Property tax – A good initiative by Muhith

The Finance Minister, AMA Muhith, has announced that there will be a drive to both register properties in Dhaka and then to ensure that the owners are paying taxes on them.

Good – even though in general we are not in favour of higher taxes and even though this is going to mean the most dreadful intrusion on students. For that’s who the Minister will hire to go around and count and identify the buildings.

The good part of this comes from the fact that property taxes are probably the least bad of all taxes. But this begs the question, “Why do we need taxes at all?”

We need taxes to pay for government. And however it might seem at times, we really do need to have government as there are some problems that simply cannot be solved either well or at all by the private sector or voluntary cooperation.

However, taxes come with another problem – tax something and you get less of it. Tax incomes and people won’t bother to earn more, tax profits and there will be less business, tax imports and you get fewer imports, and so on.

So, what we’d really like to do is tax something where supply cannot change. The answer to that is to tax land.

Despite the rivers moving it around a bit in Bangladesh the amount of it isn’t going to be changed by taxation. It is this that led Milton Friedman to say: “There’s a sense in which all taxes are antagonistic to free enterprise – and yet we need taxes. …So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.”

There is a moral intuition behind this as well. Land in the centre of Dhaka is worth much more than the same area of land out in the fields somewhere, and this is owing to the people, roads, services, infrastructure and so on around the area that add to the value of the land. So, given that it’s the activities of everyone else that make it expensive then why not tax some of that value being created by other people?

Put the two together, that land taxes are not distortionary – because the tax won’t change the amount of it – and the moral insight described above, and we get a clear argument in favour of this type of taxation. The economics of this are quite clear and have been for well over a century.

However, a pure land tax, while it would be near perfect, is also rather difficult to implement. A tax upon buildings, rather than the land, is less perfect but much easier and that’s why most countries tax buildings. My native Britain actually leads in this, earning some 11% of all government revenue from property taxation, the highest amount in the OECD.

There is one concern though, one that we must always have when considering taxation. Who is it that actually pays the tax? For we know very well that it is not always the person handing over the money who “really” pays the tax or carries the economic burden. This is known as tax incidence and it is a vital part of the consideration of any form of tax.

Some will think, for example, that the landlords will just raise rents and it will really be the people paying the tax. This isn’t how it works and we have two ways to work this out.

The first is empirical. Back in the 1980s there were certain areas of Britain economically depressed and the Thatcher government decided to create special zones, much like the Special Export Zones in Bangladesh today. Property taxes in those areas were abolished to encourage companies to move there but all that happened was that rents rose. And if rents rise in the absence of taxation then we can also assume that they will fall in the presence of it.

Which gives us our second line of reasoning. We like property tax precisely because we’ll not change the amount of property very much by having it. That’s the non-distortionary part of our argument above. But we also agree that the capitalists, or perhaps the rentiers because they’re the people collecting the rents on the buildings, are greedy and they are already charging the maximum they can.

Another way to look at it is that there is a certain value, or “utility,” to occupying a particular building and tenants aren’t willing to pay more than that. So the price of being in the property is essentially fixed by the desire to be in it and the supply of other properties. How that price is split between the landlord and the taxman is of no concern to the tenant.

The effect of this is that property taxes, whoever actually hands over the money, come out of the pocket of the landlord. We have known this since David Ricardo published 200 years ago this week.

So, property taxes, while not perfect, are at least a close approximation to the least bad of all taxes. They are economically efficient and possibly even morally just, as it will be the landlords paying this tax, not the tenants or renters. Thus, this decision by Muhith is a good one.

And on those rare occasions when we find a government doing something sensible we should commend the action, for it makes our comments on the more normal silliness rather more valuable if we are known to be fair about these things.

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.

Source: bdnews24