Beneficial property taxation

As most people in Pakistan avoid paying taxes

The Prime Minister has been saying that the people avoid taxes because they don’t see any visible benefits. With the approaching elections in Punjab and K-P, the issues of financing public services will assume centre-stage again. In most countries, these services are provided locally, as this is the level of government for effective delivery. Property taxation has the key role here. In the first Mahbub ul Haq Dialogue held in Lahore last Friday, Professor Ehtisham Ahmad of the London School of Economics and Zhejiang University in China explored the potential of a “beneficial property tax” as a new reform. He thinks that property taxes are the most visible of taxes. This is why they generate the most opposition, unless closely linked with benefits. His research on other countries estimates the potential to be at least two per cent of the GDP. In Pakistan, property taxation is collected by the provinces and the proceeds are transferred to the local level through inefficiently administered transfer mechanisms. In FY19, the yield was a mere Rs7 billion in the total provincial revenues of Rs402 billion.

Broadly, property taxes are of two types. One is the US model, with clearly recorded ownership titles and timely information on changes in property values. This is hard to implement in countries like Pakistan. The other is a simpler “beneficial” tax based on occupancy and using rate-setting and simple criteria depending on the size and location linked to the cost of service delivery. It avoids the complexity of full cadastre and abstruse valuation changes by linking registration and occupancy to the cost of service delivery. Countries with complex ownership/leasehold structures are recommended this approach. In the UK, the approach generates 3.3 per cent of GDP in revenue. Professor Ahmad is working with the Chinese finance ministry to devise a system for them. Along with Lord Stern, he had carried out ushr-related simulations for the 1980s. Land tax used to generate around 5 per cent of GDP from Moghul days until the Government of India Act, 1935. Political considerations and corrupt patwaris led to the collapse of the tax base. Their simulation of acreage-based land tax linked to a percentage of gross output (7.5%) for insurance purposes above the limit of 12.5 acres was modestly estimated to yield one per cent of the GDP. This land tax credited towards ushr was linked with local public services: healthcare, basic education and social protection for the locally identified needy. It would have transformed rural local governments towards better accountability and social service delivery. That was then. Now, as he puts it, property tax on beneficial area/locality-based model linked to basic services could generate an additional one per cent of the GDP in Pakistani cities. The finding is informed by his ongoing research that places the estimate for cities in China and Mexico at 2 and 1.5 per cent of the GDP respectively.

In sum, Professor Ahmad calls for developing a beneficial property tax model for local governance with a local tax system linked to local infrastructure and service delivery, revamping local government for improved accountability, a focus on SDGs and a generalised asset-based tax system linked to social services; besides access to credit for local infrastructure. Interestingly, the beneficial property taxes imply zero net tax — the burden of taxation being compensated by the benefit of expenditures. As a result, changes in taxes and expenditures do not raise reactions from taxpayers, such as migration, protests and voting out incumbents. Also, there is less resistance and, including, above all, cheating. He believes that his scheme of things is likely to reduce informality as well.

Published in The Express Tribune, February 7^th, 2020.

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