There’s a nice, jokey proximity between Land Value Tax and the Labour Theory of Value — their acronyms are so easily confused. Perhaps one is an accident of proximity, or one is a consequence of the other. Andy Burnham could be about to launch an LVT. Vested interests will fight it. Call it socialism. But it is rooted in classical political economy, so what could be more appropriate than to set it off on the 250th anniversary of The Wealth of Nations?
In the 150 years since Henry George made the case for a tax on land values, we have succeeded in building economic policy that violates the logic of both. If you accept — as I do, and as the classical political economists did, and as the logic of markets arguably should suggest — that human labour, human endeavour, is the source of value creation, then it’s really important to distinguish productive activity from non-productive rentier activity. And so you want to place the highest taxes on activities that benefit from other activities but do not perform activities themselves. A Land Value Tax is the logical policy consequence of actually believing in the labour theory of value, and also believing that markets are efficient when they work freely — that is, without controlling factors.
The classical distinction: productive and unproductive labour
Adam Smith made it clear in the first sentence of The Wealth of Nations: "The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life." And he then made the distinction clear, if not always consistent. He distinguishes between labour "that adds to the value of the subject it is applied to" and labour "that does not fix or realise itself in any permanent subject or vendible commodity." A manufacturer creates value; a servant does not. On this logic, a person who improves land — farms it, drains it, builds on it — creates value. The mere owner of land who receives the benefit of its value contributes nothing.
David Ricardo took this further. In Principles of Political Economy and Taxation (1817) Ricardo singles out land for special treatment. Capital and labour are produced, but land is not. The value of land is not derived from the labour in it — you cannot simply work harder and increase land. Rather, land value is a measure of the scarcity of desirable sites, which is socially produced. When a city grows up around a piece of land, when infrastructure is built up around it, when labour concentrates in a region, the value of that land increases. But this was not the fault of the landowner.
The insight for taxation is that the value which is attached to land without any effort of the owner is the value which should be taxed. Tax the value created by scarcity, location and the efforts of others. This is a Land Value Tax. And it is especially relevant to a country where the feudal hangover means that around 30% of the land is still owned by the wealthy families that took it in 1066. The same rule is applicable to other "passive" income. Rather, we ought to reward and incentivise human endeavour, which means cutting taxation on income and entrepreneurship. But we do the exact opposite.
David Harvey, in The Limits to Capital (1982), develops Marx’s rent theory to explain how ground rent — the unearned income derived from the ownership of land — becomes the means by which the labourer’s own productivity is used against him. As cities concentrate productive activity, land values go up. But workers cannot move to cheaper land without losing their jobs. They are caught. They have to spend more and more of their labour to pay for housing. The land produces nothing. The worker does. But the landowner gets paid by the worker.
The economist Mariana Mazzucato, in The Value of Everything (2018), shows that modern capitalism has lost the classical distinction between value creation and value extraction. Private landowners, who did nothing to create the public investment in infrastructure, research, education — the collective labour that makes cities valuable — capture it. She quotes economist Yanis Varoufakis, who says that we are living in an economy where “value creators are increasingly impoverished as value extractors become phenomenally wealthy.” This is the natural result of taxing productive activity while leaving non-productive extraction untouched.
Why the Old Economists Were Right About Incentives
So if you actually believe — or want — markets to work, if you believe incentives matter, then you should tax most heavily those activities that create the least value. A person who works, who builds, who innovates is adding value, so of course they should be incentivised through lower tax rates. The higher rates should be levied upon the person who sits on land and waits for appreciation, who uses zoning laws to restrict supply and raise prices, or who exploits any other restriction in a monopolistic market. This policy would generate more revenue, provide the right incentives, and improve the functioning of markets in and of themselves. It’s not just the direct market. It’s the market for land. Wealth is then shared more evenly around the population, giving a better picture of effective demand.
This the classical economists instinctively knew. Ricardo wondered why rents were rising and wages falling. He concluded that the landlords were pocketing the gains of other men’s labour. His solution was simple: tax the rents, not the productivity of the farmer.
