Loading...
The Financial Express

Wealth inequality: Property tax can close the gap

| Updated: April 01, 2019 21:05:41


Wealth inequality: Property tax can close the gap

Inequality in the current global economic system is inevitable. As in the advanced economies, wealth inequality in the developing world, too, remains a difficult policy issue. In Bangladesh, the share of total income of the poorest five per cent plummeted to 0.23 per cent in 2016 from 0.78 per cent in 2010. The share of income of the richest five per cent has grown to 27.89 per cent in 2016, which was 24.61 per cent in 2010. The income Gini has risen to 0.483 per cent in 2016, up from 0.458 in 2010. The Wealth Gini stands at a staggering 0.74 per cent and the top five per cent wealthiest people's share of wealth was more than half of the total wealth of the country (CPD, 2018). Poverty reduction in the country has also slowed down in percentage point from 1.80 per cent in 2000-05 to 1.20 per cent in 2010-16. Hence, the issue of growing inequality in all dimensions, such as income, consumption, assets, opportunities, employment, capabilities, well-being or happiness is gaining importance among economists, policymakers and civil society.

Wages and better (decent) job condition for the poor have not improved much despite significant growth in GDP. Income and wealth inequality in urban areas is increasing even faster. Rapid urbanisation is not ensuring enough jobs, or enough income for newcomers to live a better life. Employment growth also shows a depressing result falling down to 1.9 per cent from 3.3 per cent between the periods of 2000-05 to 2010-16. Most jobs are still informal (85.1 per cent) and not decent (BBS 2017). The upper-line poverty in urban areas was 18.9 per cent according to 2016 BBS statistics. In this backdrop it would not be exaggerating to state that the benefit of economic growth and prosperity is not trickling down to the extremely poor.

Inequality in initial endowments (e.g. ability, inherited wealth) will exist in society, but it is the role of the government to frame the problem of inequality and rein in such uneven distribution of income and wealth. The key mechanism that can deliver more growth and more equality is by raising the median income of poor households through investing heavily in human development (i.e. education, skills and health). Moreover, increase in growth will not sustain if there is more reliance on low wages without upgrading technology and skills of workers.

Such measures can be financed either by higher marginal tax rates or by reducing deductions and exemptions. Government needs to pare the payments away from wealthier and target welfare assistance to the extreme tail-end of the income distribution curve. Breaking the wealthiest by taxing heavily and transferring this to the poor is not the recommendation. High marginal tax incidence may have negative impacts on growth or any tax cuts may have disincentive effects. Rather, in the face of rising wealth inequality, one possible solution can be the general tax on wealth. But wealth taxes have clearly fallen these days. Wealth taxes in developed world, where they do exist, contribute relatively very little (max one per cent on an average) to the total tax revenues.

Bangladesh government has introduced "Wealth Tax" in the form of "Income Tax Surcharge" in 2011. As per the new measure, 10- 30 per cent surcharge is applicable on the tax on income (not on income) paid by individuals based on the proposed different slabs with recorded wealth exceeding Tk 20 million. The surcharge collection was Tk 3.55 billion in FY 2016-17 from some 11,661 wealthy persons, which was only about 0.20 per cent of the total income tax in FY 2016-17. This is because individuals who do not have taxable income but own significant wealth in various forms need not pay any Income Tax Surcharge. Besides, the inherent mobility of wealth, tax evasion and lack of administrative and technical capacity for appropriate valuation, implementation and collection are major challenges to wealth taxation. Hence, question remains whether tax authorities in developing countries can enforce tax policy efficiently to raise revenue.

Rather than trying to tax all wealth, properties like land, apartments, residential and commercial buildings can be taxed. This is because property tax is the best equitable form of taxation for generating revenue and ensuring stable finance. It can help spectacular expansion of municipal revenues and expedite the fiscal and financial recovery. The benefit will come in terms of service provision of water, electricity, sewerage, waste collection, policing and maintenance of public parks, schools and roads etc., funded at the local level.

In Bangladesh, wealth is mostly accumulated in the form of immovable physical assets, such as land, apartments, buildings and commercial business properties. The concentration of wealth and wealth accumulation in the form of immovable property are higher in urban areas. This is due to better job opportunity, higher wage, demographic composition and property values. So, property tax can be an annual levy on immovable properties for financing municipal government.

Secondly, property tax can complement income taxes to reinforce progressivity. Property taxation is similar to a proportional tax relative to income as the income elasticity of demand for property suggests that housing expenditure is roughly proportional to permanent income. It can be seen as a tax on capital; as such, it is likely to be progressive in its incidence. It is not as buoyant as income or sales taxes. With well-administered property tax, local authorities can count on a predictable, autonomous and potentially lucrative source of income. Moreover, property is immovable, so it is very difficult to evade tax. Property tax can make immediate connection between property values and local services. Visibility of such tax would also make governments more accountable. It can address income and wealth inequality in settings where wealthiest are difficult to tax.

Increase in wealth thus not only provides the opportunity for property taxation for financing the cities, it also opens new financing options for the government to redistribute wealth. It can underpin government policy in relation to domestic resource mobilisation at its core, which is a key development priority. That is, property tax can also be an important part of fiscal decentralisation. Moreover, the reality is that tax authorities in developing countries are struggling to tax income from capital effectively despite growing evidence of increasing wealth and wealth inequality. Low revenue contribution of wealth tax is evident in spite of increasing tax base and intensive real estate market development.

The current wealth tax systems are clearly undermining huge revenue potential. Though, the idea within public policy circles is that political governments in developing countries evaluate wealth taxes as an 'excess burden' in addition to basic load of income and sales tax payment and it tends to discourage the use of capital. The country's average tax collection as a percentage of gross domestic product (GDP) was 10.3 per cent in last 10 years, the lowest in the South Asian countries. The gap between tax revenue and GDP in Bangladesh is also the highest among 17 Asia-Pacific countries. Hence, there is ample scope to widen the tax net with more progressive property tax systems. This will have an impact on incentives as they change directly the distribution of endowments in favour of the poor.

A tax burden is more likely going to rest on the middle and upper income households. However, if property tax can be designed appropriately, it will be the most effective revenue generation system in the country. Bangladesh's neighbour India has wealth tax, which is payable if the market value of certain assets exceeds Rs 3 million. Over 50 per cent of property taxpayers paid through online platform last year. The tax is one per cent of the combined value of such assets. Most shockingly, in Bangladesh, wealthier people are enjoying incredible rate of returns by investing in properties compared to any other capital investment. Property investors are enjoying windfall gains due to astronomical hike in property demand and prices over last two decades. Such gain in this format of investments attributes to almost tax-free income! This has encouraged people to invest heavily in properties which are crowding out productive investment in other real economic and business sectors.

Therefore, it is high time the government shifted towards enhancing the fiscal capacity of local government by taking policy measures to introduce property tax. But implementing property tax can be difficult, especially in developing countries where the fundamental policy challenges are administrative deficiencies of the tax authority, lack of political will, lack of authentic data, appropriate valuation system, immature real estate market and under-developed registration system, procurement, legislation and mortgage systems. However, interests on property taxes in the developing countries have popped out recently due to the effect of low revenue generated by current tax systems on their ability in providing many of the public services. Till date, many countries of the developing world have initiated property tax successfully. More depends on the intentions of the country's government to step up the process and reform tax policy in order to explore this untapped revenue potential.

Rahat Syful Hoque is a development researcher.

[email protected]

 

Share if you like

Filter By Topic