Beneficial Property Taxation for Emerging Market Countries: Addressing Climate Change and Post-Pandemic Recovery

174 Pages·2022·3.831 MB·English

by  Ehtisham Ahmad, Giorgio Brosio

Beneficial Property
Taxation for Emerging
Market Countries
Addressing Climate
Change and
Post-Pandemic Recovery
Ehtisham Ahmad
Giorgio Brosio
Beneficial Property Taxation for Emerging
Market Countries
Ehtisham Ahmad • Giorgio Brosio
Beneficial Property
Taxation for Emerging
Market Countries
Addressing Climate Change and
Post-Pandemic Recovery
Ehtisham Ahmad Giorgio Brosio
Former IMF, Grantham Research Campus Luigi Einaudi
Institute University of Torino
London School of Economics and Torino, Italy
Political Science
London, UK
ISBN 978-3-031-08611-3 ISBN 978-3-031-08612-0 (eBook)
https://doi.org/10.1007/978-3-031-08612-0
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P
reface
The importance of an effective property tax has become clearer in the
context of ensuring and financing a resilient provision of health care and
basic services during the pandemic. The sustainable financing of basic ser-
vices and facilitating access to private finance is also coming into focus in
view of the investments needed for decarbonization and sustainable
employment generation. Yet, the standard ownership-valuation model has
been found wanting in advanced and emerging market countries alike. In
this volume, we address issues that have arisen in practice since the 1980s,
and some of the analytical and political economy considerations that have
become apparent over the years in implementing alternative models. Rent-
seeking due to the proximity of taxpayers and tax collectors has been a
persistent problem, while resistance from taxpayers has increased over
time. Both simplification of the tax base—for example, through area/
location-based or presumptive tax, and use of functional administration
structures provide important alternatives, supported by modern techno-
logical advances, for example, satellite imagery and blockchain options,
together with low-tech verification.
We draw on a series of IMF technical assistance missions that we partici-
pated in on multilevel finance in emerging market countries in the
mid- 1990s (including Colombia, Indonesia, Bolivia, Nigeria, and Mexico).
There were widespread and persistent difficulties in the design of a prop-
erty tax to generate revenues with the “ownership-valuation property tax
model” that applies in the US and many advanced economies, and which
has been the standard recommendation of the multilateral banks to many
countries. The complexity of establishing property titles or accurate and
v
vi PREFACE
timely valuation changes had proved to be a major constraint. This was
compounded in many cases by the proximity of tax administrators to tax-
payers (e.g., the colonial “tax collector” model in some countries) gener-
ating “rent-seeking” opportunities.
We participated in an IMF technical assistance mission to Colombia in
1995 to address sub-national tax options and transfer design to support a
significant decentralization of spending responsibilities that had just been
initiated (Ahmad et al., 1995). Although Colombia had probably the best
cadastral system in Latin America, revenue collections were dismal. The
mission proposed the use of presumptive methods to break the logjam on
property taxes, the introduction of a modern functional structure of local
tax administration that would minimize rent-seeking, and an equalization
transfer system to ensure that the tax system does not give an unfair advan-
tage to the large metropolitan areas and exacerbate spatial imbalances.
Given his dissatisfaction with the cadaster at that time, Mayor Mokus in
Bogotá built on the functional administration and introduced a self-
evaluation system together with a sanction of forced purchase of proper-
ties at declared values in egregious cases. After an initial spurt in revenues,
collections stalled and remain below potential. It has not been easy also to
replicate this in other cities in Colombia.
The political economy problem of placing additional taxes on fixed-
income people makes, paraphrasing Alfred Marshall, the ownership-
valuation model “onerous,” and for most informal sector households
inapplicable. Experiments with the model in Shanghai and Chongqing
failed to raise significant revenues, and this has posed a significant con-
straint in anchoring the financing of local infrastructure that has relied
heavily on land sales and off-budget accounts of property developers and
