Property taxes, public services and wealth

24 February 2016

Tom Goodfellow  - Associate Fellow, SPERI, & Lecturer in Urban Studies and International Development, University of Sheffield

Placing property taxation, redistribution and social justice in an ethical context

Two weeks ago I was in Addis Ababa at a conference on taxation and development. Unexciting as this might sound to many, questions of tax strike at the heart of social justice.  Why else do many in Britain and elsewhere get so enraged about the existence of tax havens and global corporations that don’t pay their share?  Why else did the introduction of one new local tax instrument – the poll tax – play such a pivotal role in bringing down one of Britain’s most formidable and long-serving prime ministers?  Taxation is by far the most significant mechanism of redistribution available to us nationally, locally and, to some extent, globally too.

As with the poll tax, it was with regard to local taxation that the debate became especially energised on the final day of the conference, which involved participants from Canada to Uganda, Norway to Sierra Leone. The specific subject of debate was property taxes: a crucial concern in a context where, as one of the conference presentations showed, 88.5% of Uganda’s richest individuals own plots of land worth $150,000 or more but paid little or no tax on the land.

Whilst there is a lot of agreement that property tax is the most progressive form of local taxation, in many parts of the developing world it barely functions (and Uganda is certainly not the worst case). There are multiple reasons for this failure, and amid the technical discussions of valuation techniques, administration and technology, some key questions of political philosophy came to the fore.  What actually is the essential nature and purpose of property tax?  Is it simply a tax on wealth, or is it something people should be expected to pay in proportion to particular benefits that they receive from their property?

This may seem an over simplistic dichotomy, but it generated quite heated debate. One way to persuade people that they should be paying tax on their property is to link it clearly to benefits and services provided by a municipal government.  But if the amount of tax you pay is linked to property value, in many parts of the world this value bears little relation to service provision.  Why, various African representatives argued, should someone who has built their house and continually increased its value by digging their own well and drainage system – services which they believe the government should provide but hasn’t – pay more tax than someone who has failed to improve their house but benefits more from government services because they are linked to a paved road or water supply?

Most people would agree that property, as a fixed asset that commonly appreciates in value, should be taxed in the interest not only of funding services but facilitating some social redistribution. However, it is one thing to talk about this in a context like the UK where the majority of increase in property value is effectively unearned: housing shortages, the influx of foreign capital and the financialisation of the housing sector are driving up house prices (albeit with a highly uneven geography) regardless of what people do to improve their houses.  Yet, in other contexts where most people build their own houses and improve them as a means of bolstering assets and security for themselves and their families – often in the face of governments which are unable or uninterested in providing basic infrastructure and services – the ethical dimension of the tax is somewhat more complicated

If, for example, I were to enhance the value of my house in the UK significantly – let’s say by converting a loft or cellar – I wouldn’t pay more property tax because my house would stay in the same council tax band (properties in England haven’t been revalued since 1991, which is extraordinary when you think about what has happened in the UK property market since then). So why would we expect people in a society where building a property from scratch (often out of necessity) is the norm, and continually improving it can be central to making it function as a home, to pay more property tax as a consequence of these activities – possibly more than people who are benefiting more directly from government services?

The case for this can only be made on essentially philosophical grounds that those who have money to improve their homes are wealthy, and wealth should be taxed for redistribution and the public good. This case is hard to make in situations where governments are failing to provide basic public goods, and where people have long felt that they are expected to provide for themselves – not least due to decades of (often donor-sponsored) discourses of ‘self-help’ and market solutions in the housing sector.  Add to this the authoritarian history of (violently) extracting ‘hut taxes’ from many African populations under colonialism and you have a major public relations problem.

This leaves something of a conundrum with regard to how to transform attitudes and practices of taxing property in parts of the developing world where inequality is soaring on the back of untaxed real estate wealth. Should governments try to appeal to simple self-interest (e.g. if you pay this tax your local services will improve) or should there be some effort to explicitly link the tax to wealth and social justice?  The former is likely to be better for reducing resistance to the tax; yet it does not articulate the case that people should pay more in proportion to their property wealth.  To produce a sustainable and progressive system the latter is surely required.

The process will therefore require several steps in most developing country contexts. Making the case for the property tax in itself – the idea (which many take for granted in the UK) that property tax itself is a good thing, providing local governments with much-needed revenues to improve public services – has to come first.  But on top of this, there is the longer and harder slog of working towards truly progressive systems where taxation is better linked to the market value of properties, and is accepted as being fundamentally a wealth tax with redistributive ends.  This will never happen overnight, especially in places where legacies of government provision are so patchy and accountability is weak.  Yet it is a crucial aspiration if we don’t want to see further socio-economic and spatial polarisation in urban landscapes across the developing world.

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