Richard Murphy: Why land value taxation wouldn't work for Scotland

Two contributors to the letters page of this newspaper have pointed that out. They are quite sure I made a big mistake by not doing so. I have to inform them, this was no mistake on my part. It was entirely deliberate.

I am well aware that the proponents of land value taxation think that it can solve almost every known problem. On occasion, I suspect that they think that even the common cold might be cured if only we were to have such a tax. Unfortunately, they are wrong in just about every way imaginable.

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This is not to say that a proportional tax based on the value of all land, including that estate land used for leisure purposes (or game hunting, as most of us might call it), would not be a good idea. It clearly would be. But let me be abundantly clear that it would not solve the problems of Scotland’s economy. In fact, if introduced as its proponents suggest with the aim of replacing income tax, it would make things very much worse.

That is at least in part because those proposing LVT’s seem to have no idea what tax is for in the modern economy. They seem to think that without tax a government cannot spend, and so function. Tax is, in their opinion, about providing the money a government needs to function.

This is true in the case of Holyrood because it has no money creation powers. In that case it must have revenue from tax. But to base the devolved tax system of Scotland on such an assumption would be absurd when the aim is to have Scotland independent, and with its own currency. If that were to happen, then the Scottish Government, like every other sovereign government with its own currency, would not be dependent on tax to fund its spending. That would be because, as a matter of fact, every single penny of that spend would be funded by its central bank, just as every single penny of UK Government spend now is ultimately met by the Bank of England loaning funds to the UK Government.

When we have an independent Scotland with its own currency tax will have numerous roles to play in the economy.

There are six reasons to tax:

•  To ratify the value of the currency: this means that by demanding payment of tax in the currency it has to be used for transactions in a jurisdiction.
• To reclaim the money the Government has spent into the economy in fulfilment of its democratic mandate.
• To redistribute income and wealth.
• To reprice goods and services.
• To raise democratic representation - people who pay tax vote.
• To reorganise the economy ie fiscal policy.

Note that none of these has any relationship to funding the government. That would be done in an independent Scotland by the new central bank it would have. The primary role of tax would be to prevent inflation that would arise as a result of that money creation process that would fund government spending. Tax must be used in such a situation to take government-created money out of circulation, which is precisely what it does.

However, the means by which tax takes money out of circulation matters. Some taxes can be more focused than others at ensuring all the social aspects of this process of money cancellation are best dealt with. So, income tax can be considerably finessed - and by much greater a degree than it is already, as my Taxing Wealth Report 2024 demonstrates.

Corporation tax is essential to make sure an income tax works, but also to prevent a country without such a tax from becoming a tax haven and an international pariah, as would surely be the case otherwise.

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Inheritance tax and capital gains tax could be much better capital taxes, and so be better tools for tackling inequality than they are now. Again, the Taxing Wealth Report 2024 demonstrates how.

And even the apparently regressive VAT could be useful (and much more so than it is at present) in taxing "bads" within the economy. Excess rates could be introduced. The denial of the right to recover VAT in anti-social businesses, like gambling, advertising (almost all of which promotes climate change) and petrochemical production might achieve this.

Smaller taxes could be finessed in the same way, none of which can be done with a land value tax, meaning that the use of tax as a social policy instrument would virtually cease if LVT was used instead. That would be a disaster.

But so too would building a tax system on the need to raise revenue alone be a disaster unless we abandon the hope of independence. Why base a Scottish tax system now on a tax whose use would be inappropriate after independence?

Then let’s stop pretending, as LVT proponents do, that land taxes would be paid by landlords. This is total nonsense. Land taxes would be paid by tenants. Land owners would pass on the charges, and as evidence rents have skyrocketed recently as landlords have passed on increased interest costs. They would, of course, do the same with LVT.

The Finance Secretary addresses MSPs (Image: PA)

So, land taxes, at rates very much higher than now, would be due by the poorest in Scotland, whose cuts in income tax would be minimal or non-existent. Meanwhile, oligarchs and illicit money would flood into Scotland, attracted by an absence of income and corporation taxes, and the gross inequality seen in the world’s worst tax havens would be reproduced here. In both cases, very politely, no thank you very much.

Land value tax was a 19th-century solution to a shortage of government tax revenue created at a time, when the use of the gold standard constrained a government’s ability to act as it wanted. It was an anachronism, even then. In the 21st century its widescale use would be a hideous, inequitable and immensely socially and economically destructive proposal that meets no known current need, whilst it would almost certainly make life very much worse for many of the most economically deprived.

As a solution to council tax reform LVT might have a small role to play in Scottish taxation. As a general solution it is not just a non-starter, it is rightly dismissed as contrary to Scotland’s 21st-century requirements. We have suffered with the economics of the madhouse for more than 40 years. The land value taxation my critics propose is more of the same of that. No wonder I ignored it.