Thursday, 10 October 2013

Wanted Worldwide: Sensible Property Taxes, and a Property Tax Champion

By Mick Moore 

What are property taxes? Broadly, they are taxes on the ownership, occupation or legal transfer of land and buildings. They take many forms, and go under many different names.

The most familiar are regular annual charges payable by the owners or occupiers of urban residential or commercial premises. In Britain we call this the Council Tax. Some governments levy taxes on the legal change of property ownership: in Britain these are termed stamp duties. A few national and big-city governments practice what were once known in Britain as betterment levies: they increase property tax charges in localities where large public investments in infrastructure – like new shopping malls, improved transport links – increase the value of nearby residential or commercial premises.

In virtually all property tax systems, charges are calibrated according to some measure of the value of individual properties – and often according to other criteria also, including, for example, how many people live there, whether the owner is a widow, a pensioner or a war veteran, or whether the property is rented out or used for commercial purposes.

Viewed from close up, property taxes are diverse and complex. However, a bird’s eye view leads us to two clear and simple conclusions: they are good taxes; and they are under-used. That case is very well made in the most thorough recent review of the British tax system – the 2011 Mirrlees Review produced by the Institute of Fiscal Studies

Why are property taxes good?

  • They distort patterns of economic activity less than virtually all alternative major sources of tax revenue. Property is not mobile, and so cannot be moved around just to avoid tax. Taxing the occupation or ownership of land, houses or buildings generally has positive incentive effects. It encourages people to make the best use of those scarce resources, and not simply to accumulate them.
  • Unlike most other taxes, the main burdens fall on more wealthy people.
  • They are difficult to evade. Unlike many other assets, land and property cannot easily be hidden from any modestly competent tax authority.
  • Almost worldwide, they are the main single actual or potential revenue source for sub-national governments. In historical and comparative perspective, sub-national governments in most of contemporary Africa and Asia – and to a lesser extent Latin America – are grossly under-powered and under-funded. A revival of property tax revenues would almost inevitably signal a resurgence of district, provincial, municipal and metropolitan governments.

Why are property taxes under-used?

Property taxes account for about 2% of GDP in OECD countries, less than 0.7% in developing and transitional economies, and for derisory sums in many low income countries(i). Why so low? And why especially low in low income countries? The answer certainly does not lie in any lack of expertise, research or literature on the subject. We have plenty of all three. Neither does it lie in lack of technology. Digital technologies in general, and GPS (global positioning systems) in particular, recently have made it much easier to locate and record properties and maintain and update property registers.

The most obvious reason for low property taxes is that they are especially likely to stimulate political opposition, in two ways:
  1. Because property taxes are almost always controlled by urban, local or district governments, local elites are especially well-placed to oppose them – notably by resisting the increased assessments needed to compensate for inflation and by delaying revaluations of properties.
  2. Most of the tax burdens borne by ordinary people do not require them directly to hand money over to a tax agency. They ‘pay’ the taxes in the sense that taxes reduce their spending power. But someone else actually transmits the money to the tax collector on their behalf. Most personal income and social security taxes are deducted from salary cheques and channelled to government by employers; sales and value added taxes are collected mainly by wholesalers and retailers; excise taxes on alcohol, tobacco or fuel are paid to government by producers, importers or wholesalers; and import duties are collected from importers. Property taxes are an exception: taxpayers need either to hand over the cash in quarterly or annual instalments, or make arrangements for their bank to do so. Property taxes are thus very visible. They irritate and upset people even when the sums of money involved are small.
But I don’t think political resistance is the whole story.

There is another side to the same coin, especially relevant to developing countries: property taxes have no powerful institutional champions. The international agencies (IMF, World Bank, OECD) and the aid agencies that have contributed to effective national level tax reform in many developing countries (as I've discussed in an IDS Working Paper) have barely touched sub-national/property taxes, for understandable reasons. These issues are largely beyond their reach. National level politicians typically are not enthusiastic about helping sub-national governments to a larger share of fiscal resources. And sub-national governments, lacking a good revenue base in property taxes, are generally too weak to champion their own cause. They tend rather to put their energies into trying to obtain larger financial transfers from higher levels of government.

There are success stories about property tax reform in developing countries (see for example, M. Govinda Rao’s account from India). But they are scattered and local. The people directly involved have few ways of communicating with their peers in other provinces or countries. Success does not easily spread and cumulate.

Contrast this with the world of the national and international tax specialists. Here we find a global ‘epistemic community’ of accountants, economists, lawyers, and tax administrators who work in the IMF, the OECD, consultancy companies, transnational auditing and professional services firms (e.g. the Big 4), associations of tax professionals, national tax administrations and ministries of finance. Members of this community meet and communicate with one another frequently, and mainly in English, French or Spanish. Ideas are tested and experiences exchanged. Success travels.  

Property taxes need more institutional champions, nationally, regionally and globally. But what would these champions look like, and who will create them?

(i) Bahl, R., and J. Martinez-Vasquez. 2008. The Determinants of Revenue Performance. In Making the PropertyTax Work. Experiences in Developing and Transitional Countries, edited by R. Bahl, J. Martinez-Vasquez and J. Youngman. Cambridge MA: Lincoln Institute of Land Policy.

Mick Moore is a Professorial Research Fellow at the Institute of Development Studies and Chief Executive Officer of the International Centre for Tax and Development.

