The Commission on Local Tax Reform was established jointly by the Scottish Government and the Convention of Scottish Local Authorities in 2015 to assess the evidence that would enable a decision to be made on a new system to replace the Council Tax. Since its inception in 1993 the Council Tax has been based on 1991 house prices and was described as “not fair, progressive or locally empowering”.
In the invitation to download its Final Report, the Commission on Local Tax Reform says, ‘The current system of Council Tax must end.’ The Commission is unable to decide what should replace the Council Tax because ‘there is no one ideal local tax.’ The best it can do is suggest that the political parties select, from the three options considered in its deliberations, a ‘broad based’ system of local taxation in preparation for the elections in May.
There are, in the Report, several references to ‘fairness’, ‘progression’, ‘stability’ and ‘efficiency’ which might indicate criteria by which a suitable system of taxation could be judged but there is no mention of their relative merits or importance.
The Commission failed to comment on the most important feature of any tax or charge- it should not hinder employment or trade and so reduce the total fund from which the tax or charge must be paid. The second in importance is that, for fairness, the amount of tax or charge levied is related to the ability to pay and for justice, earnings should not be taxed whilst any unearned rental income is left untaxed. Thirdly, a tax or charge should be cheaply and easily collected, so that the costs of administration are as low as possible. The fourth feature is that there should be no opportunity for avoidance or evasion.
The analysis by the Commission of the merits and disadvantages of three taxes:- Income Tax, Council Tax and Land Value Tax, clearly shows that the Income Tax should not be included in any new system of local taxation. It fails to meet any of the criteria for a suitable tax. The commission’s report says that a Local income Tax is favoured by about a third of those who gave evidence and that they understood it. The last part of this statement cannot be true. It is avoidable and evadable, especially by the rich, it is expensive to administer, very complicated and difficult to understand, even by chartered accountants. Its impact on employment and trade is so deleterious that at least one pound is lost from the economy for every pound taken in Income Tax. That people are familiar with it is its only merit.
The Council Tax, based on the market price of houses, has no merits which are not shared with Land Value Tax (LVT) which is best described as Annual Ground Rent (AGR): but unlike AGR, Council Tax has the disadvantage of deterring improvements to houses which would shift them to a higher tax band. It also fails to encourage the development of suitable vacant land, nor does it discourage land banking. There is wider variation in house prices within a locality than there is between land prices, which make valuations more difficult and expensive.
AGR has the big advantage of stimulating development, and employment associated with development. This will increase the production of wealth, and the rental value of land will rise but its market price will fall because speculators and land hoarders are discouraged. The current relationship between the rental value of land and its market price will no longer apply. The ability of young people to afford a house will be greatly improved. Without a fall in land prices, the price of houses will never be affordable.
Without a fall in land prices, the price of houses will never be affordable.
The experience of countries like Denmark shows that a revenue system based on the value of land can be made to work and is easily administered with frequent revaluations.
A form of AGR; a Land Tax, has been used previously in Scotland. It was the main source of revenue prior to the 1707 Union of Parliaments and continued for several years afterwards but was gradually abolished by the landowners in the Westminster Parliament, who changed the tax laws to pass the burden of paying taxes onto working people so that the barons and lairds could enjoy the unearned rental value of the land. We are often told that we live by the ‘Law of the Land’ but it would be more accurate to say we live by the ‘Law of the Land Owners’.
AGR could simply replace the Council Tax at current levels of local government revenue collection, but its simple application would more equitably distribute the burden of costs among those who are required to pay; but if it is decided that the amount of revenue collected locally should supply more than the 12% currently obtained from Council Tax to improve local democracy and accountability, the revenue from ground rents, what we call AGR, could be increased and the National Income Tax reduced.
I am often asked why I advocate the collection of the AGR to fund the necessary functions of government. My wife and I own a farm in Fife, of about 650 acres, its market price will fall markedly if AGR is introduced. I estimate its current market price to be about £4m, which is above £3m more than we paid 23 years ago. The £4m price tag is no advantage to us at all because we do not want to sell it. The farm’s earning capacity is not increased by this high price.
