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Fred Harrison, Research Director of the Land Research Trust, has been an investigative journalist and an adviser to the Economics Department of the Russian Academy of Sciences. His book Ricardo's Law: House Prices and the Great Tax Clawback Scam is published by Shepheard-Walwyn (£18.95).

LONDON Mayor Ken Livingstone claims that the capital subsidises the rest of the country. Taxpayers in London and the South-East, we are told, pay such heavy taxes that the Treasury transfers about £13bn to regions like Yorkshire.

This is one of the appalling myths that cripples public policy and prevents people in the regions from enjoying a square deal from the public purse.

In reality, people in the South-East are subsidised by the regions. And the housing market is the vehicle for delivering this shameful result. For the tax policies of the Treasury, which are supposed to transfer income from the rich to help the poor, are biased to achieve the opposite effect.

Progressive taxes are the tool for transferring income from low-wage workers to the owners of pricey plots of land in the most desirable locations. This happens at both personal and regional levels. First, let's look at how it works on an individual basis. Compare, for example, people in the lowest 20 per cent of incomes - most of whom rent their homes - with those in the top 20 per cent incomes bracket. According to a recent estimate, the lowest fifth pay, on average, £246,000 in taxes over their working lives. The average for the richest fifth is five times as much - £1.19m. That sounds fair. The rich can afford to subsidise the poor. Right?

Wrong! Consider the impact of this tax regime in the real world. Take the case of Tony Blair. His home in London's West End, worth £3.35m, rose in value last year by nearly £1m. So most of a lifetime's tax liability for the Prime Minister and his wife, Cherie, was clawed back in one year.

So who is paying for the public services enjoyed by the Blair family? Not the Prime Minister or his barrister wife. They recover all their lifetime's contributions to the public purse in just two good years of house-price rises. People who rent their homes, on the other hand, don't get a penny back in windfall gains. They are left to pick up the cost of public services.

Why blame tax policy for this injustice? Because residential properties vary in value due to the quality of tax-funded services. That is why estate agents announce that a house for sale is located close to a railway station or to good schools.

Now let's look at the regional evidence. First, note that taxes spent in London and the South-East are largely invested in infrastructure like transport. These investments are directly responsible for raising house prices.

But expenditure in the North is heavily devoted to supporting people who are marginalised by the tax burden on employers. They are jobless or on low wages, in the main, because they are taxed out of the labour market. And public expenditure to help them does not push up house prices. The outcome of this bias in tax policy is reflected in the total value of houses. These are calculated by Halifax, the mortgage lender.

Last year, housing stock in Yorkshire and Humber was worth £219bn. In London, it was £584bn and in the South-East it was £637bn. So London's homes are worth nearly three times more than those in this region and yet its population (at 7.2 million) is smaller than Yorkshire and Humber's (eight million). South-Easterners have houses worth three times more than Yorkshire residents, even though their number (five million) is much smaller.

Now we begin to understand why the pattern of public spending, as it affects house prices, causes the ever-growing gap in wealth between richer and poorer regions.

Halifax reports that the average annual increase in house prices over the past two decades has been 10 per cent. This year, London home-owners can expect an uplift in the value of their homes - thanks largely to tax-funded investments - of about £58bn. Now re-examine the claim that London subsidises the rest of the country. The £13bn transferred out of London by the Treasury is dwarfed by the tax claw-back through the housing market:

£58bn.

Commuters who live in the leafy South-East but work in London are even better off: they accumulated an extra £63bn last year, thanks to tax-funded public services such as improvements to train services. In Ricardo's Law I explain that the only way to achieve a level playing field for all the regions is for government to rebase its revenue policies on the rents that people pay for using land.

Taxes on wages should be abolished. Instead, public services should be funded out of the land value which schools and hospitals create.

This is not a novel idea. A century ago, it was propounded by one of the great Yorkshire industrialists, the Chocolate King, Joseph Rowntree.

In 1904, he willed that his fortune should be spent to help the poor - and he strongly recommended an investigation into how public charges on the rents of land would alleviate problems like homelessness. Unfortunately, the Rowntree Foundation has chosen not to test this policy against those that lock people into despair and dependency.

But without this fundamental change, Yorkshire will continue to linger near the bottom of the economic and social pile.