Let’s make a couple of things clear at the outset. Any proposal or recommendation that property taxes in some form or other be introduced and added to the Finance Minister’s armoury, will, in Malta, raise fire and brimstone reactions from at least two sources, both of whom presently have vested interests in the present status quo remaining eternally unchanged. These are the political class (for which read being utterly terrified of loss of votes), whilst the other group embraces many in the building and construction lobby, the multiple property owners, and fellow travellers.

That said and done, it does not, however, change the fact that some form of property tax must soon come to Malta, for various reasons.

For a start the EU is undoubtedly looking with a big magnifying glass at the fiscal elbow room that all finance ministers in Malta – as in all other EU member-states – have to operate in.

Secondly, (as I will show later) property in Malta, especially that which is owned by foreigners, is possibly one of the contexts within which most tax evasion is occurring, undoubtedly after the collection of VAT.

And, thirdly, property taxes are the most effective (even if unpopular) way of reducing the rampant levels of inequality within Maltese society.

The fiscal armoury presently available to any Maltese government is, for various reasons (not the least of which historical) circumscribed into income tax, value added tax, and customs duties, which post-EU entry have lost much of their previous weight in the total tax mix. As Malta’s inflow of EU funds will not remain at the same levels, it is reasonable to think that every finance minister’s position remains an unhappy and uneasy one.

A few initial economic considerations:

That many Maltese citizens are the proud owners of their own residential property is something of which we are rightly proud as a nation. That several Maltese survive our hot summers in some smaller summer residence that they own or rent is also to our credit as a nation, and should in fact not be something to tamper with. That many family-conscious Maltese like to give a vital leg-up to their offspring when they start married life, in the form of a residence for the new family, yes, that too is something which should be protected.

But the status quo when fiscally looking at property ownership is simply not an option for long in Malta. We certainly, for example, cannot – without acting fiscally – continue to tolerate situations where wealthy foreign owners buy property in Malta, never or very rarely live in it, but rent it out to relatives, and friends, and even total unknowns and do not declare one cent of income.

We certainly, too, cannot tolerate speculators, including many in the building industry, who openly tell you that they never save money in the banks but simply buy property to hold and eventually speculate with.

A small country like ours does not have endless resources of either land or even constructed buildings. On the demand side it is simply idiotic to argue as though ever more land will be made available for whichever foreigners – whether the so-called “investors”, the foreign workers increasingly taking over jobs from the Maltese, the foreign retirees, the rich new passport scheme holders – wish to come and stay here.

If we are going to be honest about sustainability in this small country of ours (and I haven’t even yet touched on environmental degradation and increasing uglification in many places!), then basic economics tells us that a big chunk of our stocks of both land and built property is already falling down into that part of the overall property market which is known as the non-clearing market.

This increasing component of the overall national property holdings is part of our national assets. Loanable funds or savings, plus costly labour, materials, and other assets, have gone into the creation of them, but with no return whatsoever coming from them to the national economy.

The last National Census showed there is far too much long-unoccupied and long-unutilised property in Malta and Gozo. Purely in such a context, it is simply bad economics from an overall national viewpoint to allow more highrise buildings, bringing down villas and old houses, ruining gardens, or taking over open land to build more villas, apartments and commercial properties.

To what extent, one may ask, does Mepa really concern itself with supply and demand of property in Malta? Or isn’t economics at all a concern for this authority?

It is within the overall context of this background that one must then start looking at property taxes. I am fully aware of their potential unpopularity, but as an academic I am not in the business of seeking popularity, but rather with concepts of social justice such as that of reducing rampant inequalities.

Let us start with a simple example from a country that, like many others, has been challenged in recent years about its increasing income inequality: South Africa. In an upscale neighbourhood in Cape Town a 1,600 square foot apartment may have a price tag of about $480,000, but it costs the owner some $2,700 in annual property taxes to the local government. By contrast, the owner of an apartment in a much less attractive area, valued at, say, one-tenth of the first one, would only pay a proportionately much smaller $150 a year.

Property taxes factually boost government income, and allow governments to redistribute from the rich to the poor, or even poorer, and thus reduce inequality in their constituencies. (Of course the concept of redistributionary impact is applicable with regards to all government taxes and expenditures and not only property taxes!)

But governments do not generally make as much use of property taxation as they could to address income and wealth inequality and raise revenue.

As said earlier, this is because property taxes are unpopular – perhaps because they are, if properly structured, hard to evade, and, yes, in some of their formats can be difficult to administer.

What is a property tax?

The term ‘property tax’ is often used in a broad sense to include a very wide spectrum of levies. These could include annual taxes based on the value (or size) of immovable property, taxes on sales of real property, net wealth taxes, taxes on inheritances and gifts, taxes on transfers of securities (e.g. shares in property-owning companies), and even taxes on the non-use, or uneconomically wanted, or non-economically beneficial, types of properties.

There is quite a historical record tagging that part of this subject which relates to purely the traditional and narrow sense of regular taxes on immovable property. These taxes have been used since ancient times, for example in China and Greece. Luminaries such as Adam Smith, David Ricardo (who wrote so much about rent), Alfred Marshall (who coined the concept of ‘quasi-rent’), and even Winston Churchill, have all emphasised the benign features of property taxes. Closer to our times we see countries as diverse as Ireland, Greece, China, Cambodia, Croatia, Egypt, Liberia, Namibia, and others, all devising forms of property taxes to boost their government revenues, plus reducing inequality.

John Consiglio teaches economics at the University of Malta.