Basic Income and Land Value Tax: balancing the books

You asked, and so you shall receive.

Metal Dice and Three Houses by Images Money on Flickr. Shared under [CC BY 2.0]

Following publication of my article Funding UBI with a Tax on Land, I received a number of comments asking that I back up the figures with some calculations. I have now compiled some results, but these pose more questions than were asked in the first place.

I see this as a good thing: I’d like my initial results to provide a starting point for discussion and improvement. The system I have worked out is one possible means by which it could work — but it is based on swapping today’s 2018 UK economy for something completely different tomorrow, so who knows what could happen?

The first caveat is that the values I’m working with are unlikely to remain static. Changing our tax regime so drastically will affect our spending priorities, which will in turn have effects on the value of various goods, including land. Land Value Tax could reduce the value of land if set at a certain rate, and the removal of taxes on other things will affect their value too. In addition to this, the provision of UBI and a zero income tax rate will alter our spending, saving and investment choices.

Overall, this means that while the numbers add up for what I have created here, any of these variables could be changed so that the equation balances. That doesn’t mean that every permutation yields a valid economic outcome. The only way we can determine how well it would work, or even if it could work, is to run a complex simulation of the economy. I possess neither the knowledge nor the software to be able to do this, so we’ll have to make do with the simplifications that I have made.

Below is my first shot at the calculation, using the 2018 UK economy as a starting point. Below the infographic, I will go into the strengths & limitations of my analysis, and offer some pointers for further consideration. I welcome any feedback on these findings, and would love to collaborate with other Medium members to devise a working model.

I’m based in the UK, but some input and numbers from those located elsewhere could also help — and if you’re non-UK based you might be aware of other factors that aren’t obvious to UK residents. I’d also welcome comments from people living under governments that don’t subscribe to neoliberalism.

Not bad for a first attempt.
If you want to make your own infographics like this, visit Canva, where you can sign up for a free account and create something as stunning as this, or even better. Most of the tools and templates are available for free, or you can upgrade for a small fee if you’re looking for the full works.

Calculations

There’s a lot the image above doesn’t tell you, as well as what it does. These figures are the ones we’re really bothered about, but you need to know how I arrived at them.

Treasury income & outgoings

Total UK government income and total UK government spending are for 2018/19 and were sourced from the 2017 Autumn budget.

Administrative savings for moving to simpler UBI and LVT schemes are estimated at £8bn for each scheme, totalling £16bn. These are based on the saving calculated for UBI in the Green Party Basic Income Consultation Paper: April 2015, and extrapolated to cover both schemes.

UBI values

For the costs of UBI in the final pane, I looked at a scheme that would preserve current government income and expenditure, and one that would provide all citizens over 18 with a basic income of £10,000 (for no other reason than it’s a nice, round number, and an amount that one could live modestly on).

There are about 52 million adults in the UK. If the current welfare budget was divided equally among them, each person would get (£252bn -£16bn)/ 52mil = £4,538. This by itself demonstrates that a basic income scheme of some form is possible, but we want to do better than ‘possible’, we want a scheme that is desirable. Anyway, in order to finance this scheme, we could either keep tax as it is, or introduce a 57% tax on the value of land. Whoa, that sounds a lot! More on this below.

A basic income of £10,000 would cost the treasury £10,000 x 52mil + £16bn = £536bn (I left off the £16bn in the infographic, oops). That would require a land tax of 80% of rental values.

Other means of funding UBI schemes are given in this report from the University of Bath; you may find these interesting and useful:

What Land Is Taxable?

In my calculations, not all of the UK would be taxed. I have removed significant land areas owned by the Crown, government, charities and utility providers; details of which were obtained from this article.

The landowners on the left get off tax-free.

23.8% of UK land is non-taxable, but this is a conservative estimate. The land types in the infographic are the most common money-making uses, and the areas were determined using the Land Cover Atlas of the United Kingdom as follows:

Agricultural: 131,270 km²
Industrial: 2,452 km²
Commercial: 3,858 km²

For housing, I did not consider area, but based the calculation on a household representing a single unit. The total number of households in the UK is 27,227,800. This is less than the number of homes in the UK, which stands at about 27,713,000 — but empty houses don’t generate rent.

Calculating the area of taxable farmland was quite difficult, because large portions of the countryside are owned by entities that I have excluded in order to arrive at a higher estimate of the tax rate.

