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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,

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Presentation on theme: "Tax Aspects of Domestic Resource Mobilisation – a Discussion of Enduring and Emerging Issues Land Tax UN Financing for Development Office & IFAD Rome,"— Presentation transcript:

1 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

2 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)

3 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

4 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

5 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

6 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 20 th 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

7 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 1960s Columbias valorization tax contributed up to 38.6% of total property tax collections

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