PROPERTY TAX REFORM IN DEVELOPING COUNTRIES

PROPERTY TAX REFORM IN DEVELOPING COUNTRIES

PROPERTY TAX REFORM IN DEVELOPING COUNTRIES

by

JA Y K. ROSENGARD

Harvard Institute for International Development and International Tax Program Harvard University

Published in association with

INTERNATIONAL TAX PROGRAM HARVARD UNIVERSITY

SPRINGER SCIENCE+BUSINESS MEDIA, LLC

Library of Congress Cataloging-in-Publication Data

A C.I.P. Catalogue record for this book is available from the Library of Congress.

ISBN 978-1-4613-7594-4 ISBN 978-1-4615-5667-1 (eBook) DOI 10.1007/978-1-4615-5667-1

Copyright © 1998 by Springer Science+Business Media New York Originally published by Kluwer Academic Publishers in 1998 Softcoverreprint ofthe hardcover Ist edition 1998 Ali rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo-copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC.

Printed on acid-free paper

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Contents

About the Author

Foreword

Author's Preface

Acknowledgements

Chapter One: Introduction Conceptual Framework Methodology and Presentation

Chapter Two: Jamaica Case Study The Jamaican Property Tax In Perspective:

Case Study Snapshot The Jamaican Property Tax In Law: System Design The Jamaican Property Tax in Transition:

System Reform The Jamaican Property Tax In Practice:

System Performance

Chapter Three: Philippines Case Study The Philippine Property Tax In Perspective:

Case Study Snapshot The Philippine Property Tax In Law: System Design The Philippine Property Tax in Transition:

System Reform The Philippine Property Tax In Practice:

System Performance

Chapter Four: Chile Case Study The Chilean Property Tax In Perspective:

Case Study Snapshot

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xi

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xv

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31 32

36

42

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62

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85

viii Contents

The Chilean Property Tax In Law: System Design

The Chilean Property Tax in Transition: System Reform

The Chilean Property Tax In Practice: System Performance

Chapter Five: Indonesia Case Study The Indonesian Property Tax In Perspective:

Case Study Snapshot The Indonesian Property Tax In Law:

System Design The Indonesian Property Tax in Transition:

System Reform The Indonesian Property Tax In Practice:

System Performance

Chapter Six: Synthesis Overview Cross-Country Analysis Reform Guidelines

Appendix: GDP/GNP Deflators and Exchange Rates

Selected Bibliography

Index

Epigraph

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157 157 176

189

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209

About the Author

JAY K. ROSENGARD is a Development Associate at the Harvard Institute for International Development (IllID), Harvard University. He has over twenty years of experience in the design, implementation, and evaluation of development policies, programs, and projects throughout Asia, Africa, and Latin America. Dr. Rosengard's areas of expertise include: municipal finance and management; intergovernmental fiscal relations; banking and financial institutions development; microenterprise financing; tax reform; management information systems; monitoring and evaluation; human resource development; and public administration. He has worked for a wide variety of multilateral and bilateral donors, as well as directly for host governments and private sector clients. His experience combines significant accomplishments while managing complex overseas implementation activities, interspersed with internationally recognized applied policy research and teaching at leading development institutions in the United States.

Foreword

Developing countries experiencing high rates of wbanization and facing increased demands for the provision of municipal services have had great stress put on their budgets at the state and local levels of governments. In their search for an appropriate source of revenues to finance these services, governments have been turning to the property tax as a potential revenue mechanism. Although property taxation in some form has often had deep historical roots, it is a form of taxation that in more recent years has been neglected because of its political sensitivity and the difficulties faced by the tax authorities to implement it in a fair and stable manner. Pressures for special exemptions, multiple rates, and an inadequate design to account for inflation have eroded the property tax faster over time than most other components of revenue systems.

The response of many professionals in this area has been to try to implement ever more sophisticated, and expensive, mapping and computerized geographical information systems. To date the results of this approach have been dismal, at best. Dr. Rosengard has taken a different approach by studying in depth the experiences

of a series of countries that have made major efforts at implementing property tax systems. From this research he has tried to identify what elements lead to success and what have failed. In addition, he is a practitioner who has worked for several years as an advisor in Indonesia on one of the few successful implementation experiences to be found in developing countries.

xii Foreword

The Harvard Institute for International Development was given the privilege to assist the Ministry of Finance of the Government of Indonesia from the design stage through to its final implementation. As a member of that team, Dr. Rosengard was able to get first hand experience on the identification of factors that are critical for success.

The International Tax Program (ITP) at Harvard University is delighted to have been able to support this research effort, and to be identified with the publication of this book. The ITP has been able to do this because of the generous financial support it has received from the Lincoln Institute of Land Policy to undertake research on such topics. I am confident that the findings of Dr. Rosengard that are presented in this book will be of great interest to both academics and practitioners in this important area of applied public finance.

