The Least Bad Tax on Wealth
The UK's public finances are in a bind. Ever-growing spending demands are squeezing the budget, forcing politicians to look for new sources of cash. Unsurprisingly, the popular idea of a 'wealth tax' is making the rounds again. The idea polls well because it sounds simple: find the richest people and tax their assets.
The problem? It’s a terrible idea in practice. Not because the wealthy shouldn’t contribute more, but because a traditional wealth tax is among the most inefficient and economically damaging ways to do it.
But what if there was another way? A way to tax wealth that is fair, efficient, and actually encourages economic growth? Enter the Land Value Tax (LVT). This is a classic idea with surprisingly radical roots, championed by social reformers and economists who believed that the value of land, a common resource, should benefit society as a whole.
Why a General Wealth Tax Fails
Let's quickly look at why an annual levy on total net worth is a bad idea.
Capital Flight: Wealthy individuals are globally mobile. Their yachts, art, stock portfolios, and private equity stakes can be moved to more favourable jurisdictions with the click of a button. A UK wealth tax risks an exodus of capital and entrepreneurs, shrinking the very tax base it targets.
A valuation nightmare: How do you value a private company or a vintage car collection every single year? The administrative burden would be colossal, creating an army of tax avoidance advisors and clogging up HMRC with endless disputes.
It Taxes Productive Assets: A wealth tax penalises the very act of creating and accumulating capital that fuels investment, job creation, and innovation. It taxes the factory, the startup equity, and the machinery of the economy itself.
In short, it’s a policy that has been tried and abandoned by most European countries that attempted it for the simple reason that it’s fiendishly complex and economically counterproductive.
A Better Idea: Tax the Land
A Land Value Tax is, in principle, elegantly simple. It is an annual tax on the unimproved value of land, and only the land.
It completely ignores the value of the buildings, renovations, or machinery on top of it. You could own two identical plots of land side-by-side in central London; one a derelict patch of weeds and the other holding a £500 million skyscraper. With an LVT, the tax bill on both plots would be exactly the same.
The principle is this: the value of a location is not created by the individual landowner. It is created by the community and the state. The presence of nearby Tube stations, good schools, a thriving economy, and a safe society is what makes a patch of earth in Mayfair worth millions. That value is created by the community. Proponents of LVT argue it's therefore the fairest and most efficient thing to tax.
The Good, the Bad, and the Practical
The Upside:
Hyper-Efficient: Land is the only asset that cannot be moved to Monaco or hidden in a vault. Its supply is fixed. Taxing it doesn’t stop anyone from working harder or investing in a business. As such, most economists agree it's the most efficient tax in the playbook.
It Kills Speculation: LVT makes it expensive to sit on valuable, underdeveloped land. The owner of a vacant lot in a city centre would face a significant annual bill, creating a powerful incentive to either build something productive on it or sell it to someone who will. This would discourage land banking and could significantly boost housing supply.
It’s Fair: LVT taxes unearned wealth. It falls most heavily on those who own the most valuable land, making it inherently progressive.
The Downside (The Trade-offs):
Valuation: The biggest hurdle is practical: how to separate the value of the land from the building sitting on it. While opponents say this is impossible, proponents argue modern data analytics and computer-assisted appraisals make this entirely feasible.
Transitional Shock: Its introduction would create winners and losers. Landowners would see the value of their holdings fall overnight, as the new tax liability would be instantly priced in. This would be a major shock to the system.
The "Asset-Rich, Cash-Poor" Problem: What about the pensioner who bought their house in the 1970s and now lives in a high-value area on a modest income? It would be unfair to force them out with a huge tax bill. This is a serious concern that requires a specific solution (more on that below).
What Taxes Could it Replace?
LVT should not be an additional tax. Its power lies in its ability to simplify the system by replacing our most damaging and hated taxes. An ambitious LVT could replace:
Council Tax: A confusing and regressive property tax based on outdated 1991 valuations.
Business Rates: A widely despised tax that penalises businesses for occupying physical property and improving it.
Stamp Duty Land Tax (SDLT): A transactional tax that gums up the housing market, discourages moving, and makes it harder for people to downsize or relocate for work.
Inheritance Tax on Property: A complex tax that often forces the sale of family homes and farms. A predictable annual LVT is a much fairer way for property wealth to contribute to public funds.
Replacing these with a single, transparent tax based on land value would represent a colossal simplification of the UK tax code.
A Practical Path Forward
A "big bang" introduction is a non-starter. It would be politically and economically impossible. A sensible, incremental rollout over a decade or more is the only viable path.
Step 1: The Great Valuation. The first, multi-year step would be a comprehensive national project to create a public, transparent register of the unimproved value of every single land plot in the UK. This is a huge but not insurmountable data project.
Step 2: Start with Business. The first tax to go should be non-domestic business rates. This would be a huge boost to high street businesses and could be tested on commercial land first. It would allow the valuation models to be refined and the economic effects to be studied.
Step 3: Abolish Stamp Duty & Phase in for Residential. Once the system is proven, abolish SDLT. At the same time, begin phasing in LVT for residential properties at a very low rate, while simultaneously reducing Council Tax. Over 5-10 years, the LVT rate would slowly rise as the Council Tax is phased out completely.
Step 4: Solve the Pensioner Problem. The solution to the "asset-rich, cash-poor" issue is simple: deferral. Homeowners below a certain income threshold would have the right to defer payment. The LVT bill would accrue as a debt against the property, only payable when it is next sold or upon the owner's death. No one would ever be forced to sell their home to pay the tax.
Conclusion: The Best House on a Bad Street
No tax is popular. But some are far more economically destructive than others. While a general wealth tax is a recipe for capital flight and administrative chaos, a Land Value Tax stands apart.
It is a tax on unearned wealth that cannot flee. It encourages development, discourages speculation, and allows us to scrap a host of deeply unpopular and inefficient existing taxes. The practical and political hurdles are significant, but they are not insurmountable. If we are serious about taxing wealth in a way that is fair, progressive, and pro-growth, the Land Value Tax is, at the very least, the least bad option we have. It’s an idea whose time is long overdue for serious consideration.