A fundamental flaw in economic theory

Heather Wetzel introduces a discussion on why we should not ignore the relevance of land and other natural resource wealth in how the economy works

The flawed UK tax system is a root cause of individual and regional inequality and is structured to favour the richest individuals and companies at the expense of those who do pay their taxes in full.  By shifting taxes off wages and production and on to unearned income that owners of land and other natural resources receive it will help bring about a balanced, fair, efficient and sustainable economy that benefits all and one that will lay the path to a really green environment. 

Through our combined demand to use land and other natural resources, the whole of society generates land and natural resource wealth –  NOT those who claim ownership of our precious natural resources. And because land value and taxes are inversely related such a shift in what is taxed means that land wealth, reflected in rent and capitalised value, will transfer to the public purse.

Summary

Until a government understands there is a fundamental flaw with modern economic theory and therefore with how our economy actually works, there can never be a permanent solution to the ills that blight our society including poverty; insufficient public service provision; persistent unemployment or low wages for many; insufficient affordable good quality homes for all; economic and social inequality for individuals and regions and an inefficient and distorted tax system that allows avoidance and evasion by so many and a damaged environment because of our over- and bad use of land and other natural resources.

Although this paper discusses land, the same arguments apply to all natural resources. 

Why didn’t politicians or economists see the 2008/9 or earlier recessions coming?  The Labour Land Campaign and economists who understand the importance of land theory did see them coming – and predicted them years before they happened and have predicted the next recession will be around 2026.  But they were ignored because the government of the day and its economic advisers and other influencers based their decisions on an economic theory that is fundamentally flawed.  Likewise, governments the world over fail to properly understand how economies work and therefore also failed to predict the inevitable recessions affecting individual countries and, like the last one, the world.

Economic booms and busts can be eradicated, but only if a fundamental error in our economic analysis and economic theory, and therefore in our political decision-making, is recognised and then corrected.  Unfortunately, economists and politicians fail to recognise the economic significance that land and other natural resources play in the economy. 

These decision-makers and influencers ignore the economic fact that as public and private investments are made so the increased surplus income – that is, income after costs of production are paid – that arises as a result, is diverted to landowners for no other reason than they claim ownership of the land that our homes, jobs, public services etc are sited on.  This ‘Economic Rental Value’ of land becomes the unearned income of landowners instead of being returned to the public purse to be used to maintain and develop our public services, including our environment and which greatly contribute to generating land value.

Because we have accepted the historical appropriation of our natural resources, we have also accepted a terrible injustice whereby the surplus wealth – which we all create through our economic and social actions and decision-making – goes, without question, to owners of land.  This means that no matter how much we increase our economic output, landowners will always take the lion’s share of the surplus wealth we all create while wages for labour are kept low.

  • Why do we allow this hideous and immoral situation to continue? 
  • Why don’t economists, academics or politicians see the wrongness of such injustice? 
  • Can we do anything to stop this theft of the wealth we all create from going to a few simply because they lay claim to part of the surface of the planet and the other natural resources that originate from land?
  • Are there lasting solutions that will eradicate poverty – whether in poorer or richer countries?
  • Can a shift in WHAT is taxed enable all natural resources to be used sparingly and efficiently?

So long as our economic and social policies are based on inaccurate economic theory, we can never be free of poverty, economic or social injustice or environmental destruction in the UK or in the world. 

Land speculation is a root cause of economic instability and poverty

The supply of land is finite.  So, when we see a site deliberately kept out of use, it effectively reduces the supply of land available to those wanting to use it.  We don’t have to look far to see derelict offices, or factories or houses or waste land that usually have rubbish dumping and rats being the only activities taking place on them.  These sites are kept out of use for a reason.  Either the owner is inefficient (often the case with publicly owned land) or they are waiting for the maximum return they can get either by developing the sites themselves or by selling them at the optimum price to a developer.  These unused sites are an asset that the owner will borrow against for other financial ventures, until they are ready to give their permission for the site to be brought into its full permitted use. 

The pressure by developers and others to have new homes built on greenfield sites is encouraging urban sprawl and more long distance commuting.  Such a policy means increasing car use with all that entails in terms of pollution, road injuries and deaths; allowing the unused and underused sites that exist in all towns and cities to remain unused and underused; encouraging the misuse of our natural resources and adding to the problems of global warming and pollution of our planet.

