Article: Time for a Property Tax

(The Economist Feb 4^th 2012)

Article Summary

China’s economy is so huge, and its significance to the world so great, that it is easy to forget the country’s property market is still in its adolescence. Two decades ago most city folk were consigned to dilapidated quarters provided by their state-owned employer. In the years since then house building has boomed and the cult of home ownership has taken a hold on the Chinese psyche. But the market has seen epic swings, and prices are now falling in many big cities.

In other parts of the world local governments raise revenues by taxing homes based on something like their market value. In China taxing property is a touchy subject. The government had tried imposing a variety of levies on the sale, size and historical cost of property, but none on the market value of homes. That changed a year ago, when Chongqing and Shanghai, two giant cities, introduced a pilot tax on some upmarket homes. The tax was largely symbolic, levied at low rates on a few thousand homes in each city. But it nonetheless set a precedent. China should now broaden that tax to as many properties as possible, in cities across the country.

For local governments a fully fledged property tax would provide a stable source of revenue. Unlike workers or businesspeople, homes cannot up sticks and leave. A property tax raises revenue year after year, in contrast to a land lease, which can be sold only once. What’s more, such taxes allow local authorities to capture some of the value they create: as they invest in local amenities, property values rise, and so do the taxes they are able to collect.

Economic terminologies

To tax (from the Latin taxo; "I estimate") is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by manyadministrative divisions. Taxes consist of direct tax or indirect tax, and may be paid inmoney or as its labour equivalent (often but not always unpaid labour).

A property tax (or millage tax) is a levy on property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state, acounty/region, or a municipality. Multiple jurisdictions may tax the same property.

There are three species or types of property: land, improvements to land (immovable man-made objects, such as buildings), and personal property (movable man-made objects). Real property (also called real estate or realty) means the combination of land and improvements. Under a property tax system, the state requires and/or performs an appraisal of the monetary value of each property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions.

(Reference - Wikipedia.com)

Opinions

A property tax could also temper the wild swings in China’s housing market. A recurring levy would make it costlier to buy and hold a second or third home as a speculative bet on rising prices. That would force some absentee homeowners to sell their vacant flats or rent them to the many citizens priced out of the market. Some economists believe that the light taxation of land in Japan contributed to its ruinous asset-price bubble in the 1980s.

A property tax would by no means be easy to implement in China. It would require homes to be registered, title to be clear and the appraisal of property values to be credible. But similar obstacles have been overcome in other developing economies, including many cities in India.

Under Chairman Mao, taxes on private property all but vanished along with private property itself. Today’s Chinese set no store by the old socialist doctrine that “property is theft”. But many urban Chinese now think of taxation that way. They feel, with some justification, that they already pay too much to a state that provides too little.

This antipathy is not lost on China’s local governments. They are wary of angering the urban middle class, who own their own homes, and the city elites (including party officials and their families), who usually own several. So they continue to cause anger by throwing rural folk off their land. China must now act boldly to reform its taxation of property. Otherwise it will have to face the consequences of continued weak local-government finances and even more social unrest.