speri.comment: the political economy blog

The UK is sinking deeper into property inequality – here’s why

In the UK and in developing countries enormous wealth is generated from property. New approaches and action is needed to value and tax property wealth

Tom Goodfellow, Associate Fellow, SPERI, & Lecturer in Urban Studies and International Development, University of Sheffield

Tom GoodfellowOutrage has been mounting over the untaxed incomes of the global elite, foreign ownership of urban land and soaring rents in the private rental sector.  Much of this boils down to two key matters: who owns property, and how they are treated.

The UK, it seems, is a place that makes it very easy for individuals to generate a great deal of wealth from property, with little concern for social justice or the provision of affordable housing.

But this problem is not uniquely British.  Across the world – and particularly in many developing countries experiencing fast economic growth – capital is flowing rapidly into real estate.  And increasingly, governments are waking up to the need to effectively capture some value from these investments, for the public good.  Yet, as my new SPERI Brief on property taxation shows, this can be extremely difficult to achieve due to complex historical legacies around land, as well as deeply entrenched vested interests.

Consultants from the UK and other rich countries are often the first on hand to provide advice and propose systems of property and land taxation, to enable governments in poorer countries to bring in revenues that reflect the real value of developments.  Meanwhile, ironically, the UK’s primary property tax – a monthly ‘council tax’ paid by residents to local authorities – remains scandalously out of line with modern property values.

Of course, property inequality looks very different in British cities than it does in cities in developing countries.  In many African cities, a clear majority of people live in slum conditions, the like of which are (thankfully) consigned to the past in Britain.  Yet the property markets are being transformed by very similar processes.

International capital flows are central in both cases: wealthier migrants from low-income countries now based in the US and Europe often channel their earnings into untaxed property back home, while the UK solicits property investments from footloose international elites.  Whatever the context, the outcome is largely the same: luxury properties abound, often unoccupied and almost always undertaxed, while governments fail to provide proper incentives for developers to invest in cheap housing.

These issues are particularly concerning in poorer countries, not only because of the scale of inequalities and gaping absences of affordable housing, but also because investments in luxury properties divert funds from other sectors, which urgently need capital to make the nations’ economies more productive.

What to tax?

It seems clear that governments of both poor and rich countries need to find ways to reduce the appeal of massive investments in high-end property, and to spend more on housing and services for low-income groups.  The question is: how?

Stamp duty is obviously one mechanism for capturing some of the value of property, but as this is a one-off payment it deals with only part of the problem.  Updating the council tax is an important step in the UK – though this will be very politically difficult.

More fundamentally, however, simply updating council tax bands sidesteps major questions about exactly what we should be taxing when we tax property.  Given the state of the UK property market, a proper debate is needed on these issues.  But as this is also a global issue, the UN’s biggest conference on urban development issues in 20 years should also provide a forum for discussing this at the global level.

One possibility that has aroused significant interest is a land value tax.  The idea is that public investments in infrastructure – rather than private individuals’ effort – make land valuable. So, the government should ‘recapture’ this value for further public investment, by taxing property owners a proportion of the annual rental value of their land.

Some argue that taxing land also encourages people to use land productively, and deters speculation; in other words, if you are paying a relatively large amount of tax on a plot of land, you will want to make the best possible use of that land (by building a tall tower, for example), in order to maximise your profit.

By contrast, taxing buildings discourages investment and development, so many proponents of land value taxation argue that structures should simply be ignored.  There is a certain progressive logic to this: for the most part, growth in land value provides a windfall to the owner, so it seems like a fair revenue to tax.

Should buildings be off the hook?

But a land value tax could have some undesirable consequences: exempting buildings from taxation encourages developers to build for maximum profit – and this often means constructing expensive, luxury residences for wealthy investors.  What’s more, large buildings impose on the surrounding residents and public spaces in a number of ways which can be seen to warrant taxation – for example by blocking light, generating traffic and adding to pollution and noise.

