What's the justification for a land value tax?

We can't ignore the fact that land is the property of the commons.

George Monbiot has written a passionate call for a land value tax in the Guardian today. Pointing out that the coalition has singularly failed to take any real attempt to increase tax revenue — with the Lib Dems reneging on their promise to raise capital gains tax to 50p, and both parties turning their nose up at the economically-beneficial revenue gains of a financial transaction tax — he suggests one final attempt to come up with a novel way of raising revenue which the government might support: a land-value tax.

He describes the benefits:

It stops the speculative land hoarding that prevents homes from being built. It ensures that the most valuable real estate – in city centres – is developed first, discouraging urban sprawl. It prevents speculative property bubbles, of the kind that have recently trashed the economies of Ireland, Spain and other nations, and that make rents and first homes so hard to afford. Because it does not affect the supply of land (they stopped making it some time ago), it cannot cause the rents that people must pay to the landlords to be raised. It is easy to calculate and hard to avoid: you can't hide your land in London in a secret account in the Cayman Islands. And it could probably discharge the entire deficit.

More importantly — for the purported aim of winning over the coalition government — he also cites the politico-philosophical background of the tax, in the words of Winston Churchill:

Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived ... the unearned increment on the land is reaped by the land monopolist in exact proportion, not to the service, but to the disservice done.

In quoting Churchill, Monbiot may strengthen the ability of his argument to win over the marginal Conservative, but he weakens the overall power of the claim to the justice of a land-value tax.

Because in these days of massive private-sector involvement in the provision of public goods, it is harder to argue that the landlord in his role as land monopolist "renders no service to the community". Developers put up money for transport links, for schools, for shops, and for park land and open space. A good developer does, deliberately and directly, increase the value of the land on which they build. And, despite Monbiot's claim to the contrary, some developers do go so far as to create the land on which they build.

The better argument for why a land value tax is just is that land, unlike all other property, can only ever have its root in expropriation from the commons. Even in the case of artificially created land, the sea-bed from which it was raised was once the collective property of all human-kind, and was only later privatised. In Britain, the legal fiction around land ownership even promotes this idea: no-one but the crown actually owns land. No matter how big your estate, it is remains the actual property of the Queen.

In other words, a land value tax isn't only justifiable because of the effect of the state in increasing the value of land; it's also justifiable because, no matter how long ago that land was cordoned off and turned into private property, it was once part of the commons.

(In fact, of course, the longer that land has been privately held, the more justifiable a land value tax is. In recent centuries the state has sold land to private interests, at least ensuring that some of the gains were collectivised; but no-one was paid when the first nobles threw up walls around their estates a thousand years ago.)

But arguing political philosophy with the coalition also reveals the folly of trying to convince them on the benefits of a land-value tax, or indeed any tax. Because while the rhetoric is about shrinking the deficit, which new taxes help, the ideology is about shrinking the state. And if that's the aim, arguing about the value of various taxes will never win the fight.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation