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FT editor Roula Khalaf selects her favourite stories in this weekly newsletter.

The author is Professor Emeritus in the Financial Markets Group at the London School of Economics

Imagine we were in a world where there was no tax structure but the Government suddenly had to raise £22 billion to balance the budget. clean slatewhich structure would we choose?

The answer is quite obvious. We would raise most, if not all, of the required revenue by taxing the income from land ownership. Why? Because the quantity and quality of land do not respond negatively to a tax on its income, while labor and capital investment do. Moreover, land cannot avoid or evade taxes by moving it abroad, as capital and (rich) people can.

Much of the value of a property is not the result of the owners’ own efforts, but rather depends on its location, nearby public services, and attractive private development nearby. In other words, it is the result of the efforts of the entire community.

The overwhelming case for a land tax has been known for centuries and has been made by many of the world’s leading economists. Yet such a tax, or its less satisfactory counterpart, a property tax on the total value of land and buildings, has played little role in the British tax system or in most others. One reason for this is supposedly the difficulty and cost of valuing land separately from buildings. But techniques and technology have now advanced to the point that this is no longer a major obstacle.

Rather, the main reason is that the rich and powerful in any country almost always dominate land ownership and oppose any land tax. But Chancellor Rachel Reeves is in a much stronger political position today than she was when Lloyd George last seriously proposed a land tax in 1909.

The main problem with a land tax is the initial transition from the status quo. Plans, contracts and funding were all based on the absence of a land tax. If such a tax were to be introduced now, and at a level immediately sufficient to cover the entire £22 billion budget deficit, then, according to the research I and my colleagues have carried out, it would require a tax rate of 0.6 per cent per annum of the value of land, but no tax on the buildings, which normally account for around 50 per cent of the value of a residential property.

In other words, the tax burden on a £1m property would be 3,000 per year. While this would balance the budget, it could lead to an initial fall in average house prices of around 7% – and even more for high-value properties if the tax were progressive. Because this would cause some valuations to fall below the existing mortgage valuation, there would be a risk of financial hardship.

The key to successfully introducing a property tax is therefore to solve the transition problem. It is necessary to introduce such a tax initially at a low rate, say 0.06 per cent (or £300 per year for a property valued at £1 million), to avoid an initial significant fall in property prices. This would initiate a rising property tax rate that would not close the budget gap immediately but only over time. This could be achieved either by a planned schedule of tax increases, say at annual intervals over two decades, or by applying a higher tax rate on rising property values ​​and a lower tax rate on the level of property values.

The second option may be politically easier and result in a smaller fall in property prices, but it would make future revenue developments much more uncertain. Of course, there are countless other transitional problems to be solved, such as how to deal with low-income landowners, how to deal with agriculture, how to deal with royal lands, and so on. But these problems are much easier to solve.

If we assume that we want to not only balance the budget but also completely replace the income tax, we estimate that the property tax would have to rise to around 20 percent of the value of land by 2045. This would significantly reduce average land prices, but would also give a massive boost to the economy, increasing the profitability of investments and the incentive to work. GDP would rise by 50 percent and the value of residential properties by 30 percent, as there would be better incentives to build and modernize buildings. Now is the opportunity to start introducing a property tax. I hope the Chancellor takes it.