There is an increasing bias among wiser economists in favour of well-designed property taxes. This is because such taxes carry less distortion possibilities and greater fairness than other taxes, with at the same time providing good potential for increased revenue to government.
In most countries, property taxes on immovable property yield fairly modest amounts of revenue. IMF government statistics suggest that the average yield varies for different levels of economies. In the case of advanced economies it works out at some one per cent of GDP. That is two-and-a-half times the average level (0.4 per cent of GDP) in middle-income countries. When we come to the category of low-income countries the revenue importance of property taxes is still unknown.
The one per cent of GDP raised from property taxes – the average for developed countries – is often used by middle-income countries as an ambitious general revenue target. Certain high-income countries, such as Canada, the US and the UK, actually raise more than three per cent of GDP from annual property tax revenues. Others in the same grouping, such as France, Israel, Japan, and New Zealand, raise over two per cent of GDP from property taxes. These trends therefore suggest that a target of between two and three per cent of GDP is a realistic one for high-income countries.
Reasons for property tax vary from one country to the next, but the most frequent are the need to dramatically reduce deficits – or even support cuts in other taxes – as well as to increase efficiency and fairness. In Asia, for example, after 2013, a few countries increased property taxation to dampen strong property price appreciation, something that we here in Malta badly need to consider.
Property taxes are considered by most tax experts as being more efficient than other taxes – particularly income taxes – for various reasons. In the first instance they do not discourage the virtues of work, of saving, and of investing. Secondly, property taxes are harder to evade than most other taxes, and this mainly because property is immobile: nobody can ‘hide’ property! Indeed, much of the resistance against property taxes comes from the fact that they are transparent, with limited potential for both tax avoidance or evasion. One can easily understand why Merryn Somerset (2013) calls the tax on property “the perfect tax”, while Cabral and Hoxby (2012) described it as “the most hated among taxes”.
An OECD study (2010) of what determines economic growth – (‘Tax policy reform and economic growth’, Tax Policy Studies No. 20) showed that the taxation of immovable property is less harmful to growth than other forms of taxation, particularly when compared with direct taxes.
It is widely recommended for tax revenues to be allocated to subnational institutional levels. Indeed, in many countries, the quality of local services as provided by, say, local councils, is both dependent on, and generally reflective of, property values.
One can argue whether taxing at a local level can improve accountability and the effectiveness of political institutions, but one can well imagine a situation where reductions of the governmental allocations to such councils take place. Agreement on rates can also limit tax competition between local governments (such as local councils undercutting each other), and tax exporting (shifting too much of the tax burden on to nonresidents).
Who really bears the tax burden? There is growing agreement that those with high and middle incomes end up paying most taxes, putting pressure on many countries to strengthen property taxes as a way to improve the fairness of the overall tax system.
The progressivity of property taxes can be enhanced through steps to reduce, or even eliminate, tax liabilities for low-income or low wealth property owners. Let us consider a couple of examples:
• One can tax properties only above some threshold value, and then gradually increase the rate.
• One can exempt old and disabled people from paying the tax, or charge them lower rates.
• One can allow ‘mortgaging’, or delayed payments, of property tax liabilities for low-income households. If a property tax is truly charged as what tax specialists call ‘a benefit tax’ – equal to the value of services received – such changes would have no distributional impact, which in practice is, however, rarely true.
• And, of course, one can choose to tax only long vacant or unutilised buildings which fit certain descriptions.
It would be foolish to assume that introducing such a tax would be easy to implement. In Malta, for example, the absence of a reliable and/or accurate property owners’ register constitutes the major ab initio problem.
There is also the problem of calculating a market value-based tax on land and buildings.
This is challenging and would require substantial investment in administrative resources.
This data-intensive exercise normally requires a lot of research, cooperation, and exchange of information among many entities, such as local councils, the courts, the legal and notarial professions, tax authorities, Mepa and the accountancy and banking professions.
To ensure growth of property tax revenues in line with increases in property values – what is known as tax buoyancy – and ensure the fairness of the tax, you need to have an effective valuation system which accurately tracks the market.
Not every country has such taxes, and even where they exist there are differences in terms of effective enforcement. But the reasonable economic arguments for strong and appropriately designed immovable property taxes remain.
Careful planning and execution, an efficient basic infrastructure inclusive of IT systems, and a strong political will to reduce societal inequalities, can result in a property tax that is fair, equitable, and reasonable within the context of any society.
In the case of Malta, all of these attributes can be satisfied through the introduction of a property tax on the holding of long vacant and unutilised property, pushing owners towards taking them out of the economically unproductive and non-clearing part of the national economic system.
The equating of property to the collection of stamps or racehorses or beautiful paintings, as just ‘another form of investment’ – unproductive as it will be – can no longer be tolerated in our economy.
Measures need to be urgently taken unless we are all destined to become the victims of developers, speculators and environment destroyers.
John Consiglio teaches economics at the University of Malta.