Previous blogs on tax policy by the same author include:

Monday, 7 October 2013

Inconvenient truths for Kenya after Westgate attack

By Jeremy Lind 

Two weeks after Al-Shabaab militants murdered over 60 shoppers and diners and laid waste to one of Nairobi’s smartest malls, a reckoning has begun: how could an attack of such ferocious brutality happen in the heart of one of the city’s wealthiest enclaves? Could it happen again and, if so, how can an attack of a similar magnitude be prevented? And what does the Westgate massacre say about the state and condition of Kenya as a nation and people?

With the fate of 39 missing civilians as well as the number, fate and identity of the militants still unknown, these are the questions Kenyans have begun asking each other as well as the country’s divided political establishment. The search for answers will expose a number of inconvenient truths.

Violence and insecurity deeply imprinted in contemporary Kenyan life

The first of these is that violence and insecurity are deeply imprinted in contemporary Kenyan life. Even before the Westgate attack, a number of conflicts and low-level violence were bubbling away at the margins. In recent years militants have attacked churches, bars, bus stations, and police posts in Nairobi, Mombasa, Garissa, Mandera among other towns and cities. Authorities were uncertain and feeble in responding to the violence, even as it encroached further and further into the country and claimed many lives.

Yusuf Hasan, MP for Nairobi’s Kamukunji constituency, told the Guardian, "In the past two years, there have been 11 bomb attacks in my constituency. Yet there have been no arrests, and not one single person brought to court. What does that tell you about the state of the investigations? The government told us it was al-Shabaab and that that was the end of the story. It's not good enough."

All the while, across the border in Somalia Al Shabaab was honing its capacities to execute sophisticated attacks. This year it has launched several devastating assaults, including on the UNDP compound in Mogadishu in June that killed 15.

While attacks by militants have rocked many cities, violence has continued to flare in Kenya’s north. Devolution under its new constitution was meant to devolve decision-making and resources leading to improved accountability, as well spreading development funds more equitably between the country’s agrarian, highland core and the long marginalised dryland areas.

It is still too early to tell if Kenya’s devolution experiment will be a success. So far, there has been uneven progress, with genuine innovation and dynamic leadership by governors in some counties. However, ethnic and clan fault-lines old and new have opened up in many places, leading to clashes and displacement. Hundreds are feared to have been killed in recent months.

Violence often pays in Kenya's broken political system

A second inconvenient truth is that violence is as an effective technique and strategy to advance discrete political and economic interests in Kenya. Close and even casual observers of Kenya’s politics will recognise the simple reality that violence pays in Kenya’s broken political system. But how can this system reform itself when it harbours and provides sanctuary to people whose very position has been secured in part through violence?

Some openly speculate that the Westgate attacks may in fact provide leverage to a campaign to dismiss the cases of Kenya’s President Uhuru Kenyatta and Vice President William Ruto before the International Criminal Court. The dismaying revelation of widespread looting of Westgate’s luxury shops during the rescue operation by Kenyan Defence Forces to free hostages gives the impression of indiscipline and corruption run amok in Kenya’s military institutions. It has been pointed out that the same structures that allow a customs inspector at the port or a border official or a policeman looking at a truck of goods on the highway to turn a blind eye for a bribe are the structures that terrorists exploit to their advantage.

The Kenyan journalist Bertha Kang'ong'oi wrote, “Westgate exposed our shame. It was the most visible display of the country's failed systems, which have been allowed or tolerated for too long.” The structures that permit ivory poaching, car hijacking, organised crime, tax evasion, and the siphoning of funds are the same ones the Westgate militants used to stash a weapons cache in a shop in the mall before the attack, to collude with a shop employee, and to otherwise form partnerships to carry out such a complex attack in the middle of Nairobi. Any meaningful plan to strengthen security needs to get to grips with Kenya’s culture of violence and impunity more widely.

Strengthening security in Kenya will require more than tinkering at the edges

In the immediate aftermath of the Westgate attack, the world’s attention and that of many Kenyans focused on Al Shabaab and international terrorism more broadly. As the days passed, Kenyans increasingly looked at themselves for answers on how the attack could have happened. As questions mounted, President Kenyatta launched a Commission of Inquiry, which has been met with some cynicism. Some wonder whether the attack will give impetus to reform the country’s security architecture and culture, something advocated by members of the National Assembly.

Yet, the problem runs deeper.

Strengthening security in Kenya will require more than tinkering at the edges of its security and intelligence structures, or expanding military operations in Somalia. Kenya’s military involvement in the African Union Mission in Somalia, ostensibly to create a buffer between Kenya and violence-plagued southern Somalia, has failed to prevent terrorist attacks in Nairobi and elsewhere.

Kenya’s political leaders should also resist the urge to rush through further anti-terrorism laws, or resort to punitive policing of its Muslim populations. Effective security requires getting the basic functions of government to work better for all Kenyans, not just its embattled political establishment. The Westgate attack has touched the very top of Kenyan society. Let us hope they will act in ways that meaningfully improve security not only for Nairobi’s well-heeled but also a wider citizenry terrorised by extremist violence and spreading conflict.

Jeremy Lind is a Research Fellow at the Institute of Development Studies, and has worked for over 10 years on both conflict and Kenya.