Glenn P. Jenkins Director, International Tax Program Harvard University Cambridge, Massachusetts

Author's Preface

The principal strengths and weaknesses of property taxation in developing countries are not well understood. Thus, governments attempt to use property taxes to achieve unrealistic policy objectives. At the same time, they miss promising opportunities to exploit property taxation effectively. Governments try to remedy a multiplicity of economic, political, and social ills via property tax reform, while they fail to optimize the financial potential of property taxation.

The cost of these fundamental misperceptions is compounded as technocrats and foreign advisors attempt to reform misunderstood property tax systems by misapplying scarce resources to achieve inappropriate ends. The results are not encouraging. Revenue generation routinely falls well short of needs. Ancillary objectives are seldom achieved. Tax bases are narrow and quickly eroded. Coverage is inequitable. Administration is arbitrary and corrupt. Unduly large amounts are spent on overly complex data collection and property valuation activities. Taxpayer compliance is low. Popular resentment is high.

Property Tax Reform in Developing Countries presents practical guidelines for the design and implementation of property tax reform in developing countries, based on an innovative conceptual framework and intensive field investigations. This book reviews the underlying fundamentals of the property tax, examines the common misperceptions that have led to so many unsuccessful attempts at property tax reform, analyzes the experiences of Indonesia, Chile, Jamaica, and the Philippines in depth to highlight what works and what does not work, and concludes with detailed suggestions for future property tax reform initiatives.

Property Tax Reform in Developing Countries emphasizes that the purpose of property tax reform in developing countries should be to ensure the long-term generation of adequate local government discretionary resources. This book makes a compelling argument that property taxation is an inappropriate policy tool and poor administrative mechanism for guiding allocative decisions, achieving social goals, recovering the cost of capital investments, or pricing private goods.

Property Tax Reform in Developing Countries also stresses that the fundamental principals of property tax reform in developing countries should be

xiv Preface

administrative and allocative efficiency, horizontal and vertical equity, and system sustainability. This book demonstrates that, unlike the norm in property tax improvement efforts, reforms can minimize the costs and maximize the longevity of reform by: increasing coverage through establishment and maintenance of a broad tax base; emphasizing simplicity through promotion of transparent policies and administrative clarity; and enhancing buoyancy through routine indexing and periodic non-traumatic revaluations.

To translate these concepts into operational practices, Property Tax Reform in Developing Countries explains why the process of property tax reform in developing countries should be one which stresses utilization of personal and institutional incentives, dissemination of public information, an integrated perspective, and selective implementation. This contrasts sharply with the usual approach to property tax reform, which usually ignores the incentives required for personal and institutional behavioral change, the importance of public awareness, the need for a holistic approach, and the wisdom of approaching change incrementally.

Acknowledgments

I am deeply indebted to many who have assisted me during preparation of this study.

First and foremost, my family has maintained its faith and confidence in me throughout the ordeal, and their support has been both a comfort and an inspiration. I am also grateful for the wise counsel of the Gang of Four: William A. Doebele, Jose A. Gomez-Ibanez, Glenn P. Jenkins, and Karl E. Case. Our discussions have been spirited and intense, with seldom a dull moment to anesthetize our deliberations. Suggestions have been taken in the constructive spirit offered: sometimes accepted, sometimes rejected, but never ignored. The adept facilitation of Carl Steinitz is also appreciated. Of course, ultimately I am responsible for the product, so I adhered to an old Yiddish expression: Barat zich mit vemen du vilst; un tu miten aigenem saichel - Ask advice from everyone, but act your own mind.

I am most appreciative of the financial support provided by the Graduate School of Design for the past two years, and by the International Tax Program for field work undertaken in preparation of the case studies.

I have benefited immensely from my HaIvard Institute for International Development colleagues both in Cambridge and in the field, particularly those I have had the pleasure of working with most closely in Indonesia: Richard Patten, St. Clare Risden, Marco Montes, and Roy Kelly.

Finally, the credibility of this study is greatly enhanced by the insights of taxpayers and tax officials in Jamaica, the Philippines, Chile, and Indonesia who graciously subjected themselves to repeated questioning regarding their thoughts and actions.

Although it is not feasible to thank all those who have helped me understand their countries better, I would like to express my appreciation to those

xvi Acknowledgments

who have subjected themselves to the most abuse in the course of my research: Commissioner of Land Valuations Elizabeth A. Stair of the Ministry of Finance and Public Service in Jamaica; Director of the Bureau of Local Government Finance's Special Projects Management Service Erlito R. Pardo of the Department of Finance in the Philippines; and Valuation Subdirector Roger Lowick Russel Alvarez of the Internal Tax Service in Chile.

I am especially grateful to Property Tax Director Karsono Swjowibowo of the Ministry of Finance in Indonesia. who has been a close friend, respected professional colleague, and demanding client, often all at the same time. We have certainly both learned a lot while working together to improve property.