In fact it is a disadvantage to us in our desire for the next generations of our family to continue farming. If our son has to buy out his brothers and sister he will have to sell the farm to do so. If the price of land was close to what its productive capacity would justify, there would be no problem.
We have not earned the £3m by which the market price has risen, it is the result of the perverse tax system, which favours the ownership of landed property and discourages employment and enterprise.
I hope that when the NFUS discusses the Land Reform Bill that it takes into account the problem of the high price of farmland and the reasons why it is so high. I am not concerned that the market price of our farm will fall because we will gain from the reduction in the harmful taxes, which inhibit us now.
We would like to have the opportunity to be reasonably rich from farming our land, not to be unreasonably rich by selling our land for an unreasonably high price.
I know I am not the only farmer in Scotland who favours the collection of AGR by the government. I am probably the only one who is prepared to stand in public and say so.
The SNFU also uses the principle of AGR when it charges membership fees per unit area according to the quality (which NFUS calls ‘capability’) of the land farmed.
We agree completely with the concluding statement of Commission that: “This is an opportunity that must not be missed”.
The following FAQ has been prepared by the Scottish Land Revenue Group (SLRG) as a general guide:
FREQUENTLY ASKED QUESTIONS (FAQ)
What is AGR?
Answer: “Annual Ground Rent” (AGR) is an alternative means of raising revenue to replace current local or central government taxation that is required to pay for all public goods and services.
Unlike any other economic resource land is both universal and permanent (save only for cataclysmic acts of nature, produced most typically by sea, geological events, such as erosion or the changing course of rivers).
With these very rare exceptions every parcel or tract of land, large or small, in city or country – every site whether agricultural, timber, mineral or urban – has some potential annual rental value.
This potential rental value applies to the land or site itself alone, and does not apply to any building or development on the site (the development of a site, such as a building or new extension, is the product of labour or enterprise, which is quite separate from the underlying land or site that is given by nature).
This rental value of the land or site is created not by any individual owner but by aggregate demand (i.e., the fundamental need we all have to occupy land and use natural resources).
It is a public good provided both by nature and any further advantages created by the site’s location as a result of the product of the community and the labour and investment of many (e.g., and only as an example, in a city with all the facilities, services and infrastructure this implies).
At present the landowner makes little or no contribution to this public investment and AGR is an annual rental or levy designed to share this gain with the taxpayer.
Under “Annual Ground Rent” (AGR) this public rental value would be collected from the site owner or landowner, while exempting from taxation the value of all buildings and other produced assets owned or developed by the labour or investment of individuals or organisations.
Why are there different names for AGR?
Answer: Over the long history of this idea, which is long associated with the American thinker Henry George (1839-97), it has been known under a number of names, abbreviations and titles; Land Value Tax (LVT) or Land Value Rating (LVR) being only the most common.
Annual Ground Rent (AGR) accurately and simply describes what it is; a rent payable to the wider community for the resources, investment, services, infrastructure, activities and presence of the population that give value to the basic, undeveloped site; the ground, the specific area of land its core undeveloped value.
AGR is not a confiscation of private property which remains in the same hands, nor is it really a tax: because it is universal – every piece of land or site will pay a core rent, that will be established at a level according to its variable rental without valuing whatever stands on the site and is excluded from the rental charge, save only accounting for the highest undeveloped ‘planning permission’ the site possesses.
Taxes, on the other hand are arbitrarily set according to the changing political preferences of passing Governments, and operate as public confiscations of revenues that are created by labour, by investment or trade.
Some taxes are expensive to raise, difficult to administer and easy to avoid or even evade; how does AGR solve these problems?
Answer: AGR is cheaply and easily administered because mapping is computerised and individual sites do not have to be visited to assess values. Denmark has such a system and it requires fewer valuers (assessors) than a system bases on house prices.
AGR is impossible to avoid or evade because land cannot be hidden or moved and values can be made available for public scrutiny. Failure to pay the AGR leaves the owner open to the risk of the property being taken over by someone else that is willing to pay.
Why should I support AGR?
Answer: The move to Annual Ground Rent will, for most households, be of immediate financial benefit. Most property owners own only the parcel of land beneath their residence. A large segment of the population owns no land at all. In time, the cost of acquiring land for residential homes and businesses will begin to come down, creating a far more affordable economic environment than exists today.
