VO L U M E 1 6 N U M B E R 1

CMI BRIEF
MARCH 2017

This CMI brief

features research on
property taxation
in Africa

Photo by José Carlos Babo (CC-license)

Property Taxation in
Developing Countries
AUTHORS Property tax (PT) raises on average revenues of less than
Merima Ali 1% of GDP in developing countries. In many African
Senior Researcher, CMI countries it contributes far less than 0.5%. Following such
Assistant Professor, Economics low contribution, there is a growing eagerness among
Department, Syracuse University
policy makers to increase its share in GDP. This policy brief
provides a theoretical rationale behind such enthusiasm
Odd-Helge Fjeldstad
by discussing the reasons for considering PT as a ‘good’
Senior Researcher, CMI
Senior Fellow, ICTD
tax compared to other forms of taxes such as income and
Extraordinary Professor, ATI consumption tax. It also elaborates on conditions under
which PT may lead to inefficiencies and inequities. Various
Lucas Katera reasons for the overall poor revenue performance of PT
Director of Commissioned Works, in developing countries and possible policy implications
REPOA are examined.
2 C M I B R I E F V O LU M E 1 6 N U M B E R 1 , M A R C H 2 0 1 7

Figure 1: Property tax revenue as percent of GDP in 2010

Source: Generated using IMF’s

≤0.09 ≤0.42 ≤1.03 World Revenue Longitudinal
Data (http://data.imf.org/
≤1.97 ≤2.05 No data revenues).

Revenue Contribution of Property Tax Administrative innovation: PT requires the creation of systematic
Though it can have many forms, property tax (PT) is generally record keeping and organisation, and involves the collection of
levied as an annual tax on the value of real property such as land and detailed data on land and properties, thus potentially spurring
buildings. There are exceptions to this definition as capital invested broader administrative improvements.
on land in general, and non-residential activities like businesses in
particular, could be mobile. While PT as a share of GDP can reach as Ideal source of local government revenue: Because the tax base is
high as 2% or more in high-income countries, it accounts for less than geographically delimited and paid by local residents with limited
1% in developing countries. Figure 1 shows the revenue distribution mobility, PT is generally regarded as a stable and predictable
of PT as a percent of GDP for different countries for the year 2010 revenue source for local authorities. Because properties are
based on data from IMF1. Western European countries, United States, physically immovable, it is in principle relatively straightforward for
Canada and Australia on average collect PT that is close to 2% of governments to identify and tax properties, even where administrative
their GDP. Some upper middle-income countries such as Brazil and capacity is limited.
Argentina also have a share similar to most developed countries.
Transition countries in Central and Eastern Europe and former Soviet Promotes transparency and accountability: PT is highly visible to
Republics revenues from PT represents close to 1% of their GDP. taxpayers and, in principle, linked to improved local services. As a
For most low-income African countries where data is available, PT result, it holds unique potential to act as a foundation for bargaining
contributes to less than 0.1% of their GDP. between taxpayers and governments over revenue and public
spending, hence, making policy makers and local officials more
Property Tax as a ‘Good’ Tax accountable.
There are a number of theoretical and policy justifications for the
need to promote PT among developing countries. The ‘Good’ Tax Turning into a ‘Bad’ Tax
There are some exceptions to the above-mentioned advantages of PT
Efficient: PT is considered more efficient compared to other forms that might result in inefficiencies and inequities. These exceptions
of taxes such as consumption and income tax because its imposition may arise from factors such as the type of the tax base, the method
does not affect resource allocation by distorting the decision to supply used to assess the revenue base, and differences in the overall
and invest in the form of human and physical capital. Because it is a enforcement of the tax across localities.
tax on wealth, rather than productive activities, it does not undermine
productive incentives – and can also encourage more productive use Using mobile properties as the tax base: Using mobile properties as
of land and property. This advantage holds because of the ‘immobile’ the tax base may result in inefficiency by affecting resource allocation.
nature of the tax base. The base for collecting PT usually includes land and buildings. The
efficiency advantage of PT that emanates from the immobile nature of
Equitable: PT is considered as a progressive tax because land and the tax base only applies to land and not usually to buildings, especially
capital, in general, are owned by relatively wealthy individuals. As a non-residential structures that are mobile. For example, applying PT
result, the burden of the tax is likely to be borne by middle and high on businesses that use relatively more property as an input in their
income earners. production may be distortionary by affecting their decision on how,

1 The term ‘property tax’ as it is defined for statistical purposes by the IMF, refers to all taxes payable on the use, ownership, or transfer of property. It includes recurrent
property taxes, capital transfer taxes (such as stamp duties and property transfer taxes), estate and inheritance taxes, gift taxes and net wealth taxes. Many developing
countries do not report on sub-national taxes to the IMF.
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Table 1: Comparison between the two commonly used property assessment methods

Market-based assessment Area-based assessment

The benefits from local services financed by the tax can be Cannot reflect benefits from local services, and hence it may
reflected in property values and help promote accountability and become difficult to create transparency and accountability among
transparency among local officials. local officials.