Land Rental Values

Land Tax abolishes all other taxes and imposes a single tax based on the value of land. Under such a system, the landowner makes money from the rental value of their land, so the tax is levied on rental values and not sale values. The problem is in determining rental values, because the present system of land ownership in the UK does not sell and rent land in the way an LVT would expect it to. Any values calculated here are likely to be incorrect, but they are a relatable starting point that we can use to understand the problem and use as the first iteration of calculations.

The values in the infographic are the average present-day rents for four broad categories of land. They are not all expressed in the same units, but for all except residential they are easily convertible into £/km². I obtained these values from the following sources:

Residential: £11,088 per household per year (HomeLet Rental Index)
Agricultural: £200 per hectare (DEFRA Farm Rents 2015/16 — England)
Industrial: £86 per m² per year (Industrial Rents Map)
Commercial: £216 per m² per year (Offices Rents Map)

Multiplying these values by the areas above, we have total rental values as follows:

Land Tax Values

For a basic income of £4,538, government expenditure is the same as the 2018/19 level of £809bn, which is 57% of the land rental value.
For a basic income of £10,000, government expenditure increases to £1.037trn, coming to 80% of the land rental value.

That sounds like a lot, but is it really? Comparing LVT to the present system of numerous separate taxes is difficult. But given that we are currently charged on our income, profits, savings, house values, inheritance, purchases and more, it’s clear that a high land tax could be offset by the tax savings we would make on all of these things as well as the gain made by the basic income payment— as long as the tax rate is set right.

In terms of how much tax in total we pay, it differs from person to person. Even if you file your own taxes, you still won’t know the total amount of tax you pay because of taxes on goods and services applied at the point of sale. However, the UK’s Tax Freedom Day is May 29th this year, meaning that the average tax rate per person is 44%. That’s pretty high — and yet we pay minimal taxes on land at present. Exchanging the 44% average personal tax for even an 80% tax on land rental values would represent a saving for most, and depending on how the economy developed after such a change in fiscal policy it could even be more tax-efficient for landowners. Of course, there are conditions attached…

Stepping Into The Unknown

We don’t know how implementing either UBI or LVT would change the economy. We sure don’t know how they’d work together. But there are some things that we should expect to affect, or be affected by, a change to UBI and LVT.

Tenure

This is bound to be affected by LVT, and an overnight swap to this system could cause major upheaval. In the UK, many people do rent their homes from a landlord, but those who own their homes (including said landlords) will either own the building and the land, or just own the building. Those who own their homes on a leasehold basis pay ground rent to the owner of the freehold. Introducing LVT would either introduce another layer of rent to be paid, or would impose a tax burden on homeowners that have purchased the freehold, which is around 80% of British homeowners.

This potentially raises issues over rights to housing: what happens if a landowner can no longer afford to pay the LVT on the land that their main home is built on? Would LVT effectively make everyone a leaseholder with the government as landlord? Is it possible that land rents would fall to a level that is sustainable for most, mitigating the effects of this problem?

Land sale value and rental value

One of the anticipated effects of LVT is that it will reduce land values. This is no accident — when land-grabbing happens, the value of land soars and the wealth is concentrated within a small elite. By setting the land tax at a level that makes it too costly to just hold on to real estate for the sake of it, owners of large areas of land are more likely to wish to sell, or to develop their land. Landowners will need to set their rents at a level that will earn them a profit after land tax has been deducted, but sale values could fall as land no longer holds the same value simply by virtue of existing. Land tax changes the way that land has value, shifting it from sale price to rental price. These are the 2018 average sale and rental prices of the four land categories under investigation:

Average UK house price obtained from http://landregistry.data.gov.uk/app/ukhpi

Architectural style and form

You may have noticed that the land area given to “built on” spaces is quite small compared to the size of the whole country. It’s a common misconception that Britain is overcrowded, when the truth is that 83% of us live in towns or cities — which collectively make up a tiny fraction of the land. Less than 2% of Britain is built on. For comparison, 5.9% of Britain is peat bog.

The fact that our urban spaces are so densely packed demonstrates in part why land values for residential, industrial and commercial land are so high. And it also drives our construction techniques and building designs. There is a fashion in the UK at present for high-rise blocks. There are many reasonable objections to this form of development, but in terms of protecting the environment, reducing carbon emissions and maximising efficiency, it’s the best way to build. It concentrates development in cities (where it belongs), and leaves the countryside untouched and available for everyone. And it also works perfectly if you are a landowner paying LVT.

