The cost of living features in nearly every news bulletin at present. However, while the inflation increases in the prices of energy and food are always highlighted, increases in the price of housing are seldom mentioned.
Forty years ago the share of household incomes spent on food was about 30% and the share spent on housing was 10%. Now these numbers are reversed because of inflation of house prices. Many are unable to afford food or heat because so much of their income is spent on paying rent or mortgages.
People would be able to afford to eat and keep warm enough if housing costs were lower, but politicians too often ignore this fact because they falsely believe that high and rising house prices are beneficial to the national economy. House prices are included in the calculation of GDP so rising prices can enable politicians to claim the economy is doing better than it actually is.
Schemes like “Help to Buy”, which enable more people to obtain mortgages, only make houses dearer. House prices have risen enormously over the last 35 years following the boost given to house ownership by allowing council houses to be bought by their tenants at greatly reduced prices. But at the same time, houses have become a favoured form of investment because our perverse tax system taxes landed property very lightly compared with the taxation of earned incomes.
The diversion of investment into landed property and away from manufacturing industry has diminished the ability to produce essential goods, which have to be imported, and encouraged the provision of financial services which produce very little of relevance to the real economy as experienced by the majority of people.
Taxation has dominated discussions of the cost of living but has focused on the amount of tax levied with no comment on what is being taxed. Most government revenue is from Income Taxes and Value Added Tax which have large inhibitory effects on employment and trade.
The amount of revenue collected is far less important than where it is collected from. People currently on strike in protest about wages and cost of living could end up seeing most of the extra pay they hope to get overtaken by continuing inflation in the cost of living. They should be asking for reductions in the cost of housing , which is not included in the consumer price index of inflation, instead of demanding more pay.
Without radical tax reform to remove taxes on earned incomes and increase the charges on the incomes received by those of us who own landed property, unearned, from the increases in its price, the cost of living will not be reduced. The pursuit of more pay without tax reform is like treating the symptoms of a disease without seeking its cause. Millions have boosted their riches more from the unearned increases in the price of their houses than from the wages they have earned from working.
The government could make a start on tax reform to rebalance the national economy by abolishing Council Tax and Business Rates and replace them with Land Value Tax (LVT) otherwise known as Annual Ground Rent (AGR).
Council Tax is based on house valuations in 1991 and has become absurdly regressive. The highest priced house owners pay a much smaller percentage of their market price than those with the lowest priced houses. The longer revaluations are delayed, they will become more costly, but if LVT/AGR replaces the present whole-property valuations, the cost will be much lower and the job done more quickly.
The variation in land values in any given area is much smaller than that of whole properties. LVT/AGR should also be charged on eligible land which is derelict and disused and currently contributes nothing to local revenue allowing its owners to afford to leave their land unused. This would provide an opportunity to increase the revenue for local government to pay for the much needed improvements in education, healthcare and welfare.
The aims of government economic policy should be to maximise the standard of living of the people; minimise their cost of living; and minimise the cost of doing business. These aims will never be achieved with the present perverse tax system which inhibits the production of wealth with high taxes on employment and trade, and taxes those who own landed property very lightly.
Politicians of all parties are content to blame the current high cost of living on mistakes made by their opponents in recent years but none of them will admit that radical tax reform has been avoided by politicians for more than a hundred years! After 1660, parliament took control of government from the monarch and all its members were landowners. Landowners had been responsible for supplying the vast majority of public revenue for government and they soon began to shift their tax burden onto working people by imposing excise taxes, which the landowners could avoid! The present tax system, after all these years, still maintains the privileges of relief from taxation of the unearned income of those of us who own landed property and most government revenue is taken from the earned incomes of working people.
All the funds for the necessary functions of government can be met by the annual collection of the economic rental value of land and other natural resources and would allow taxes on employment and trade to be abolished.
Council Tax is based on the market price of houses but most of the price of houses consists of the price of the land on which they are built, not the costs of building. The land component of the price of a house used to be about 10% of the total price. This has risen to more than 50% during the last forty years, so imposing a charge on the rental value of the land is much more effective in reducing the cost of living than a charge on the price of the whole property as it does not inhibit development.
Radical tax reform will not solve all the nation’s economic problems but without it most of them will only get worse and the gap of inequality in health and wealth will get wider.
Duncan Pickard is member of the Scottish Land Revenue Group