Australia, Hong Kong, Singapore & Taiwan: How property taxes affect economic growth
In biological evolution, the genes that persist are those that have the greatest tendency to be propagated — not to be confused with those that are most advantageous to the individuals that propagate them. So it is that the male Carolina mantis (Stagmomantis carolina) attempts to mate with the female in spite of the 25% probability that she will bite his head off and eat him.
Similarly, in public debate, the ideas that persist are those that have the greatest tendency to be propagated — not to be confused with those that are most advantageous to the parties that propagate them (or with the truth). In this context, ideas are called memes; as biologists study the selfish gene, so political scientists must study the selfish meme.
One of those selfish memes alleges that land tax is bad for property owners. While this belief is false (for reasons that I have explained elsewhere), it is so good at spreading itself among property owners that the property lobby, like a male mantis offering its head to the female, deliberately promotes other memes designed to undercut the case for land tax. Thus we are told that the economy will be ruined if land tax is increased — or worse, that the economy will be ruined if land tax is not urgently reduced.
The truth, of course, is that a sufficiently high holding tax on land makes it uneconomic to hold land for purely speculative purposes, so that the would-be speculators are forced to do something more productive with their money, while others are allowed to do something more productive with the land. The additional productivity is as good for property owners as for everyone else.
Or at least that is the verdict of reason. In seeking empirical evidence to test the theory, we have the problem of controlling for extraneous variables. One method of doing this is to compare jurisdictions in which the other variables are similar, e.g. different municipalities similarly distant from the CBD of the same city. Another is to study the same jurisdiction before and after a change in the tax system, noting any changes that defy the trend in other jurisdictions. Examples of both methods are considered in Working Paper No.5. Simply comparing the tax systems and economic growth rates of different countries does not give the desired control. But, as the following tables show, even simple comparisons provide ample counterexamples to the claims of the property lobby.
Australia: Tax receipts for 2002-3
$bn % Total Total revenue (all governments): 235.13 100.0 INCOME TAX: Personal: 91.13 Corporate: 38.69 Total: 129.82 55.2 RECURRENT PROPERTY TAXES: Rates: 7.42 Land tax: 2.5 Total: 9.92 4.2
[Source: The Australian.]
Recent (trend) economic growth in Australia has typically been between 2% and 4% per annum. Now consider some competing economies.
Hong Kong: Tax receipts for 2006-7 (revised estimates)
$M % Total Total revenue: 229195 100.0 Income tax (including profits tax): 116000 50.6 RENTS: From government quarters: 658 From government properties: 1031 Land licences, short tenancies, other: 1423 Total: 3112 1.4 RECURRENT PROPERTY TAXES: General Rates: 15407 Property Tax (16% of annual value): 1250 Govt rent (3% of rateable value): 5795 Total: 22452 9.8
The 3% "Govt rent" is on leasehold titles that expired with the change of sovereignty in 1997. The distinctions between categories under "Rents" are not clear from the budget papers. [Source: Budget Estimates (links under heading "Revenue Analysis by Head").]
Economic growth in Hong Kong was 7.5% in 2005, 6.9% in 2006 and 5.6% year-on-year in the first quarter of 2007. So economic growth is about twice as fast as in Australia, while the fraction of revenue drawn from recurrent property taxes is slightly more that twice that of Australia.
Singapore: Tax receipts for 2006 (revised)
$M % Total Total revenue: 27827 100.0 Income tax: 13881 49.9 Land sales: 5017 18.0 Rental: 658 2.4 Recurrent property tax: 1948 7.0
[Source: Singapore Ministry of Finance, Revenue Estimates.]
Recent economic growth in Singapore has typically been 6% to 8% per annum. This is again about twice as fast as in Australia, while the fraction of revenue drawn from recurrent property taxes is 67% higher than in Australia.
Taiwan: Tax receipts for 2005
Income tax: 39.9% Land Value Increment Tax: 5.2% RECURRENT PROPERTY TAXES: Land Value Tax: 3.4% House Tax: 3.2% Total: 6.6%
The above percentages are of total revenue (national & local). [Source: Taiwan Ministry of Finance, Total Tax Revenues, p.4.]
The Land Value Tax is a holding tax at progressive rates, while the Land Value Increment Tax is effectively a capital gains tax on land alone. The House Tax is an oddity; it obviously hits improvements, but also takes land area into account.
In Taiwan, the fraction of revenue drawn from recurrent property taxes is 57% higher than in Australia. Recent economic growth, although not as fast as in Hong Kong and Singapore, has been faster than in Australia.
In all three cases — Hong Kong, Singapore, and Taiwan — reliance on recurrent property taxes has been greater, and economic growth has been faster, than in Australia. Moreover, all three countries have additional ways of raising revenue from property: rents in Hong Kong, land sales and rents in Singapore, and the Land Value Increment Tax in Taiwan.
Some might allege that the evidence is anecdotal. But the conclusion is supported by reason. And any evidence, anecdotal or otherwise, is better than selfish memes propagated by the unenlightened self-interest of the property lobby.
[First posted at gavonomics.blogspot.com by Gavin R. Putland. Relocated with updated links, January 16, 2009. Featured in "Return to Tax Standard Time" (Nov.5, 2007) at Don't Mess With Taxes, and "Mortgage and Real Estate Monday Link Up" (Oct.29, 2007) at Truthful Lending.]