Property bubbles, credit bubbles, and land value tax


As I explained in yesterday's post, all existing taxes that relate to property ownership, occupation, or wealth generally (Council Tax, Business Rates, Stamp Duty, Inheritance Tax, Capital Gains Tax, the TV licence fee and Insurance Premium Tax) could easily be replaced on a fiscally neutral basis with a flat annual tax on underlying non-agricultural land/location values once prices have bottomed out and stabilized.
Average total property values per square yard for each postcode sector are easy to calculate on the basis of actual selling prices and plot sizes as recorded by HM Land Registry. This total value could be split into 4/5 that relate to the exempt bricks and mortar value (probably on the high side) and 1/5 that relates to the location value (probably on the low side), to prevent there being endless appeals that the assessed value of the location value of each plot is too high. Going by long run price-to-income ratios, the fiscally neutral rate when prices bottom out would be in the region of 7% per annum (or around 1.5% of the total market value of each property).
Besides raising the money required to cover the core functions of the state – like the legal system, policing, street lighting, and so on – a tax of 7% of capital values in excess of the bricks and mortar value would serve a useful purpose in dampening the cycles of property price and credit bubbles that have plagued the UK economy since the Second World War.
These bubbles are two sides of the same coin, of course. Strict planning laws limit the amount of residential and commercial premises, so easy credit fuels rising prices rather than creating additional supply; the increased values are then accepted as collateral for further loans and so on, until the double bubble eventually bursts, tipping the economy into recession or worse.
It would be administratively easy to update total property values on the basis of existing sales in each sector each year. If the 7% flat tax were applied to all value in excess of the original bricks and mortar value (adjusted for inflation), i.e. to the bubble element as well as the location value, this would act like a much higher interest rate thereon, and thus dampen down property price bubbles (and hence credit bubbles) as well as sending a "market signal" to existing home-owners that planning permission is being far too strictly rationed.

Guest author Mark Wadsworh regularly blogs here.