urban development corporations. A major political economy constraint
arises as in the Mexican case—the lack of accountability when rates are set
at higher levels, but administration remains local.
Our proposals on area and location-based property taxes build on work
in the 1980s in South Asia on presumptive methods of taxing agricultural
land (Ahmad and Stern 1991), as well as the reforms in the UK in the early
1990s and in the transition economies in Eastern Europe. This consider-
ably simplifies administration, that can be further streamlined with the use
of satellite imagery and low-tech verification. And blockchain has huge
potential, together with the use of big data and cross-referencing
PREFACE vii
information from different sources. This was also a critical component of
Mayor Mockus’ agenda in Bogotá in the mid-1990s, a precursor to the
use of big data but digital technological advances were not available at
that time.
Despite the simplifications with occupancy rather than ownership, the
area/locality-based taxes that are allowed to vary by band at the discretion of
local authorities, and the high-tech identification of properties and tighter
monitoring of transactions, the political economy constraints cannot fully be
addressed without reference to the set of benefits provided by the local gov-
ernments. This is essential to convert the “onerous” to a “beneficial” prop-
erty tax. We made a thorough exploration of the tax-e xpenditure link in
property taxation in Mexico in a chapter co-authored with Caroline Pöschl
in our Handbook of Multilevel Finance (Ahmad and Brosio, 2015). We
explored options to facilitate this transformation for Senegal and Tanzania
(Ahmad, Brosio, and Gerbrandy, 2018) in a report for the European
Commission (EC). Summaries of the two cases are included in this volume.
While there is excellent academic and policy-based work on cities,
including metropolitan areas like Mexico City or Guangzhou, the issues
related to informality and slums, as well as pandemics and climate change
cannot be fully addressed without considering interactions across cities
and incentives for workers to move in search of better economic opportu-
nities. This formed the basis for a program at the LSE on Financing
Sustainable Transitions in China and Mexico, financed by the UK BEIS
through the Coalition of Urban Transitions. The work in China was
undertaken jointly with a few Chinese Universities and the Chinese
Academy of Social Science, and the property tax simulations were con-
ducted by Ahmad with Meili Niu, Liming Wang, and Meiyan Wang (and
the China Chapter is based on Ahmad, Niu, Wang and Wang, 2021). The
Mexican simulations were undertaken jointly with Hernan Viscarra (and
the Mexico Chapter draws on Ahmad and Viscarra, 2020).
London, UK; Turin, Italy Ehtisham Ahmad
Giorgio Brosio
references
Ahmad E, N Stern, (1991) The theory and practice of tax reform in devel-
oping countries. Cambridge University Press.
Ahmad, E. and H. Viscarra (2020), “Financing Clean, Compact and
Connected Cities in Mexico: role of a “beneficial” property tax,” LSE
Program on Sustainable Transitions in China and Mexico.
viii PREFACE
Ahmad, E., G.  Brosio, P.  Spahn and C.  Vehorn (1995) Colombia:
Reforming Territorial Taxation and Transfers, IMF Fiscal Affairs
Department, Washington DC.
Ahmad E, G Brosio and C Pöschl, (2015) Local property taxes and ben-
efits in developing countries: overcoming political resistance? In: Ahmad
E, and Brosio G (eds) Handbook of Multilevel Finance. Edward Elgar,
Cheltenham.
Ahmad E, Brosio G and Gerbrandy J., (2018) Property taxation Economic
features, revenue potential and administrative issues in a development
context. EU, Brussels.
Ahmad, E., Meili Niu, Liming Wang, Meiyan Wang, 2021. “Designing
Beneficial Property Taxation for Sustainable Development in China—
evidence from six cities, including Guangzhou” LSE Program on
Financing Sustainable Urban Transitions in China and Mexico.
c
ontents
1 Property Taxation, Instruments, Models, Administration,
and Potential Effects 1
2 Failure and Promise of Property Taxation in Senegal 33
3 Challenges of Property Taxation in Tanzania 45
4 Financing Sustainable Local Spending and Infrastructure
in China 61
5 Mexico: Failure of the Traditional Property Tax and
Proposed Beneficial Property Tax Alternative 93
6 Administration of Property Taxes 117
7 Toward a Beneficial Property Tax Agenda for Sustainable
Growth 139
ix
x CONTENTS
Annex Table 1 Detailed structure of property taxation in
selected countries 145
References 147
Index 155