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David McWilliams: Tax unused land and the housing market will be sorted

Landlords will bring idle land into use pronto if they face a big cost such as tax

Economics is counterintuitive – and maybe this is the most important lesson in macroeconomics. Here’s a good example. A responsible household will try to save but the economy is not a household. When everyone in the economy saves at the same time, it may look good and responsible from an individual perspective but, if everyone is saving, who is spending? Since your spending is my income, if you are not spending, where is my income going to come from? And as savings flow from income, if my income is falling so too are my savings, thus everyone saving at the same time leads to a fall rather than an increase in savings.

When so-called “serious” people call for general belt-tightening, urging people to save and not spend, it sounds parsimonious – and in modern economics we’ve fetishised parsimoniousness – but it’s actually silly. What seems like common sense isn’t sensible at all.

The wealthiest 10 per cent of households hold roughly 54 per cent of the wealth in Ireland, with the top 30 per cent owning close to 85 per cent. This means that the other 70 per cent of Irish households hold only 15 per cent of the nation's wealth

When we look at the housing debacle – not just in Ireland but all over the world – it's not uncommon for people to argue that, in order to get the housing market going, we need to subsidise it more, give more tax breaks, reduce the costs and that this will bring land into use. All of this sounds plausible, but it's all too intuitive. The counterintuitive approach suggests that we do precisely the opposite and we will get more land into use. Tax land heavily and more will be used and made commercial than if we don't tax it. The reason is clear: if the cost of leaving land idle is low, then it will be left unused. If there is a big cost – such as a tax – on idle land, it will be brought into use pronto and the landlord will try to get as much commercial activity on this land as possible to generate the revenue to pay the tax.

Ireland is the least populated country in western Europe, yet we have among the highest land prices. It's a stitch-up. It is really that simple. To be sure, there are issues with housing delivery, planning and finance, but the critical issue is not only the cost of land but the perception of that land as an asset. If you treat land as sacrosanct, elevating it above the interests of people, you will get a system that hoards land and exploits people, forcing employees and entrepreneurs to pay over the odds for homes, funnelling more and more money into the pockets of landowners.


As land is a base price in the economy (because higher land and house prices feed directly into our costs of living), higher land prices ratchet up wages and this ratchets up the general price, making Ireland one of the more expensive places on earth to live. However, this elevated price level is not a reflection of a generalised elevated standard of living as one might assume, but a reflection of an underlying price which is out of whack with everything else. The entire domestic economy worships at the altar of land, making all of us poorer not richer.

It also concentrates the wealth of the country in the hands of the few, supplemented by the rest. The results are quite startling. The figures below are from an excellent ESRI Working Paper from 2016, entitled “Scenarios and Distributional Implications of a Household Wealth Tax in Ireland”.

On an income basis, Ireland is quite an equal country and over the past few decades Irish income differentials between the top incomes and the poor have narrowed somewhat, with the vast majority of us in the middle. This is progress and the tax and welfare system works hard to maintain this social contract. But we fail badly on wealth inequality and the culprit is land.

The wealthiest 10 per cent of households hold roughly 54 per cent of the wealth in Ireland, with the top 30 per cent owning close to 85 per cent. This means that the other 70 per cent of Irish households hold only 15 per cent of the nation’s wealth. Take that in for a moment. The vast majority of Irish people, most on decent incomes, only own one euro in six of the national wealth. According to the Economic and Social Research Institute, the bottom 50 per cent own a mere 7 per cent of the nation’s wealth.

The paradox of property is that its value increases even when the revenue stream is negligible because of hoarding

Further down, the bottom 10 per cent have debts higher than assets, so they have negative wealth. The vast majority of Irish households’ wealth is in real (non-financial) assets – dominated by primary residences, land and farms. Back in 2016, the total net wealth of those households with positive net wealth was €378 billion. Doubtless that figure has increased. These figures require a bit of perspective.

When we examine the housing crisis and the evident wealth inequality, it’s not hard to conclude that land is the asset that is, how do I put this politely, screwing with Ireland. And the paradox of property is that its value increases even when the revenue stream is negligible because of hoarding.

We could fix this with a site value tax, which penalises land that is left unused and encourages development on land. It was first suggested by Henry George in one of the bestselling books ever. Poverty and Progress was published in 1879, only the Bible sold more in the 1880s. Fans include George Bernard Shaw, Friedrich Hayek, Leo Tolstoy and Teddy Roosevelt and its teachings formed the basis for centre-left thinking in the late 19th century. The central argument was that land and the protection of land create poverty and inequality. It is hard to argue with that when we see the Irish data.

George suggested a new tax, called a site value tax (SVT). The concept is quite simple. The value of any given site is derived from two components – the land on which it lies and what you decide to build on it. An SVT is a charge on the unimproved value of land – that is, the total value less the value of whatever capital has been built on it. It seeks to capture the rental value of the site and, as such, is all about location. It penalises land left undeveloped and thus encourages development but doesn’t punish those improving and maintaining properties such as protected structures as it’s based on the land value. It encourages an efficient use of land and punishes both speculative hoarding and vacant or idle property. It would also tax idle wealth that is driving wealth inequality both here and abroad.

The SVT critically accords with the counterintuitive nature of macroeconomics. To bring something into use, make it expensive, not cheap, to leave unused. When land carries no penalty for being unimproved, it is taken out of supply and the overall supply of land for development falls causing land prices to rise. This is happening now in Ireland. We could fix this by making unused land expensive via a tax and, in short order, this land would come on stream for development. It would also encourage much more dense use of land and more dense urban development, while at the same time reduce wealth inequality.