Reducing Whose Burden?

Reducing Whose Burden?

Seasoned Lib Dem Conference-goers agree that the tax debate at Brighton in 2006 was one of the best since the Party was formed. The motion was passed by a clear majority, rejecting a 50% top rate of income tax and embracing a “Green Tax Switch” from productivity to pollution, with a call for “further policies on land taxation to be developed, including consideration of the Lyons Review when it is published”. Note that it did not merely ask for existing policy to be further developed.

FPC moved fast and before Christmas re-convened the Tax Commission (TC) that had brought us Fairer, Simpler, Greener (FSG), with a new Chair, to specifically address a number of outstanding issues. The December 2006 FPC agenda paper acknowledged that “by far the most controversial aspect [of the TC’s work] will be the land tax question”. Some TC members saw this as an opportunity to replace our commitment to Local Income Tax (LIT) with a form of land taxation, not necessarily just – or even at all - at local level.

ALTER has long made clear that it doesn’t object to LIT – or ‘localised income tax’, as we prefer to call it – so long as a domestic property tax is retained at national level. As FSG noted, replacing Council Tax with LIT “will leave the UK in a unique position internationally of having no direct taxation of property at all”. Under Mike Williams’ chairmanship in 2006, the TC accepted this would be a very bad idea, confirming in the same paper that “there is good reason in principle why taxation of property should be retained”.

Development had already begun on an alternative proposal from Vince Cable for a national ‘progressive [domestic] property tax’ to ensure the Green Tax Switch wouldn’t be seen as a sham. As it stands (thanks to LIT), our tax policy actually increases the burden on wealth creating wage earners by around 3% - despite Conference asserting that it “supports the principle of using taxes on resource usage to help cut taxes on wealth creation” by endorsing FSG!

The Brighton debate and outcome showed that Conference understands that “‘ability to pay’ can relate to income or wealth or both”, and that it wants tax policies which tap into wealth. And the most important untapped and rapidly growing source of wealth in Britain today is the land under our houses.

Regrettably, it has become ingrained in the minds of the Party’s economically illiterate that “Axe The Tax” means ‘no more domestic property tax’. Even senior figures in the Party have been convinced by their own unsubstantiated propaganda that abolishing Council Tax (CT) whilst introducing a national Land Value Tax (LVT) would be an electoral disaster. This claim is made without any polling evidence. All the Party has ever done is compare LIT with CT. No poll has asked voters if they might prefer a ‘fairer property tax’ to LIT. The limited real evidence we do have, from residents’ surveys conducted in Newbury over the past nine months, clearly indicate that an overall majority of voters would prefer a fairer property tax to all other options, with twice as many supporting this as LIT. “Interesting”, said Chris Rennard on hearing this.

Reducing the Burden is the title of the draft policy paper now emerging from a seemingly semi-detached TC under its new chair Dick Newby. It is highly doubtful whether it meets Conference’s wish to develop new land tax policies, and it will be interesting to see what the Federal Policy Committee (FPC) does about that. The draft paper does at least offer a solution to the duplicity of a 2p Green Tax Switch and a 4.5p LIT rate, which currently raises the overall burden on jobs. Let’s hope both FPC and Conference approve of that anyway!

But it is the absence of any coherent policy on taxing the unearned wealth accruing to the owners of landed property that continues to confound any Liberal Democrat claims to care about the young and economically excluded. Despite acknowledging in FSG that “tax reform should take account of inter-generational [wealth] issues”, there was nothing in FSG - and there remains nothing in Reducing the Burden - that actually does anything to address this.

The arbitrary and widely trailed million pound property tax is there, but it is a sorry shadow of what might have been achieved – without compromising LIT! It smacks of gesture politics and has already been dubbed an “envy tax”. The problem remains that, when CT is axed for LIT, the vast majority of homes will be untaxed. Average prices will rise by over £20,000 and this Party will have further exacerbated the growing generational crisis in affordable housing.

There are 2 other key policy papers also in production that will be debated by Conference this autumn; on Poverty & Inequality and on Climate Change. Although both will no doubt contain worthy attempts at reversing the rich-poor divide and rising global warming, the opportunity for the concurrent Tax paper to lead the way with a coherent fiscal thread now seems certain to be lost. Tax reform is fundamental to tackling wealth inequity and the efficient use of finite resources. Taxing land values is a critical part of the solution. While all 3 papers may nod in the right direction, none seem able or willing to commit.