Yet we tax wage labour at 20–40 percent. We tax corporate profits at 15 to 25 per cent. But we let land values appreciate tax free.
The Georgist Argument, Carried On
Henry George, the self-taught popular American economist who inspired Monopoly, did not invent the land value tax, writing in Progress and Poverty (1879). He had borrowed it from the classical political economy, and gave it a meaning: “We should put all taxes on the value of land, and take off all taxes on the value of the things that labour and capital produce.”
What George understands is that this isn’t redistribution based on class or punishment on success. It is decoupling the value that human effort creates from the value that nature and society provide. The current owner did not make the land itself. The value of the location was not created by the current owner. Tax that value and you are simply recovering for the public what is of public origin.
This logic runs back to Ricardo, and through Ricardo to Smith, and forward to Marx, who saw rent of land as a specific form of surplus value extraction. But it also radiates outwards to contemporary political economy. Philip Pettit, in Republicanism (1997), contends that republican freedom — freedom from arbitrary domination — demands that citizens not be subjected to the arbitrary power of landlords. Massive concentration of land ownership, with housing prices out of reach of workers’ wages, is exactly such domination. By cutting the link between housing costs and land and allowing wages to determine the supply of housing, an LVT restores some republican freedom.
Evidence: experiences with LVTs
Several jurisdictions have introduced land value taxes or similar measures and the evidence supports the classical argument.
Denmark has been taxing land value for over 100 years. The tax doesn’t suppress development. Instead development booms, because developers have a strong incentive to build (improved land isn’t taxed; only underlying land value is). At the same time, land prices remain affordable relative to labour income.
Singapore has very effective land value capture through government land sales and development. So, although it is one of the most densely populated cities in the world, housing is still much cheaper than in comparable cities like London or Vancouver where land speculation rules.
Estonia introduced a land tax in 1993 and has maintained it ever since. Economists say it has had little negative impact on investment and has cut down on speculative land-holding.
Land prices in places with weak land taxes — London, Vancouver, San Francisco, Sydney — have, by contrast, completely decoupled from wage growth. The pattern is the same: tax labour and capital, leave land free, and land becomes the dominant asset. Tax productive activity, and productive activity will slow down. This isn’t voodoo economics. It’s basic incentive theory.
The Contemporary Case: Finance, Rent-Seeking and the Difference between Value Creation and Extraction
The old distinction between productive and unproductive activity has become urgent again, because modern finance has blurred it altogether. The hedge fund manager buys land, extracts value via zoning arbitrage and development rights, and sells. Value creation or extraction? They haven’t done any work. They have created nothing. They have simply positioned themselves between other people’s labour and other people’s capital, and taken rent.
Piketty documents, in Capital in the Twenty-First Century (2013), that returns to capital — particularly land and real estate — have far outstripped returns to labour. The reason is simple, going back to the classical economists. Capital ownership is concentrated. If you tax labour but not capital, you create a feedback loop. The rich own land, which increases in value tax-free. They use that wealth to lobby for lower capital gains taxes. Tax labour more to fill the gap. This is not by chance. It is the inevitable result of the inversion of classical logic.
The fix is not difficult. Tax land values more. Tax human endeavour less. Speculation will fall, development will accelerate — because developers have incentives to build, not hold — and wages will matter more than inheritance.
Conclusion: Value-aligned incentives
If we truly believe human endeavour is at the centre of value creation — which is what classical political economy claimed and what basic economic theory implies — then we are faced with a policy choice to tax those activities which benefit from others’ activities but do not perform productive activities themselves.
A Land Value Tax is no revolution. It is the logical policy implication of the Labour Theory of Value. Nor does it have anything to do with punishing success or taking from the industrious to give to the idle. It is just saying that the value created by labour belongs to labour, and the value created by scarcity and situation, which is a public good, belongs to the public.
This the classical economists got right. The Georgists got it back and we still have tax wrong.
The joke in the acronyms, LVT and LTV, points to something serious. The one follows from the other. If you believe in the labour theory of value then you must believe in taxing land value.