The Trouble with Land Value Tax

Land value taxes appeal to economic geeks, being a tax that does not deter productive activity, and to those on the left who want to thump the rentier class, though who they actually hurt might be rather different. A great deal has been written on the benefits. Very little has been written on the transition.

Tax Policy Associates (the TPA here, not the TaxPayers’ Alliance) have made a valuable contribution with a detailed model of what a land value tax would actually do, and in the process have unintentionally demolished the case for one. This is not a hostile document. Dan Neidle supports a land value tax and says so plainly. The report is his own honest accounting of the problems, written for a far wider audience than most tax economists reach. That is exactly what makes it so damaging.

The proposal modelled is to replace residential council tax and stamp duty in England with a single tax set as a flat percentage of land value. The revenue-neutral rate comes out at 1.28%, though the report’s own sensitivity analysis puts it anywhere between 1.1% and 1.7%.

The first problem is the scale of the increases and decreases, both for households and for the councils that currently receive the money. The council problem could be addressed by rewriting central government funding formulae. The model takes a simpler route: a slider that varies the rate by region, so that each of the nine English regions collects what it collects today. Drag it all the way across and the rate becomes 3.4% in the North East against 0.82% in London. An average Band C house in Trafford pays about £2,300 more than it does under council tax. The 120 Band H properties in Newcastle pay an average of £84,509. Your land value tax rate is now a function of what council tax happened to be in your region relative to other regions in 2026, and this arbitrariness is offered as an improvement on 1991 house values.

The transition nobody prices

Most proponents of LVT ignore the transition entirely. The TPA do not, and this is where the report does its real damage.

Property taxes are capitalised into asset values. When you change the tax regime on an asset, its value moves by the net present value of the change in future tax payments. To estimate that present value the report uses a discount rate of 3%, the return on a bank account, and arrives at falls of 17% for a £520,000 Islington flat and about 27% for the average home in Kensington and Chelsea.

But a land value tax is an inflation-linked perpetuity, and a super-senior claim secured on the property itself. The market has a price for that sort of cashflow, and it is not 3%. Index-linked gilts are the closest instrument we have, and the 2073 linker yields around 1.94% real. At 2%, the same arithmetic produces falls of 25% to 45%.

The report’s answer is to observe that at a 6% discount rate every figure roughly halves. In fairness, it offers other reasons for thinking the effect overstated: the formula assumes a constant rent, a fully credible and permanent tax, no credit constraints, no supply response and full information. Those are real caveats. The discount rate is not one of them. No reason is given why the market should price a super-senior inflation-linked liability at double the rate it prices index-linked gilts. The report concedes that 3% is on the low side and uses it as a stress test. The difficulty is that 3% is not low. It is high.

An anti-lottery

Because the rate is set to be neutral on average, every loser is matched by a winner. The distribution of those gains and losses is life-changing and close to random. Borges would be proud.

A recent buyer on 80% leverage could be forced into negative equity, reintroducing the constraint on labour mobility that scrapping stamp duty was meant to solve. Someone who has sold and is renting while they look avoids the loss and buys the replacement cheaper. Someone who has bought and not yet sold might lose twice, or win twice.

And a scheme intended to hurt the rich and reward the poor mostly rewards the owners of the houses the poor live in. A slum landlord sees a windfall across an entire portfolio.

To his credit, Neidle sees this coming. He calls it the pass the parcel problem: whoever holds property in Blackpool when the music stops receives an arbitrary windfall, landlords gain, renters do not, affordability for new buyers gets worse, and wealth inequality within Blackpool widens. His own verdict is that these are “not obviously great results”. Having written that sentence, the report carries on.

Proponents of taxing property allude to the enormous gains homeowners have made. Some did buy for very little in the 1990s, though these comparisons routinely ignore how much inflation there has been since, and many of those people have long since sold. The current owner does not enjoy the original cost basis. With little or no real house price appreciation across much of the country over the past decade, it is not clear what windfall is being taxed.

We have smashed a great many eggs. What is the omelette?

So what have we gained?

It will encourage the optimal use of land.

Any tax that does not depend on improved value will do that. An owner maximises the net present value of post-tax income from the land, so the ideal property tax is one that does not change as the property is improved. A number fixed in the past satisfies that condition automatically. The 1991 valuation, for instance. A flat percentage of land value might be a non-distortionary tax. It is not the non-distortionary tax. The error is to fall in love with the property and forget how many other taxes deliver it.

Council tax can be accused of taxing development: build a house on an empty lot and it acquires a band, and the present value of that liability depresses the sale price. But if land is worth the difference between developed value and build cost, that effect is already reflected in the land price and deters nothing. If the goal is efficient use of land, the places to look are planning permission, the sums spent subsidising non-market rent housing in London zones 1 and 2, and the arbitrary development tax that is a Section 106 agreement.

It will discourage land hoarding.

