, and sanitation – came from taxing rental income. Since urban rents added up to about 10 percent of GDP at the time, this meant that one tenth of the economy was responsible for financing almost the entirety of local authority budgets. Property, and those who occupied or rented it, thus bore the brunt of the tax burden, paying around one third of the nation’s taxes compared to one tenth today.

Relying solely on property taxes might have been fine if local governments had only been responsible for investments that raised local property values. It was not uncommon for private landowners to build infrastructure, establish sanitation services, and run private security for their neighborhoods using the income they made renting out flats or selling leases. This method enabled the initial building and gradual intensification of the central London estates of Mayfair and Fitzrovia. Indeed, many cities around the world today fund their education, sanitation, and infrastructure from locally collected property taxes. In the US, the average state’s property tax revenue is around $2,000 per capita, similar to the revenue raised by local income taxes.

The problem for British local governments in the twentieth century was that they were also responsible for welfare benefits. Wealthier areas could easily afford the necessary taxes to support their small numbers of poorer residents. But poorer areas in the inner cities found this an increasingly difficult burden.

In urban areas, working-class households spent as much as one third of their income on rent. This included approximately seven percent of their income on rates. Meanwhile, upper-class homeowners with incomes of £1,000 or above could expect to pay around seven percent of their income in total on both rents (or mortgages) and rates. Poorer households therefore paid a much higher share of the property tax burden relative to their income.

The situation deteriorated during the 1890s and early 1900s, paradoxically due to a large expansion in the housing supply. The electrification of London’s railways and trams enabled further suburban expansion and a significant increase in housebuilding. Better-off working-class families moved to the suburbs, leaving poorer areas with an even larger relief burden. Rates rose between 30 and 50 percent in all districts of inner London between 1891 and 1901. A typical increase in rates, which was recorded in boroughs like Stepney and Camberwell, was from 6 shillings to 9 shillings per pound. This coincided with a sharp economic downturn beginning in 1905 that caused unemployment in urban areas to skyrocket to double digits, which only increased the pressure on local governments in cities and the ratepayers who supported them.

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There were close to ten million properties in the country that needed valuing, and for the majority of these properties, the land and structure had been traded together, meaning that there was no distinct market valuation of land to draw from. What’s more, in line with Georgist theory, the tax was supposed to credit owners for improvements they made to the land. But this meant calculating several hypotheticals, many of which had never been measured or recorded, including building and structure value and value contributed from plumbing, access to railways, and other infrastructure contributions.

The process was beyond the capacity of the government. In August 1910, the Liberals sent out 10.5 million copies of the notorious ‘Form 4’, which required owners to submit specific details on their income and the use and tenure of their properties. It also required them to estimate the site value themselves. Failure to return the document carried a fine of £50, about £7,500 in current prices.

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A common Georgist view was that property speculators hoard urban land, and land taxes would force them to develop it. In practice, the exact opposite happened. The additional taxes simply reduced builders’ profits and forced many to reduce production. The new taxes also devalued building land, leaving housebuilders with devalued collateral for their loans, which threatened to bankrupt many of them. As a result, instead of rising, building rates cratered, falling from 100,000 in 1909 to 61,000 in 1912.

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In the end, the outbreak of the First World War put the final nail in the land value tax coffin. In 1916, Asquith was replaced as prime minister by David Lloyd George, and the Liberal party split, with Lloyd George leading a coalition between the Conservatives and Liberal MPs loyal to him until 1922. The Conservatives were still opposed to the land value taxes and Lloyd George was not prepared to defend their continuation given their abject failure before the war. The valuation, frozen during the war, was formally ended in 1920, and the remaining land taxes were abolished by Lloyd George himself in 1922.