In countries where forms of land taxation are relatively high, but building taxes small or non-existent, there is a tendency to speculate on buildings for which there is no obvious demand.  This can be particularly harmful when there isn’t sufficient public infrastructure or services to support these looming edifices.

If we consider property tax as a means of redistributing wealth from the rich to the less well-off, then it makes sense to tax buildings.  After all, why should one person be able to own a large, immovable asset without paying tax on it, when others pay tax on so many goods, services and incomes?  Is it really fair for the residents of high-rise developments to pay a small fraction of a land value tax, regardless of the actual value of the luxurious apartment which they occupy (or, more accurately, don’t occupy)?

No – taxing property wealth is not only about taxing the windfall of increased land values: it is about acknowledging that the playing field of society is not level, and that the rich should pay more because they can.  And it’s not just a question of social justice – it’s also about the kinds of incentives we want to create for investment, and the kinds of lifestyles that this promotes.  We should not be so keen to encourage intensive investment in land that we exempt buildings – no matter how extravagant and unnecessary – from any kind of tax.

In many developing countries, innovative approaches to valuing and taxing property are being proposed and piloted, and concerted efforts are being made to overcome political resistance.  The UK would do well to follow suit and bring its system of property taxation into the 21st century.

Politicians fear these issues, and public discussions about property tax has fallen all but silent since Labour failed at last year’s general election to win the argument for a ‘mansion tax’.  No solution is simple; but not talking about it won’t solve anything at all.

Tom Goodfellow’s new SPERI Global Political Economy Brief ‘Property taxation and economic development: Lessons from Rwanda and Ethiopia’ is available to download here.

Please note: this blog originally appeared on The Conversation and is republished here with permission

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Categories: Inequality, SPERI Comment, Tax | Tags: , , , | 2 comments

Articles and comments posted on this blog reflect the views of the author(s) and not the position of SPERI or the University of Sheffield.

Comments (2)

  1. Great blog Tom. A few of questions come to mind:

    1. I wonder if, when it comes to UK council tax, part of the problem is not just the politics, but also the contemporary context. When it was introduced in 1992, there was a far higher proportion of both owner-occupation and social renting. Given that, today, significantly more people are renting privately, the reappraisal of council tax bands would essentially force tenants to pay a highly regressive tax reflective of the windfall gains of their landlords. This would be insupportable in London, especially. What’s to stop any landlord passing on this or any other tax to their tenants in the form of higher rents, in the absence of falling prices (and greater owner-occupation) or a significant expansion in social housing, or, indeed, meaningful regulation and controls in the private rental market?

    2. Should we consider getting rid of stamp duty for something else, and if so, what? It strikes me as a highly inefficient and also regressive tax. Why should someone buying a house in London who may earn, say, 10% or 20% more than they would in the north, pay a disproportionately larger duty (in terms of both relative rate of duty levied and the absolute amount) simply for the privilege of being a homeowner when they have little choice but to buy a property that costs 100% or 200% more than it would in the north? They already effectively pay a massive “London tax” in terms of cost of living. Much of the debate strikes me as focusing (quite rightly) on the untaxed fortunes of the lucky ones who have sat on an appreciating asset and struck gold. But they don’t have to pay the duty when they sell, the buyer does, and given this reflects the unearned wealth of the vendor, it strikes me as doubly unfair that the buyer effectively loses out twice or thrice.

    3. A brilliant example of the processes you describe is Barbados: tiny, densely populated, swimming in foreign money. Large swathes of the coast have been bought up by foreign investors; property prices are so heavily inflated that normal people don’t have a prayer of owning land anywhere else than the interior of the island. I always think of Singapore when considering these issues: how plausible do you think their approach – heavily restricting ownership of residential property to actual residents, with a massive public programme of building and renting high-quality apartments – might actually be in, say, a UK or developing country context?