Any tax independent of whether the property is developed does no such thing. An owner may rationally wait if the plan with lower near-term cashflows has the higher lifetime value. The only way the tax brings a site forward is by creating a cashflow problem severe enough that the owner switches to an inferior project which pays out sooner. That is the tax destroying value, not releasing it.

It will let us abolish stamp duty.

This benefit is real. Labour mobility improves, downsizing increases and brings supply to the market, and grandparents find it easier to move nearer their children. Stamp duty has been raised repeatedly, causing all of these problems, and I can find no historic argument that those increases required compensation for the owners of the time. By symmetry, it is not clear why a cut must trigger a replacement tax on the owners of today.

One measure already passed to encourage more efficient use of the social housing stock is the removal of the spare room subsidy. The report, careful elsewhere to distinguish stamp duty land tax from stamp duty, reaches without hesitation for “bedroom tax”.

It is a vote winner, because 63% of households pay less.

Note what that figure is. It is the share who benefit in immediate cash terms under the full-fat tax with transitional relief and deferral already switched on. Without those softeners more people win, and the losers lose harder. So 63% is the number that survives the mitigation, which makes it the honest one, and it is still a third of the country worse off.

The report also calls council tax highly regressive, and closes by asking us to end the unfairness of a modest home in Blackpool paying more than a mansion in Westminster. But council tax was designed so that local elections could offer a choice between higher and lower tax within bounds, and by applying increases to all bands at the same percentage it forbade politicking on the basis of taking from Peter to pay Paul. Blackpool’s higher bills partly reflect decades of Blackpool voters choosing higher taxes. Why strip them of the agency? And as the Mirrlees Review argued, not every tax has to be progressive. A good tax and benefits system concentrates redistribution in as few places as possible, precisely to avoid perverse outcomes elsewhere. Calling council tax regressive is also unorthodox, given the strong correlation between larger houses and higher bills.

It will improve affordability, because house prices fall.

If 63% of households benefit, then 63% of households should see that benefit capitalised, and those houses become more expensive. Set the arithmetic aside and there is a deeper error. The houses that fall in price do so because the ongoing cost of occupying them has risen. Affordability is a comprehensive measure. Whatever discount is won on the purchase price is paid back through the annual bill.

The costs the report does concede

Land value is estimated as the residual between property price and construction cost. A residual is more volatile than the thing it is derived from, so land values move more than house prices do. Council tax delivers a predictable income stream. A land value tax would not. Councils have limited borrowing powers, for good reason, and correspondingly limited ability to smooth a volatile income. The report acknowledges this in a footnote and does not model it. A tax that is almost fixed avoids the problem entirely.

Then there is the valuation. LVT taxes something that can rarely be observed. Clever computer models bridge the gap, and the resulting valuations are inherently uncertain. In March 2026 the Welsh Government published parallel studies using hedonic regression, machine learning, formulaic and conventional methods. They broadly agreed on where Welsh land values are high and low. They disagreed on the absolute levels, and disagreed by enough that no split between land and building could be validated. None of the tested methods was accurate enough to deploy in a live land value tax.

More importantly, the valuations will often be perceived as unfair. Those receiving lower bills will conclude they were overcharged in the past. Those receiving higher bills will conclude they are being punished in the future. Denmark’s answer, after its own valuation system collapsed into what is regarded there as a major IT scandal, was to discount assessed land values by 20% before calculating the tax. Taxing 80% of the valuation requires a rate 25% higher than the equivalent rate on the full valuation. Why does your amp go up to 11, rather than just making 10 louder?

In defence of council tax

Council tax has a superficially arbitrary element, and it is utterly transparent. It is cheap to administer, unlike any system requiring repeated valuations. Even the arbitrariness has an answer. If your council tax is high compared with a similar property, then you paid less for your house than the owner of the similar one did. If you rent, the answer is the same: higher council tax on similar properties is reflected in lower rents. Capitalisation and incidence resolve the claimed inequity. And if you and your neighbour bought in 1990 and ended up in different bands, then sometimes life is unfair, and you are the beneficiary of a tremendous house price boom.

The wrong tool

We are told the principled case is overwhelming. It has underwhelmed.

We are told the practical prize is real and large. That much is true, and this tax is the wrong tool for claiming it. Planning permission and the benefits regime are where the gains are. The proposed change is no better than what we have, and it distracts from the actions that would unlock the real prize. Politicians can pursue a limited number of goals, and doing the wrong thing crowds out doing the right one.

Recognising the chaos of the transition, the report models a ten-year phase-in, and points approvingly to the Australian Capital Territory, which began a twenty-year switch away from stamp duty in 2012 without a market crash. So the claimed benefits arrive over decades. Why not a hundred years? Why not never?

With the appropriate technical knowledge, the genius in the construction of council tax becomes visible. Appreciate it. Put down the tax hammer and find the right tools for the very real gains on offer.