THE DEVOLUTION of greater financial powers to Scotland presents both a threat and an opportunity. The threat is that growth and productivity in the Scottish economy could be adversely affected if taxes are poorly designed or applied at higher rates than in England. This risk was highlighted by the Government’s proposals in late 2014 to introduce a Land and Buildings Transactions Tax (LBTT) at a significantly higher rate than in England, at 10 per cent on residential transactions between £250,000 and £1 million, compared to 3 per cent in the rest of the UK up to £0.5 million, and 4 per cent between £0.5 million and £1 million. Unsurprisingly, these proposals provoked a sharp backlash and forced the Finance Secretary into an embarrassing climbdown.
On a more positive note, greater tax powers present an opportunity for The Scottish Government to rationalise and streamline the tax structure inherited from the rest of the UK to promote growth and jobs in Scotland.
At the moment, three taxes account for around 80 per cent of all fiscal revenues raised at UK level – income tax and National Insurance contributions; VAT; and corporation tax. These are likely to remain the principal sources of revenue for The Scottish Government, and are broadly viewed as “good taxes” by economists – being reasonably easy to assess and collect, regarded as fair by those upon whom they are levied (within limits), and efficient in that they do not unduly distort the workings of the free market.
The same cannot be said for the 10 per cent of fiscal revenues accounted for by three property taxes – LBTT, expected to raise approximately £0.5 billion annually for The Scottish Government, Council Tax (frozen since 2008), which raises £1.8 billion annually in Scotland, and national non-domestic rates levied on businesses, which raise approximately £2.6 billion annually.
My proposal is that these three taxes should be replaced by a single Land Value Tax (LVT), levied on the unimproved value of land, introduced on a fiscally neutral basis. In other words, the rate of LVT would be set to raise approximately the same amount as the combined total of LBTT, Council Tax and national non-domestic rates, or around £5 billion annually. On a rudimentary analysis, this would imply that a land value tax would be levied at a rate of approximately 0.5 per cent, or £500 per £100,000 of unimproved land value annually.
A Land Value Tax would offer a number of advantages, including the following:
1. It would be cheap and easy to administer.
2. It is impossible to evade, as land cannot be hidden.
3. It is efficient, in that it does not discourage enterprise, effort or productivity. Since the taxation base is the unimproved value land, families who chose to improve their homes and thus enhance their market value would not be penalised by a higher tax rate – unlike the poorly conceived proposals for a Mansion Tax (which now, happily, seem to have died a death).
4. The taxation base would be easy to assess and update. Unimproved site values could be independently calculated by the RICS Scotland on a quinquennial basis, using data provided by completed market transactions.
5. Landowners who chose to leave their land in an unimproved condition would pay exactly the same rate per acre or per square metre as landowners who have invested in the development of their estates. For this reason, it would eliminate the need for regulations, such as those proposed by The Scottish Government, intended to force landowners to enhance their estates – and, even worse, threaten them with expropriation if they fail to do so. This regulatory approach owes more to the ideology of Joseph Stalin or Mao Tse-tung than the philosophy of Adam Smith, and, unsurprisingly, has provoked strong criticism. It doesn’t take Nostradamus to predict that, were such regulations ever to be implemented, they would almost certainly have a significant negative impact on the Scottish economy, undermining confidence and private sector investment. By contrast, in the words of Henry George, “land value tax prevents private investors from profiting from the mere possession of land, while allowing the value of all improvements to land to remain with the investors whose efforts secure it.”
6. Unlike LBTT, receipts from the tax would not go up and down with the economic cycle, but remain stable through time, because the taxation base would be the underlying land value rather than the number of property transactions.
7. As the experience of other domiciles demonstrates, LVT can be applied at State level within a Federal system, for example in New South Wales in Australia and Pennsylvania in the USA.
Because of these advantages, Land Value Tax has been advocated by a wide range of economists, including Henry George, William Vickrey and Milton Friedman, who stated in Economica in 1980 that “in my opinion, the least bad tax is a property tax on the unimproved value of land.” More recently, Scottish economist James Mirrlees, a Nobel Prize winner, advocated the use of a land value tax in his report to the Institute of Fiscal Studies on The Dimensions of Tax Design: The Mirrlees Review in 2010.
Finally, the introduction of a land value tax, set and collected at local authority level, could help cut through the growing tensions between central government and local authorities, who are complaining (in my view, with some justification) that the national freeze on Council Tax that has applied since 2008 is making it increasingly difficult for them to fund essential local services.
To date, The Scottish Government has, perhaps understandably, pursued a broadly cautious approach in applying the greater taxation powers at its disposal. However, a more radical approach is required to address growing tensions in the local taxation system, and the politically sensitive issue of land reform. A Land Value Tax would address both issues, in a way that is economically efficient and would promote productivity, growth and job creation in Scotland.