Earlier this month, I posted an article arguing strongly that Australia’s state and territory governments should look to replace stamp duties on property transfers with a broad-based land values tax, levied on all properties:
Broad-based land value taxes (LVT) would… assist in the provision of new housing via two channels. First, an LVT would help make infrastructure investments self-funding for governments, since any land value uplift brought about through increased infrastructure investment (e.g. new roads, trains, etc) would be partly captured by the government via increased LVT receipts. Accordingly, governments would be more likely to facilitate development, rather than act to restrict it in a bid to save on infrastructure costs. Second, an LVT would penalise land banking and vagrancy, effectively increasing the supply of land in the process and bringing new homes to market more quickly.
Overnight, the International Monetary Fund (IMF) released its preliminary Article IV consultation recommendations for the UK economy, which recommends that the government does away with demand-side housing stimulus and instead introduces land taxes on vacant land in order to improve effective housing supply and fund infrastructure spending (my emphasis):
- Bringing forward planned capital investment where possible, which would help catalyze private investment and spur much-needed growth…
- Further modifying the composition of [fiscal] consolidation to boost growth. This could include growth-friendly measures, such as reducing marginal effective corporate tax rates to bring investment forward, and introducing tax allowances for raising equity. To offset the budgetary impact of these measures over the medium term, the government could undertake a reform of property taxes and consider broadening the VAT base.
- The 2013 Budget announced a new scheme, Help To Buy, aimed at boosting activity in the housing market. This measure may temporarily help boost confidence in the housing market, but there is a risk that, in the absence of an adequate supply response, the result would ultimately be mostly house price increases that would work against the aim of boosting access to housing. To mitigate this risk and engineer a supply response, the government should consider fiscal disincentives for holding land without development.
- Government investment in supply-side measures to boost growth will enhance rather than damage credibility… [A]lthough supply measures are often thought to have only long-run benefits, they could bring immediate reassurance to purchasers of UK debt.
While not as comprehensive as a broad-based land tax levied on all property, the IMF’s recommendation is a step in the right direction. However, in order for it to work properly, there would need to be a mechanism whereby the local authorities share directly in the revenue.
One of the key roadblocks to housing supply in the UK is its centralised fiscal system, whereby local authorities – which are the primary decision makers on development and have statutory obligations to provide services for new houses – receive very little revenue from increased population and housing. As such, these local authorities tend to be biased against development. This nexus, therefore, would need to be broken.
