The greatest source of wealth in the world today, worth far more than oil or gold or equities, is the land beneath our feet. The world’s real estate, its total wealth assessed at almost $275-trillion, is far more valuable than any other commodity or asset. In countries rich and poor, real-estate prices have risen faster than inflation.
This poses a serious problem. In many of the largest and most troubled countries, that huge increase in wealth is beyond the reach of taxation. Rising property values cannot, in such places, be tapped for the greater public good – even if only to pay for the sidewalks, fire hydrants and garbage-collection services that may make property more valuable.
Property tax, commonplace in North America and Europe, has proven impossible to implement, assess or collect in much of the rest of the world. It’s a big part of the reason why otherwise successful countries have filthy streets, inadequate schools, and, I’d argue, faltering democracy.
I recently watched a group of Egyptian officials outline a bold proposal to collect revenue from Cairo’s soaring property values to an audience of urban-policy experts. They proposed a set of “value capture” fees on property owners that would pay for road and infrastructure improvements that directly benefit them – a simple form of property tax.
It sounded good – and especially for Egypt, a highly aid-dependent country with few substantial sources of revenue. But one well-informed economist in the room raised an eyebrow. “This is the right thing to do, but Egypt really lacks the ability to assess it or collect it,” said Lawrence C. Walters, a Bringham Young University economics professor who is considered the world’s leading authority on international property-tax policies.
Dr. Walters pointed out the barriers that Egypt, like many countries, faces in getting revenue out of its property boom. Most buildings are constructed informally – that is, illegally. Most property is unregistered – that is, the government has no idea who owns it, or even where its boundaries are. And the Egyptian state and bureaucracy are deeply corrupt, inefficient and riddled with property owners who benefit from inaction.
“The use of land as a basis for generating revenue is under-used in the majority of countries – the reasons vary from country to country, but it often begins with inadequate property registration,” Dr. Walters told me in an interview. Across Africa, between 60 and 70 per cent of privately owned property is not registered. In many East European countries, the collectivization of land during the Communist era has left no records of land title, and the incomplete transition has left bureaucracies incapable of managing it. War-torn countries, such as Afghanistan or Somalia, find themselves with all land records destroyed.
Many countries officially have property taxes (usually levied annually) but rarely collect them. India and Egypt are among many countries that only levy taxes after construction has been completed – which is why a majority of buildings appear to be not quite completed, with a top floor missing and taxes never paid. Others only charge tax when land changes hands – pushing property sales underground with “black money” cash transfers.
Reversing this course is possible. Some places with zero property records – such as the cities of Hargeisa, Somalia, and Kabul, the Afghan capital – have successfully conducted property inventories that have made value assessments, and eventually taxation, possible. Cities in Colombia now finance all their transportation growth through one-time tax charges on properties that will benefit from it (though the lack of an ongoing tax revenue stream to pay for maintenance could prove a big problem).
But there’s more interest than ever before in making property tax work, Dr. Walters says. Last month, Chinese Premier Li Keqiang announced that China will “push forward legislation” to introduce the country’s first national property tax – after a 13-year property boom that has done little for Chinese cities, which generally fund themselves by selling land to developers, an act that contributes to inequality and pushes land prices higher.
But China will have a hard time valuing property, which, on paper, still belongs to farming collectives – analysts say it could be three years before China has any ability to implement such a tax.
There’s another reason Beijing, like many other governments, may be hesitant. Property tax tends to lead to democracy. Taxation changes the relationship between people and their governments – once money is involved, citizens start wanting things, including representation.
Doug Saunders