If you build a house, you’re using somewhere in the region of 90 m² for that one dwelling. But if you build a tower block with a footprint roughly three times that, you can fit two luxury flats plus lobby on every floor — and you can build as high as planning regulations and the laws of physics will allow. LVT incentivises construction upwards rather than outwards.

Jobs market

UBI is one means of ensuring that all are provided for if/when the robots take our jobs. But combining UBI with LVT could change the way that many earn a living. My article on Land Value Tax attracted comments from those who do not wish their “hard-earned” land appreciation to be taxed. But taxing land might open up opportunities for many people who would nowadays not consider property development.

In the UK, housing and land is extremely expensive and is hoarded by a wealthy minority. LVT may catalyse the break-up of large estates, even though the price of land will fall. The maintenance of the land is the cost that deters land-grabbing, not the value of the land itself. Smaller plots will be available for whoever wishes to purchase and manage the land appropriately. If they choose to neglect it, they’ll be worse off.

But if people buy land to rent to others in order to boost their income, that’s an alternative to a conventional job, and it’s open to those from all parts of society, including those whose jobs are made obsolete by technology. Property developers have a poor reputation (often for justifiable reasons), but strangely an increase in property developers might be a good thing.

Personal income

The balance between basic income, earned income and taxation needs to be such that citizens have enough money to live on. Of course the price of housing, rent and consumer goods factors in to what makes a living wage, but let’s assume the government only controls the tax rates and basic income payments.

Some may get by on just the basic income, without owning any land or seeking employment — with the advent of this age of automation, many service and manufacturing jobs will disappear and at least those displaced workers will be cared for financially. Others with higher skill levels may seek additional employment on top of their unconditional basic income, meaning that for this group the basic income acts as an incentive to work.

Because both the basic income, and a workers earnings, are untaxed, citizens have the potential to become very wealthy without penalty. Any taxes levied must not only cover the government’s spending (including the UBI), but must be at a sensible level so that citizens are not taxed so heavily that their wages are eroded to a level that they cannot survive. In this system high earners can choose to invest in land, including for their own dwelling, but they will be taxed on it. They could also choose to simply rent and avoid tax, but they would have to pay the market rent which is dependent on the tax rate.

Home ownership

Land value tax aims to assist (potential) homeowners by preventing individual landowners from becoming too greedy. But there could be problems at the other end of the scale, if homeowners cannot afford the tax on the land their home is built on. This might then promote behaviours such as building on land of a lower value, or purchasing apartments in a tower block, but for the individual homeowner the question is of whether or not they can afford a home at all. The housing market in 2018 in the UK removes choice for a large portion of the population. Many cannot afford to buy a home anywhere, yet are forced to pay crippling rents that are greater then a typical mortgage payment; those that can afford to buy are limited to cheaper housing that may be unsuitable.

This problem began with property speculation and the sale of social housing to tenants with none built to replace it. It escalated with overseas investors buying up large tracts of our cities and pricing ordinary residents out of the market. My hope is that LVT would disincentivise the hoarding of ‘luxury’ apartments as assets for wealthy foreigners, and return the land to the people who will actually use it. If land tax becomes too expensive for some to buy a home, we might wish to consider a long-term renting model such as that used in continental Europe.

Land tax rates

In the present market different types of land have different values, and this would be reflected in a land tax, if it is to be fair and effective. In the UK, we have an abundance of farmland (well over 50% of the nation), and the financial yield is lower than the equivalent area of industrial or residential land. Land rents for urban uses are therefore higher than for agricultural land. It’s expected that different levels of rent would be achievable in a land tax system, but also that the rent will be affected by the tax rate. Therefore different tax bands should be created for different uses, and possibly based on the sale value of the land. However, we must take care not to set a tax rate that drives up the rental value artificially — as this would not only distort the market, but also price those subsisting on the basic income out of the housing market — which would defeat the point of having a UBI system.

In conclusion

I don’t know if the values in my fancy infographic are the right ones for a real-life version of UBI combined with LVT. But they are what the system would look like in the UK if we just changed our fiscal system overnight with no revaluations.

I have presented some simple calculations that are almost certainly wrong, but I’d like feedback and suggestions for additions, changes, etc. I’d like to have a go at something a bit more complicated, and any recommendations for how to do this would be appreciated.

Ultimately each of the components of my fictional economy influence, and are influenced by, the whole system. So a number of different equilibrium points are possible, and it’s more complicated than just saying “the numbers are wrong”. The figures I used in my system add up, but are they sustainable or useful? I’m not sure, but I can see that a UBI funded by LVT is possible.