In 2020 and 2021, government spending rose by almost £400 billion, covering policies from furlough to free school meals. This spending dominated the national conversation, but as many of those programs wound down and inflation began to rise, the focus inevitably shifted to taxes.

At the Autumn and Spring Budgets of 2021, the Chancellor announced a series of tax raises amounting to around 2% of GDP, mainly from increases to Income Tax and National Insurance. These have had a mixed reception: described simultaneously as progressive and regressive. There is, however, one thing economists might agree on: raising taxes on income will reduce economic growth. For example, the Office for Budget Responsibility estimates that the behavioural response to the NI rise will eliminate 23% of its theoretical revenue.

Taxing labour income reduces labour supply, and this notion applies to many other tax bases, too: profit, property, or even carbon emissions. But one type of thing escapes it, and by doing so has become the favourite among economists: land. In the words of the OECD, “the reviewed evidence and the empirical work suggests recurrent taxes on immovable property being the least distortive tax”.

This raises two questions: what actually is land, and why should we tax it?

Land, defined

These questions were of particular importance to Henry George, the influential American political economist of the 19th century. His most famous work, Progress and Poverty, sought to explain why poverty continues to exist in times of technological advancement, proposing that the answer lies in the rents demanded by owners of natural resources which increase in value. Land, under this definition, encompassess everything not man-made. For property owners, the land you own is the ground underneath your house.

It’s important to distinguish between land area (the physical area covered by a plot of land) and land value (its fair market price). A tax on land refers to the latter, a tax on its value. But where does the value of land come from? Why is an acre of land worth 100 times more in the City of London than in Broxtowe? George posits that this gain comes from the development and productivity surrounding the land, none of which were contributed by the owner. The owner of the land, however, profits when the land value increases. If they are a landlord, they can charge higher rent; if they are their own tenant, they benefit from the improved location value of their residence (and they capture this financially when they sell). According to George, this unearned nature of land values justifies a land value tax, equal to the annual profit of the landowner (the “rent”).

A land dividend in the UK

The UK’s total land value exceeds £6 trillion, and thus a land value tax of 1% would raise over £60bn annually. Returning this revenue to UK residents as an £18 per week dividend ensures budget neutrality; this is sometimes called a land dividend. My nonprofit, PolicyEngine, has built an app to compute the impact of tax and benefit reforms such as land dividends. The PolicyEngine app estimates that this 1% land dividend would cut poverty by 18% and benefit two thirds of the population. It would also be highly progressive: the bottom income decile sees its income increase by over 7%, while the upper decile would lose 2%.