Wealth Taxes VI: Land Tax

The first brief provided a conceptual framework for wealth taxes, the second dealt with the rationale and the third discussed the problems. The fourth and fifth briefs dealt with international experiences with wealth taxes and the seventh discusses lessons for South Africa.

Introduction

In April 2017, the Davis Tax Committee (DTC), established by the Minister of Finance in 2013, called on the public for written submissions on possible wealth taxes for South Africa. The DTC noted that South Africa currently has three forms of wealth transfer tax, namely estate duty, transfer duty and donations tax, which combined bring in about 1% of total government revenue. The DTC called on public submissions on the desirability and feasibility of the following possible wealth taxes:

1. A land tax,
2. A national tax on the value of property (over and above municipal rates), and
3. An annual wealth tax

Annual wealth taxes have been dealt with extensively in the previous five briefs of this six part series, and this brief deals with land and a national tax on property with a focus on the former.

In the beginning of this year the Department of Rural Development and Land Reform released what it called the 2017 Land Audit Report. Within the Report was a proposal for a land tax in order to finance a new land reform fund. Bizarrely, while land tax has been advocated by some of the history’s most celebrated economists, from Adam Smith to Henry George, the Report relied on a 2014 blog post by UK economist Joe Sarling who graduated from university in 2009.

Definition

Administered at a national government level, a land tax in its general form is a tax on the unimproved or site value of land and is paid by the owner. Property taxes on the other hand tax both the value of the land and any improvements to it.

Adam Smith and Henry George

Adam Smith called for a tax on land in book five of Wealth of Nations. His rationale was that the rents earned from land “are a species of revenue which the owner, in many cases, enjoys without care or attention of his own” and are “owing to the good government of the sovereign.” He further postulates that “Though part of this revenue should be taken from him to defray the expenses of the state, no discouragement will thereby be given to any sort of industry.”

Henry George, who rose to fame in the United States after publishing Progress and Poverty in 1879, agreed with Adam Smith. George stated that the value of unimproved land is unearned and comes from the demand for a fixed amount of land. Furthermore, because the value of unimproved land is unearned, a tax on the land’s value will not affect productive behaviour. George specifically argues for a “single tax” in this regard. This single tax would be on the unimproved value of land and that this could provide the entire required government revenue. The plausibility of this latter point is beyond the scope of this brief.

However, the value of land is clearly not wholly determined by good government alone. It is also created by improvements in the surrounding land, which is more often effected by private individuals and businesses, rather than government. A tax on the land’s value is really a tax on its productive potential resulting from the improvements to land in the surrounding area. [1]

Other rationales for land tax

Some argue that a land tax will:

1. Encourage the productive use of under-utilised land.
2. Put pressure on land prices making land more readily available for redistribution. [2]
3. Raise government revenue.
4. Related to (3),
   1. land tax is administered on an immovable asset making avoidance is extremely difficult, and
   2. because land owners already pay municipal rates, the administrative burden may be manageable.

Potential issues

1. Agricultural costs will increase which will be passed onto the consumer in the form of higher food prices and/or incentivizing food imports, harming the poor in particular.
2. A land tax over and above municipal property taxes could prove confiscatory for owners unable to generate enough income to cover both taxes. Some people, especially the elderly, might find that their land value may have increased considerably as a result of market movement, yet they may be cash poor. Upward pressure on total land taxes could force such people out of their homes.
3. Overall tax in South Africa is already high by middle income country standards. In 2014, government revenue (excluding grants) was 30.6% of GDP, compared with an average of 21.0% for all middle income countries [3]. Further taxes may drive down returns and viable investments generally specifically large scale property development.
4. There can be little doubt that ‘double taxation’ – a national land tasx over and above municipal rates - will be met with strong resistance, and failure to pay will add to overall government debt. At 30 September 2017, total debt owed to municipalities stood at over R143 billion due defaults by rate payers and consumers of municipally provided services.
5. Suggestions have been made for rebates on municipal taxes for national land taxes paid. This will result in no increase in tax revenue for all tiers of government combined. It will redistribute revenue from municipalities to national government. Furthermore, it would muddy the political choice at the local level about what municipal services to provide. Setting tax rates at the local level places accountability for tax decisions at the local level. Lastly, municipalities might simply increase their rates to make up for the loss in revenue. [3]
6. A land tax on rented residential property will put pressure on landlords who will pass on the additional cost to the already financially strained middle class. [4]

Conclusion

Unlike many other forms of wealth tax, there is nothing an individual can do to avoid a land tax apart from disposing of the land. A new land tax, which creates an additional liability for owners, reduces the market price of affected land by the expected present value of the taxation stream. Nonetheless, land taxes have their disadvantages. Implementation of a land tax would need to be carefully considered, as the downside risks may outweigh the potential benefits.

Charles Collocott
Researcher
charles.c@hsf.org.za

Notes

[1] http://www.econlib.org/library/Enc/bios/George.html

[2] http://www.politicsweb.co.za/documents/why-the-proposed-wealth-taxes-wont-work--irr

[3] World Bank Development Indicators

[3] International Handbook on Land and Property Taxation, Bird and Slack, p33

[4] http://charteredwealth.co.za/effects-proposed-wealth-tax-south-africa/