lift property tax to boost revenue says oecd

http://www.theaustralian.com.au/business/markets/lift-property-tax-to-boost-revenue-say-oecd-economists/story-e6frg926-1226003598312

Lift property tax to boost revenue, say OECD economists
Paul Hannon
February 10, 2011 11:39AM

PROPERTY taxes are the best way for governments to raise the extra revenue needed to reduce their debts without hurting growth, a group of economists who work at the Organisation for Economic Co-operation and Development said in a paper published overnight in London.

Five OECD economists, working with Christopher Heady from the University of Kent in Britain, examined the impact of tax changes in 21 developed economies over the last 34 years.

Writing in the Economic Journal, they concluded that recurrent taxes on property, especially homes, were the best option for raising additional revenues, although they acknowledged that such taxes were politically unpopular.

As an alternative, they said governments should eliminate widespread exemptions to sales taxes, another move that could prove politically difficult at a time when food prices are already rising rapidly.

?Any necessary increases in revenue after recovery would be least harmful to growth if they were based on increasing recurrent taxes on immovable property and consumption taxes, especially if this took the form of reducing exemptions and rate reductions,? the economists wrote.



The OECD economists said the current favourable tax treatment of home-ownership boosts investment in residential property at the expense of more productive alternatives.

?This implies that increasing recurrent taxes on immovable property will shift some investment out of housing into higher-return investments and so increase the rate of growth,? the economists wrote.

Politicians of all persuasions have long encouraged investment in residential property through tax exemptions and other measures, and some economists believe that that very encouragement has contributed to the sharp rise in house prices and increased mortgage-lending that led to the financial crisis of 2007 and 2008.

The OECD economists said the use of recurrent taxes on property vary widely within developed economies. In Britain, they take the form of the annual council tax linked to the value of the property, with revenue going to local governments.

?While it is unlikely that those countries with already high levels of such taxes will want to increase them, there is considerable scope for raising them in other countries,? the economists said.

But their recommendations are not entirely bad news for home owners. The OECD economists said taxes on housing transactions - such as stamp duty in Britain, which is charged on home purchases - discourage the best use of housing, and also reduce labour mobility, both developments that hurt growth.

?Property taxes in general are likely to be more harmful to growth than recurrent taxes on immovable property,? the economists wrote.

If politicians aren't prepared to risk the wrath of home owners by hiking property taxes, the OECD economists said the next best option would be to remove exemptions on items such as food, childrens' clothing and other goods and services that are deemed to be essentials, rather than discretionary purchases.

The economists acknowledge that the removal of essentials will be criticised for hitting lower-income households particularly hard.

?Some of these...reductions are designed to reduce the apparent regressivity of the tax, but they are poorly targeted because rich people spend more than poor people on these goods,? the economists wrote. ?From a distributional - as well as efficiency - point of view, it is better to have a uniform VAT on a broad base and use some of the additional revenues to assist low-income households, which would still leave a substantial revenue gain to the government.?

The economists said that purely from the point of view of boosting growth, cuts in income taxes and social security contributions for low-paid workers are the best option. But faced with a mountain of debt, few governments are considering tax cuts right now.