Would Scotland be better off with AGR?
Answer: People who actually produce goods or provide needed services to others (whether through their labour or enterprise) are today overburdened with taxation. A shift to Annual Ground Rent (AGR) as a primary source of public revenue would relieve the productive sector of Scotland’s economy of its heavy tax burden. Scotland’s producers would be in a far better position to compete in the global economy, providing new employment opportunities for the people of Scotland. In due course AGR could be extended to replace other taxes on earnings and enterprise.
Why do you think taxes harm the economy?
Answer: The impact of taxes on the economy is best explained this way. The higher the taxes imposed on goods and services the less will be the supply of goods and services generated. When taxes are too burdensome on businesses, they pick up and move to where taxes are much lower. And, when businesses leave, people leave as well. Those left behind are often principally the elderly and the unskilled, who must now be supported by a social welfare system struggling to find the needed revenue. Annual Ground Rent solves this problem because neither production nor profits are subject to taxation. One is merely required to contribute to the community the annual rental value of any land owned.
Why do you think AGR encourages the economy?
Answer: When owners of land/sites are required to compensate the community for the privilege granted to them (i.e., to have exclusive use and ownership of part of the community land), they will develop the land to its highest, (most productive) use in order to generate sufficient revenue to cover the Annual Ground Rent charge, other living expenses, and whatever other desires they have.
Imagine the synergy created when every owner of property is rewarded for what they actually produce rather than being allowed to sit on vacant land for decades or generations while the remainder of the population must compete with one another for living space in a market that rewards those who continue to hoard land to make excessive profit, at nil cost, and without contributing to the community activity on which the value of the site and the profits the landowners make, depend.
I run a business. Why will AGR be good for me?
Answer: Once AGR is fully implemented across the spectrum, if you own property (land, buildings and other fixed assets), the value of buildings value and other business equipment will no longer be subject to taxation. Your financial obligation to the community ends once you have satisfied your Annual Ground Rent payment.
I am an employee. Why will AGR be good for me?
Answer: Wages and benefits offered to people who work for others is based on supply and demand. What Annual Ground Rent (AGR) gradually achieves is a situation where there is always a greater demand for people than the number of people in the workforce. In short, AGR is key to the elusive full employment society.
Will farming benefit from AGR?
Answer: Yes. The benefit will depend on the extent, by which the existing harmful taxes, such as the Income Taxes and VAT are reduced, to be replaced by AGR. The removal of income taxes will greatly reduce the costs of employment and the time and money spent on bookkeeping. The reduction in the market price of farmland will benefit those young people wanting to make a start in farming but cannot afford the current price of land which is almost five times that which can be justified by current input costs, yields and product prices.
Only those who want to sell the land they own benefit from its high price but for the majority, who want to earn a living from farming, high land prices are no advantage. For young newcomers to farming, they are a serious barrier. The tax reductions we recommend will reduce the costs of production for all farmers, including those who rent the land they farm.
I cannot afford to buy a home. Why will AGR be good for me?
Answer: Affordability of a residential property is based on the relationship between several important factors: (a) household income; (b) household savings; (c) the price of the property (land cost plus building cost); and (d) the terms of available mortgage financing; (e) the land cost paid by the developer. The adoption of the Annual Ground Rent (AGR) system will, over time bring down the land cost component of a residential property.
Some owners of land who have no intention of developing their site will put the land on the market in competition with others. Thus, developers will be able to acquire land at lower costs, enabling them to construct new and more affordable housing units.
I rent my home. Why will AGR be good for me?
Answer: As developers begin to acquire land at lower prices housing prices will fall, but it may take some time. As the supply of rental housing increases, the owners of these units will compete with one anther for tenants, and this will tend to keep apartment rents affordable.
In the first instance AGR is payable by the landowner, not the tenant. Of course the landowner (landlord) will seek to pass on the cost to the tenant in a higher rent, but that adjustment will depend on local house rental market conditions.
I own my home. Why will AGR be good for me?
Answer: Even if the Annual Ground Rent (AGR) System is implemented over a period of years, you are likely to experience a lower annual bill, with the owners of upmarket properties in high-demand areas paying more. However, this depends on how much land you own and whether your property is located in a high-demand area or not. High-value land will pay a premium.