    • Many thanks for this Matt – very good questions! I certainly don’t have adequate answers to them all and they are mostly things I’ve been wondering about myself. So apologies for the long and rambling answer…

      In terms of your first question, this is certainly an issue – I can’t think of any way in the absence of rent controls to effectively prevent owners from passing an increased property tax burden onto tenants. Part of the reason that this hasn’t been such a concern for me relates to the contexts I’ve been doing research in. In contrast to, say, the UK, these are places where the formal rental market is geared to a significant degree towards high-end properties rented to domestic and international elites because many lower income groups own their own properties, even if under conditions of insecure tenure. In these places, if property taxes were to increase, I suspect the effect would either be for the rents to rise (though probably not substantially), with those renting being well able afford it – or that rents would remain the same and landlords would have to take the hit because people wouldn’t be willing to pay higher rents as there is plenty of supply at that end of the market. In both scenarios, the people paying more as a result of the tax would be able to afford it and in the process the local state would gain much-needed resources for public investment that could benefit the population more broadly.

      Of course, there are some lower income groups who do rent property in these places, but below a certain level such properties would be exempt from property taxes. The issue is obviously more problematic in contexts (including the UK) where large proportions of people rent at all levels of the market. If reducing housing inequality and broadening infrastructure access/quality is to be taken seriously, then surely both taxation and rental market regulation of some kind is needed so the costs don’t keep being passed on to the most vulnerable. But even in the absence of rent controls, there could be efforts to make the property tax system as progressive as possible. This may mean fairly steep differences in tax rates between different bands/property values, so that the properties which generate a large proportion of total tax are ones where even if tenants foot the bill this is not regressive because, put crudely, they are rich tenants. This is why in essence the mansion tax idea was not such a bad one, even if in design and approach it was problematic.

      It is also worth considering whether in principle tenants should be paying some part of property taxes anyway. Where I am currently in Lagos, Nigeria, there used to be several separate charges relating to property, one of which was a ground rent paid to the state government, and one a tenement rate paid to the local government. The idea was that (in non-owner-occupier properties) the former should be paid by property owners, and the latter by tenants. This comes back to the split between land and buildings, and the idea (even if implicit here) that former gains its value largely through a windfall based on public investment choices which the landowner should then contribute to, but the latter is something that you might tax more directly in exchange for services provided (which are largely enjoyed by the tenant). The former can be seen as a wealth tax, and the latter as a sort of ‘benefit tax’. However, in practice in Lagos these are now all combined into one land use charge and there is no way of effectively preventing the cost of it all being displaced into rents. But in this particular context owners have to make all kinds of payments (including, bizarrely, paying capital gains tax on the house themselves when they purchase it because sellers can’t be made to pay, as well as various informal payments) so it might be argued that it is not unfair to displace some of the tax burden onto tenants.

      These things need to be thrashed out in any specific context. What seems pretty clear is a) there is so much money in property that in many countries it has gone beyond a tipping point where this can be seen as a healthy incentive to invest in the built environment, and into a place where this is just generating excessive wealth for a small minority and driving and exacerbating structural inequalities; b) this is particularly pernicious in places with either cuts to local spending or long-term basic infrastructure deficits due to meagre state resources. Property taxation can only be one part of a solution, but should play some kind of enhanced role alongside other policies to increase housing affordability.

      In terms of your other two points, I’ll just say something that hopefully links the two. I wonder if in relation to stamp duty there is a case for more regional specificity in the UK. As you say, the existing attempt to have a progressive stamp duty with substantial jumps in rates for different price categories hits London first-time-buyers hard. Council tax itself, however, is not very progressive due to the outdated tax bands and insufficient number of bands at the high end. This is arguably the wrong way round – i.e. more progressive property tax but flatter stamp duties could be fairer? But also, linking to your point about Barbados, one could make a case that foreign buyers have to pay substantially higher stamp duties even without actually restricting foreign ownership?

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