  • The demand for any site depends on the activities any individual, organisation or business is is planning to carry out in an area.
  • The value of a particular site will depend on its location, its permitted or intended use and its usefulness to the user in carrying out their business.
  • The economic rent of a site (or use of another natural resource) is the surplus income generated from the use of that site in producing goods and services after the costs of labour and capital have been paid.
  • The price a site is sold or leased for is the lowest price the owner is prepared to sell or lease the site for and the highest price a user is prepared to pay for the exclusive use of that site and it may be in the form of a rent or a lease (with or without rent renewals) or a freehold.
  • Taxes, government grants and subsidies are inversely related to land values

Since the industrial revolution in the UK, we have seen the repetitive cycle of property booms and busts always followed closely by business booms and busts.  In recent years, the pattern is the still same, with the gap between rich and poor widening.  A growing number of people all over the UK are unable to rent or buy homes in areas they want to live because their incomes are inadequate to do so.  Schools and hospitals are under-funded and businesses closing down and jobs disappearing because of the distorted costs of providing goods and services that land hoarding and speculation causes.  

We have seen the world banking system crumble because it was based on inflated land values that were due to sheer speculation and without any sound economic foundation.  Numerous two-parent families struggle to survive on two wages, let alone the ordeal faced by so many single parents. Valuable town and city sites are left idle, thereby increasing pressure to build in the countryside and on green belt land.  A growing number of homes in rural areas are bought as second homes or holiday lets pushing out local people from renting or buying those homes and overseas speculators are buying homes they have no intention of using purely for speculative purposes, denying those homes to people living in the UK and pushing up property prices ever further.  Today, our world environment is increasingly being destroyed in the interest of companies making huge profits and natural resource wealth being concentrated into the hands of a few powerful individuals or companies – only 1% of the world’s population own over 50% of the world’s wealth.  A considerable amount of that wealth is actually natural resource wealth.  The UK Office for National Statistics (ONS) estimates that over half of the UK’s wealth is land wealth.

All of these ills will continue to exist until an enlightened government recognises that our corrupt economic system allows a minority of the population to own, control and waste the majority of our land and other natural resources.  It’s a system that is actually designed to ensure this minority receives their enormous unearned income that they take and keep because the government accepts they have the right to “own” the earth’s natural resources and keep for themselves the economic return that we all create through our need to use them to survive.

When we experience economic development, the built-in injustice of our economic system automatically rewards those that claim ownership of our natural resources and penalises those who do not.  In the UK, we have the obscenity whereby tenants actually pay a hidden subsidy to freeholders of properties and it goes by unchallenged.  For example, why shouldn’t a family or business, who happen to be tenants and who pay their share of taxes that will be used to fund the new Crossrail, not also benefit from the increases in land values that will arise as a result of such investment?  Why should such families or businesses that also pay rent effectively subsidise the landowners that will benefit from this and other public investments?  Why should the banks of the world be allowed to fuel land speculation and make enormous profits at the expense of home-owners, businesses, public services and others that need to borrow in order to buy a property or to invest in their business or even to purchase consumer goods for their own needs?

Those who campaign for a fair and just society recognise the problems so many face but they also need to identify a key solution to enable local and national governments to eradicate poverty and provide good quality public services.  If we want a fair and sustainable economy where the whole of society has access to affordable homes, good education and healthcare and where our natural resources are used for the good of today’s population and also for the benefit of future generations, then the government must address why it continues to ignore this fundamental reform.

For all who are concerned to see fundamental economic changes that result in a fair society that enjoys a sustainable economy we must also address the land issue.

How the private ownership of land and land wealth affects the economy

Land and other bounties of nature were one held in common and what was produced was shared by all.  As rulers claimed ownership of land, so they were able to control economic and social power over people until William the Conqueror claimed ownership of all land and parcelled it out to his cronies and the Church in return for fees – the first taxes.  Those landowners grew in political strength through their control of Parliament and expanded their land holdings by enclosing common land. They made the laws that shifted taxes off their land and on to merchants and then workers while enjoying the rent from their land used in the production of goods and services and the provision of homes.  

The more productive we become, the wealthier landowners.  Because land is in fixed supply, the value and therefore the price of land increases as demand for its use grows.  The greater the amount of surplus income that is generated on a site, so landowners are able to charge higher rents to their tenants or sell that capitalised value to a new owner.  The rent charged for a property with comprise two parts – the value of the building and the value of its location which is land value.  Demand for each commercial site will also be affected by the total costs a business has to pay in the production and delivery of goods and services, including wages, Employers’ National Insurance, Business Rates VAT and other business taxes and rent or property loan repayments.  