Who cares? The young do for a start. By a majority of 10 to 1, the 2007 LDYS Spring Conference passed a motion calling for LVT and not LIT to replace CT. The next generation has a vested interest in shifting tax to a sustainable base – economically and environmentally. There are also many Green Lib Dems who will be unhappy to see no further developments on LVT – arguably the “greenest tax of all”. Every other eco-tax, with the exception of LVT, will erode its own yield. They must do, or they aren’t changing unsustainable behaviour!

Just before the TC was re-convened, no less an authority than UN-HABITAT asserted that “LVT is the appropriate instrument for the urgent fight against global inequality and poverty….. Without land tax there is a vast amount of land speculation which is pushing the price of land sky high, making it unaffordable for the poor in cities.” This was part of a contract to develop an on-line Global Land Tool to help public officials understand and implement LVT. It should be ready by August, the product of collaborative work by 30 experts in over a dozen countries, led by an American Green Party activist.

Yet we have a tax policy that will remain unsustainable and unfair to millions, despite two years of discussion and FSG’s highlighting the shortcomings, as well as the solution. A century ago, the great reforming Liberal Budget of 1909 was inspired by Henry George’s seminal work Progress and Poverty – in its very title encapsulating the essential truth: that wealth arising from economic progress which accrues, untaxed, to the ‘owners’ of land or natural resources will inexorably lead to inequality, inefficiency and growing injustice.

Average house prices have been rising by an amount equivalent to twice the average annual take-home wage. No wonder gambling attracts the poor and families in rented housing despair: social exclusion is largely the product of a failure to tax land values. Two hundred years after Parliament ended slavery, will Liberal Democrats wilfully flinch from ending the enslavement by poverty that failing to recover ‘economic rent’ inflicts on asset poor workers?

TC was directed by Conference and FPC to deal with the “practical issues which would have to be resolved to make a property tax workable”. Yet when it came to the scheduled TC meeting on domestic land and property tax, the Chair immediately called for and won a vote to stop ALTER’s detailed paper on the subject even being discussed! Apart from the aforementioned High Value Property Tax, which may or may not be billed in the paper as a step towards LVT, the TC has really only developed our existing policy to replace business rates with Site Value Rating, the local form of LVT. It remains the case that no “further policies on land tax” are in the new tax paper at all.

The first practical issue is the registration and valuation of all land sites. If we embark on LVT/SVR for commercial land only, we multiply the problems for valuers and tax administrators. Far simpler to assess all commercial and domestic land from the outset, leading to a single unified property tax system with no artificial boundaries between residential and non-residential land.

Since Labour came to power, the market value of the nation’s housing stock has tripled to over £3.5 trillion. There has been only a 5% increase in housing stock, so almost the entire rise in value has been due to land – not bricks and mortar. By levying a mere 0.5% annually of the increase in value under Labour (about £1000 on a £300k house) and assuming £100k tax-free ‘Homestead Allowance’, we could raise over £10 billion in revenue, allowing that sum to be cut from income tax and other economically damaging imposts. It would ensure a ‘soft landing’ when the house price bubble eventually bursts and we could aim to maintain house prices thereafter in line with inflation.

We can sell LVT as just, sustainable and economically sound: it needs to be introduced carefully but it is far more important to introduce it now. It would be contemptibly foolish if we allowed our only property tax, however regressive, to be abolished without a progressive replacement. We will have betrayed posterity as well as our Liberal past.

Unless we join up our thinking with LVT, the ‘reduced burden’ of taxes to which the TC’s draft policy paper refers will be enjoyed not by the poor, the young or tomorrow’s entrepreneurs, but by the asset rich, the comfortable and their unproductive tax advisers. The wealth divide will widen further and the climate – socially, economically and ecologically – will get a whole lot worse.

Tony Vickers is a lecturer in ‘green taxes’ and researcher on land policy at Kingston University, a councillor in Newbury and Chair of the Lib Dem campaign group Action for Land Taxation and Economic Reform (ALTER) www.libdemsalter.org.uk He has been a member of the Tax Commission since June 2005.