Tax aspects of domestic resource mobilisation a discussion of enduring and emerging issues land tax
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Tax Aspects of Domestic Resource Mobilisation – a Discussion of Enduring and Emerging Issues Land Tax. UN Financing for Development Office & IFAD Rome, 4-5 September 2007 M Grote National Treasury, South Africa. Forms of property taxation. 3 basic form of property taxation:

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Tax aspects of domestic resource mobilisation a discussion of enduring and emerging issues land tax

Tax Aspects of Domestic Resource Mobilisation – a Discussion of Enduring and Emerging IssuesLand Tax

UN Financing for Development Office & IFAD

Rome, 4-5 September 2007

M Grote

National Treasury, South Africa

Forms of property taxation
Forms of property taxation

  • 3 basic form of property taxation:

    • Tax based on annual or rental value of property – (estimated net rental value pa)

    • Tax based on capital value of land & improvements – tax based on assessed valueo of land & improvements

    • Tax based on site or land value:

      • Kenya, Australia, New Zealand, (South Africa), Taiwan land value system is the site system, excluding improvements such as factory buildings or houses or crops – narrow tax base necessitating higher tax rates

  • Ad valorem property taxes target ownership of fixed real estate:

    • Based on assessed value or a closely related proxy

  • Agricultural land tax (value of unimproved land in its agricultural use)

    • Not to disincentivise productive investments

    • Value does not include improvements such as fencing, drainage, dams

    • Opportunity costs

    • Hence, market value of the freehold without encumbrances & improvements

  • Urban property tax or ‘rates’ or site value tax is on market value:

    • Flat rate tax would tax value of building & land (total improved land)

    • Value of land & fixed investments/improvements

    • In urban context market value readily observable, determined by valuers based on active property market – close comparables (recently traded properties)

Economic theory rationale for land tax
Economic theory & rationale for land tax

  • Arguments in favour of land tax (see H George, John Locke):

    • To provide for own-source revenues for local governments & land reform

      • Beneficial land market effects: lower entry price, stop under-utilisation of prod. land

    • Land taxes should not distort economic incentives (fixed supply of land)

    • Equitable, as it targets unearned income: Value capture – rent caused by public investment or inherent potential of land without investment/activity of landowner (benefit received principle)

      • Is progressive as owners of large properties must pay more (=ability to pay principle)

      • Automatically compensates for land value changes – if land value improves because of public infrastructure projects, value & tax increase commensurately

      • Addresses “free-rider” problem

      • Public sector may invest even more, thereby improving agricultural outlook

      • Targeting unimproved land may lead to productivity-enhancing investments

    • Disincentive to land speculation in both urban & rural areas

    • Assist in breaking up large farm units with accompanying increases in production – intensified land use (see Chile land reforms)

    • Relatively easy to administer (cannot hide land) – improves tax morale

  • Arguments against:

    • Local governments must rely on more than one tax

    • Valuation & admin could be challenging for low income countries

    • Land tax may intensify intensive land use with adverse impact on environment

Administrative systems
Administrative systems

  • Valuation methods:

    • Area based land tax: measured land area adjusted by fertility of soil & location

    • Self-appraisal: taxpayer provides value assessment but under-valuation arrested with expropriation clause whereby govt. buys land @ declared value

    • Computer Aided Mass Appraisal: en masse valuations by relying on key statistical coefficients (both used in rural & urban areas)

    • Banding: assess properties according to 1 to 7 value bands in lieu of individual valuations

  • Collection should be done at local level:

    • Globally, taxation most efficient when tax collection & expenditure of these revenues executed by same level of government (subsidiarity/Tiebout principle)

    • Tax rate be set by local government (effective collection in SA already at 0.5%)

    • At this rate land tax capitalisation (=neg. impact on land values) will be low (in case of SA at 1% of land tax rate, land values will decline by 5%)

    • Communal areas without freehold rights should be exempted / fair assignment of shares

    • Tax relief for poorest cohorts: sufficiently high thresholds (admin expediency, phasing-in to improve acceptability BUT not for low agricultural produce prices)

    • Special relief measures or tax credits in times of drought / catastrophic events

Other design issues or tax alternatives
Other design issues or tax alternatives

  • Value of uniform and up-to-date cadastre:

    • Choice of tax base for valuation informed by availability / verifiability of data

    • In cities choice between rental value, capital value, land value, market value

    • In rural areas: determined by land use potential (climatic regions, soil types, potential for crops’ multi-year cash flow potential)

  • International practices & justification for land taxes (World Bank, 2006):

    • Promoting urban renewal

    • Ensuring productive use of restituted land

    • Defining property rights – against which emerging farmers can borrow

    • Creating land valuation capacity (needed for Capital Gains Tax)

    • Ease in structural / redistributional reforms

    • Saving on assessment costs

    • Discouraging foreign absentee ownership

    • Arresting excessive speculation

    • Managing political pressures regarding unequal access / ownership of land

  • Policy question: revenue potential doubtful in Africa, given subsistence farming?

    • Land taxes generate up to 7% of total revenue in industrialized economies

Current sa land redistribution reforms
Current SA land redistribution reforms

  • SA Government seeks to accelerate land reform program – progressive land taxes are one of instruments (next to distributing govt.-owned land)

  • Possibly extending property taxes as provided in Municipal Property Rates Act (MPRA) of 2004 to agricultural land – BUT relief for improvements

  • 2 options investigated:

    • Agricultural land tax conforming to requirements of MPRA – fast-tracking reform

    • Drafting new law specific to agricultural land, assigning tax collections to local authorities (service delivery) or national government (land redistribution finance)

  • According to MPRA total land surface of SA distributed across 237 local & metropolitan municipalities with mandate to levy property rates, however, only few collect currently from commercial farms

    • MPRA applicable to agri-land, taxing also improvement in support of simplicity?

  • Pre-1994 many municipalities did exempt agricultural land, other used regressive charging: first ha was taxed 100X more than 20th ha

  • Central govt. will impose uniform standards and cap annual rate increases

  • Currently, difficult discussion as to exempting certain lands or properties owned by govt.: dams, nature conservation sites, servitudes for power lines

What about betterment valorization taxes
What about betterment/valorization taxes?

  • Betterment taxes / special assessment apportion cost of public infrastructure investment to property owners benefiting from improvements

    • Levied for narrowly targeted public investment and charges limited to property owners who directly benefit from it

    • E.g., irrigation systems, new roads, urban renewal projects

  • Special form of betterment tax is valorization tax has been successfully implemented in Columbia, Mexico to improve urban infrastructure but with active coordination, buy-in and public selection / prioritisation of projects (greening projects, street lighting, public libraries, sewers

    • Projects are compared as to benefits & costs, public mostly affected can make input and be consulted on execution of project

    • Deepening of democracy ought to be encouraged

    • In early 1960’s Columbia’s valorization tax contributed up to 38.6% of total property tax collections