Because most of the UK’s land and land wealth is held by a few, they have the power to hold useful land out of use, raise the price of land above its true economic value and to suck wealth created from worthwhile investments and work out of the economy, thus distorting the economy creating the North/South divide and rich/poor divide.

It is our combined demand for land that gives it value; it is our taxes that pay for our public services that make sites more desirable and it is our consumption of private goods and services that creates demand for particular sites. 

Land value is created by the whole community but it is land owners who receive it – this is not fair or sensible.

Our economy is undermined by landowners and that terrible wrong is ignored by politicians and economists to the detriment of all.  As home-ownership has grown, so workers have been sucked into the ‘something-for-nothing’ mentality whereby they too enjoy increases in the value of their home (actually the land their home sits on) as the economy grows.  The dream of getting on the mythical ‘property ladder’ is the dream of joining the institution that underpins an economic system of corruption and greed at the expense of all taxpayers and consumers and even more, at the expense of tenants and other non-property owners.

We need a fair tax system as well as other progressive policies to make fundamental changes that benefit all of society permanently

We need a fair tax system that shifts taxes from wages and production to unearned income; that protects our natural resources from overuse; that cannot be avoided or evaded; that rectifies the historic wrong whereby land and other natural resource ownership and wealth have been taken by a few and left the rest of us subject to their control.

Assuming it is too unrealistic to hope for all natural resources to be taken back into common and shared ownership and the full economic rent charged for their use, then we should at least call for a levy to be applied to the annual rental value of all land and to all other natural resources including oil, minerals, airwaves, wind and solar energy, fishing in our seas, landing slots at airports, etc.  As natural resource wealth taxes are introduced there should be the abolition of current property taxes and abolition of, or at least a reduction in, negative taxes, including income tax, VAT and corporation tax.  These and most other taxes actually depress the economy and do not allow other positive economic and social policies to be properly implemented. 

Land: By taxing the annual rental value of all land and reducing taxes on incomes and production, there will be immediate benefits to society.These include a reduction in the enormous number of valuable unused or underused sites that blight our towns and cities; a reduction in the demand for urban sprawl by landowners and developers; a reduction in long-distance car commuting with the environmental and social damage that causes; an increase in the amount of land being made available for homes, start-up businesses, leisure, etc; a source of sustainable income that is free of the economic distortions caused by property market booms and busts; the opportunity to use that sustainable income to improve public services and to reduce negative taxes that actually act as a drag-anchor on the economy; a redistribution of the wealth we all create that is morally fair and economically just and which will encourage people to use their skills and talents in positive ventures.  Tenants and other non-property owners will benefit from the natural wealth they too create rather than be penalised and forced to pay an unfair and hidden subsidy to property owners.

Oil, coal and other minerals and ores: By taxing the ‘economic rent’ of all other natural resources, the wealth these resources generate will give local and national governments a sustainable income for public expenditure on health care, education, transport, housing, leisure and investing in new sources of renewable energies.

Landing slots at airports: These permissions to occupy our skies at a particular altitude and time can exchange hands for millions of pounds.  The peak time slots obviously give the airline that owns them a tremendous commercial advantage and that is reflected in the fares they charge their passengers.  The landing slot should be paid for but each slot’s economic rental value should be collected by the government and not by the airline concerned. 

Airwaves: When the former Labour Government auctioned off five 20-year licences for third generation mobile phone services, they raised £22 billion (government advisers thought £5 to £6 billion would be raised) and in doing so they collected the economic rent for the twenty years of the licences.  So long as those airwaves are needed at the time, the next auction will provide income for the government of the day again, collecting the economic rent for the use of those airwaves for the next 20 years.  This method of auctioning the use of a natural resource means the nation benefits from the natural resource wealth.

Wind and solar energy, fishing in our seas and use of other natural resources: Again, by taxing the economic rental value of each of these and other natural resources, the economic income that arises from our demand for them in their natural state will provide a sustainable source of income to be used for research and investment into, for example, developing renewable energies.

How a land value tax (LVT) would work

First, all land must be registered so that the beneficial owner can be identified. This is largely complete in urban areas, and the Land Registry aims to finish the task for the whole country over the next few years, but it needs to be carried out for all land and not just land that changes ownership.

Next, each plot of land has to be valued separately from the buildings and other developments on the land.   In effect, valuers already do this for insurance purposes.  That is why, for example, the rebuilding costs of homes are considerably less than their market values, which includes the land on which they stand.   The difference is approximately the value of the land.   Using this information and other techniques, it is possible to value every piece of land in Britain.  Experience from other countries show that valuing land is, in fact, easier, less costly and more accurate, than valuing buildings or other developments on land.

