Adam Smith considered the topic of taxes on agricultural land (which he called 'the ordinary rent of land'), houses ('house-rents') and residential land values ('ground-rents') in The Wealth of Nations (Book 5, Chapter 2) he concluded that:

Ground-rents, so far as they exceed the ordinary rent of land, are altogether owing to the good government of the sovereign, which, by protecting the industry either of the whole people, or of the inhabitants of some particular place, enables them to pay so much more than its real value for the ground which they build their houses upon… Nothing can be more reasonable than that a fund, which owes its existence to the good government of the state should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.

The same logic applies today. But although local government administers or oversees most of the 'good government of the state' – a concept we would today describe as 'core functions' such as policing, street lighting and refuse collection, and the protection offered by land registration, the legal system and planning controls – and thus contributes to a large extent to non-agricultural land values, local authority finance and property taxation remain very contentious issues.

As it happens, however, the various taxes that relate to property ownership or occupation and wealth generally (Council Tax, Business Rates, Stamp Duty, Inheritance Tax, Capital Gains Tax, the TV licence fee and Insurance Premium Tax) raised around £70 billion in the fiscal year 2007-08, approximately the same as the cost of those same core functions. There is a clear case for simplification and rationalization here.

Property values and transaction volumes are currently falling rapidly, and as a result total revenues from these sources are expected to fall by £15 billion. However, going by long-term price to income ratios, once property prices bottom out, the above taxes – a bizarre mixture of poll taxes, jealousy surcharges and transaction taxes – could easily be replaced in their entirety with an annual flat tax of around 1.5% on the capital value of non-agricultural property. Even better (for reasons that I will explain in another post), you could replace them with a slightly higher annual tax on underlying land/location values – i.e. the capitalized value of 'ground-rents'.

Guest author Mark Wadsworh regularly blogs here