Most owners of residential property on small land parcels or in less expensive areas (the majority of the population) will experience a reduction on their annual public service payments under Annual Ground Rent.
I cannot find employment. How will AGR help?
Answer: Annual Ground Rent (AGR) does not produce overnight change, but it favours economic activity, labour, enterprise and investment over passive land ownership. As AGR progressively reduces the overall tax burden businesses will expand and begin to hire more people as more and more public revenue comes from AGR, and less and less from other sources.
Can AGR prevent the next recession?
Answer: The causes of economic downturns – of recessions or even depressions are complex. What a close study of economic history reveals, however, is that at the heart of every such downturn is a crash of the property markets. The depth and duration of the crash is directly related to the rise in land prices. In turn, these “land price bubbles” are driven by intense speculation, worsened by imprudent bank lending practices. The next recession is, sadly, already in the making.
The adoption of AGR may mitigate the harshness of the next recession but will not prevent it from happening. Nevertheless, only the full adoption of the AGR system will ensure that the principal cause of our inevitably recurring ‘boom-bust’ economy finally disappears.
My community wants to buy land. How will AGR help?
Answer: Over time, Annual Ground Rent will bring down the price of land, making it easier for communities to acquire land for parks, schools, public transit rights of way, and other public amenities.
Here is what happens in the current system. Every parcel or tract of land has some potential rental value. Even when the owner does not lease out land to others to collect this value, it is there. Market forces capitalise this real or imputed rental value into a potential selling price. AGR brings this value into the community treasury, leaving nothing to be capitalised. The result is that land prices will fall over time.
I live in the city. Why will AGR be good for me?
Answer: Every city has a central business district and residential neighbourhoods where the demand for land is great. At the moment, most of this value, which is generated by the activities of the whole community, public resources and many individuals, is retained by the owners of land. AGR changes this dynamic in favour of the productive segments of an urban economy. You will gradually have more employment choices, more housing choices, higher wages and better benefits. Why? Because investment in job-creation and economic activity will bring a higher return on capital invested and the cost of leasing or acquiring land will begin to fall.
Where did AGR come from?
Answer: For most of history, governments collected “ground rents” from those who were granted use of land. As land ownership became privatised and the political power of landed interests grew, less and less public revenue came from ground rents.
Yet, there have always been efforts by civic-minded leaders to return the source of public revenue to its original, and fairest, source.
Throughout history, and noticeably in 1707 and again at the beginning of the 20th century, Scotland has been in the forefront of these efforts, although they have always been deflected or defeated by well-entrenched vested interests that established a system that excluded land from taxation.
Passing the responsibility for raising public revenues almost exclusively to the active economy based on taxation of labour, enterprise and investment, rather than on the land based interests.
In recent years business and finance has been very effective at reducing their tax payments through aggressive tax avoidance, globalisation and the wide use of foreign, secretive tax havens, unlike labour and payers of PAYE and indirect taxes.
In the modern era, the arguments are found in the writings of many political economists and moral philosophers, including Adam Smith. During the late 19th century, Liberals in Britain (influenced by the American writer Henry George) began a serious campaign to re-introduce the full collection of ground rents. They almost succeeded early in the 20th century with what was called “The Peoples’ Budget” (1909) under Lloyd George’s leadership. Labour later added Annual Ground Rent to its platform.
The House of Lords and landed interests defeated the ambition of the Peoples’ Budget and with the intervention of two World Wars and other national crises, the Labour Party gradually moved away from the ambition.
The agitation to adopt Annual Ground Rent has been a long and arduous campaign to finally bring about a full implementation of a just system of property rights and public revenue.
The opportunity today in Scotland is that with Holyrood and the return of a Scottish Parliament, its time has come.
Why is it claimed AGR is not a tax?
Answer: The rental value of land is not produced by individuals, it is a function of nature and of complex interdependent communities and publicly resourced activities; it is, by definition, public revenue (much of which is now being privately retained).
What are ‘deadweight losses’?
Answer: This term, used by economists, refers to the negative impact on the production of goods and delivery of services causes by the imposition of taxation.