Once the mechanism for valuing land has been established, it will be possible to update valuations more or less continually, thus laying the basis for introducing a system of land value taxation capable of replacing other taxes which damage the economy.

As with any major change in the tax system, there would be some ‘winners’ and ‘losers’, compared with what prevailed previously.   However, with LVT the ‘winners’ would be the vast majority of people particularly those who are currently unemployed or living in poor housing or who cannot afford high rents in order to set up their business, and the ‘losers’ would be a minority who currently acquire most of the UK’s land wealth (that we all create) as their unearned income.   

Rate of levy to be applied to land value

The percentage levy on the annual rental value of each site (the poundage) will depend on the speed at which the government of the day wishes to replace current property taxes and reduce harmful taxes and on their economic, environmental and social policies.

What is the current value of all land in the UK and how much income will a shift in taxation to LVT collect?

The UK government provides no clear, up-to-date or accurate data on the total value of land in the UK.  However, an estimate of all land value as over £5 trillion is based on information used by the Office of National Statistics (ONS).  Of course, these estimated values are based on the UK’s current tax system and would be considerably more if the UK’s tax system were changed to LVT.

The amount collected will depend on the government of the day, such as a shift to LVT being revenue-neutral in terms of total tax collected or in terms of current sums paid by individuals under the existing tax system; which taxes are abolished and which are reduced and the rate that the positive economic effects of LVT on the economy materialise. Total UK tax receipts were about £648 billion for 2014–15 of which property taxes raised around £69 billion: Business Rates raised £29 billion; Council Tax £26 billion; Stamp Duty £8 billion and a further £6 billion in Capital Gains and Inheritance taxes.

Estimates suggest an introductory 30% levy on the annual rental value of all land according to each site’s optimum permitted use would generate an income of circa £92 billion.

However, if one accepts all taxes are inversely related to land values, then if the government were to replace or reduce current taxes, the amount of land value would increase by that amount and growing as the economy becomes more efficient in currently under-invested areas.

Also, these figures do not take into account the effect of Land Value Tax on those areas where there is currently low investment, high unemployment and empty homes. As these depressed areas have low land values they would see their current tax contribution reduced under LVT, many existing businesses would expand, new businesses would flourish with the new investment and the UK economy would become more evenly balanced. Of course, a government could decide to introduce an LVT percentage rate lower or higher than 30% but politically it might be desirable to implement a gentle introduction but not to have a poundage that is so low that it would not affect the behaviour of land speculators.

A list of frequently asked questions with answers is and published on the website of the Labour Land Campaign: http://www.labourland.org/faqs

Some key points on why LVT is a fair and just tax benefiting the whole of society

  • LVT recognises that every individual helps create land values through their work, their community activities and their spending
  • LVT means that the growing number of non-property owning adults who are economically forced to live with family or friends and tenants also share in existing and future increases in land wealth rather than just freeholders and the big land owners.
  • LVT recognises that every new investment – public and private – helps create land values, whether it is in public transport, businesses, leisure facilities, schools, hospitals, airports, making neighbourhoods smarter and more pleasant, or in homes or jobs
  • LVT also recognises that existing services and businesses – public and private – add to land values
  • By including land that is currently kept idle, LVT encourages better use of land, particularly in towns and cities
  • By stopping land speculation, investors will seek worthwhile investments including in those areas that currently have high level of unemployment and deprivation, thus redistributing wealth on a regional and individual basis fairly
  • LVT therefore encourages investment in more jobs and businesses and more affordable homes
  • By encouraging the use of urban brownfield sites LVT actively contributes towards protecting the rural environment
  • LVT therefore helps to protect green land and minimise urban sprawl
  • LVT will rid communities of derelict sites and buildings that encourage anti-social behaviour
  • Unlike other taxes, it is impossible for people and businesses to evade or avoid paying their share of LVT
  • LVT increases the funds available for public services, including public transport, health, education, leisure facilities, crime prevention, and social welfare
  • Land value and taxes are inversely related so as LVT is introduced land wealth, reflected in rent and capitalised value, transfers to the public purse and away from land owners.

Heather Wetzel is Vice-Chair of the Labour Land Campaign.

Image: Author: Zacksteven421,  licensed under the Creative Commons Attribution-Share Alike 4.0 International license.

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