Is more equitable since it takes into account the differences in the Cannot capture differences in the quality of buildings and
quality of buildings and locations. locations.

Promotes vertical equity by taxing more high-income households Is less equitable and may result in larger tax burden on low-income
who are more likely to live in high-value neighborhoods. taxpayers than high-income taxpayers.

Can take into account the change in the relative value of the Cannot take into account the change in the relative value of the
property over time. property over time.

Volatile, as market value of properties change over time. Less volatile as the assessment does not depend on market value.

Difficult to undertake and more expensive to administer. Easier to undertake and cheaper to administer.

where and in what form to invest. Taxing buildings disproportionately Reasons for the Poor Revenue Contribution of Property Tax in
higher than land may also discourage maintenance, especially if Developing Countries
improvements on buildings are considered as an increase in the tax One of the reasons for the poor revenue contribution of PT in
base. Furthermore, when new and well-constructed buildings are developing countries is low-level of fiscal decentralisation. In
taxed more heavily than slums, it can slow down urbanisation or principle, local government authorities are likely to collect PT more
growth of cities by curtailing construction of new buildings. efficiently than central governments because they can more easily
oversee local residents, have better information about their assets,
Using area-based assessment to assess the tax base: The equity and monitor their compliance. However, PT collection is often
argument with PT may or may not hold depending on how the poor also in countries with a more decentralised system of revenue
tax base is assessed. Using market value to assess the tax base is collection.
generally considered fairer than using alternative approaches One of the most fundamental barriers to effective property
such as area-based assessment because the former reflects the taxation is the sustained resistance it faces from property-owning
benefits provided by local services financed by the tax. For example, elites, who form a powerful lobby that can block both policy reform
the benefit from having a property closer to public gardens or and effective implementation. This is a particular problem in
major transport facilities offers more benefit to the owner that is large capital cities, where resources are concentrated and political
not necessarily captured by a property’s dimension using area- and economic elites tend to be closely bound together. Indeed, in
based assessment. In general, valuation of properties that does not such cities, where bureaucratic capacity to overcome some of the
capture the real value of the property may result in differences in the administrative challenges is likely to be higher than elsewhere, elite
effective tax rates across properties and hence becomes inequitable. resistance may form the primary obstacle. Other reasons for the poor
Table 1 summarises the advantages and disadvantages of the two revenue contribution of PT in developing countries are the generally
widely used valuation methods. poor PT administration, weak enforcement and taxpayers’ attitude.

Significant variation in tax rates among localities: This may create Poor tax administration: This is largely due to inadequate human
inefficiency by affecting taxpayer’s location decision to move towards resource, infrastructure and limited information on properties.
low tax localities. It may further lower the market value of properties These challenges are reflected in a number of tax administrative
in high-tax localities over time and result in loss of tax revenue. tasks such as a narrow tax base, ineffective tax assessments of
properties and very low tax rates (see Box 1).
Significant variation in enforcement and tax administration among
localities: Even if tax rates do not vary much across localities to affect Taxpayers’ attitude: PT are often unpopular among taxpayers in
resource allocation, the mere variation in enforcement may do so. developing countries due to a number of reasons. First, PT that is
For example, taxpayers residing in localities with weak enforcement, levied on the wealth of individuals or businesses may not necessarily
in general, will face lower tax burden compared to localities with correspond to the income of the taxpayers. This can particularly
strong enforcement that can become inequitable. These variations overburden those with limited incomes like pensioners. Second,
may arise due to differences in capacity across localities or politics. PT on non-residential properties can be unpopular among business
For example, elected local officials may find it politically costly owners as it can affect their resource allocation and investment
to aggressively enforce PT collection in localities where political decisions. Third, collection of PT may not be matched with
elites or criminals live. improved local services, largely due to corruption and low-level of
accountability among local officials.
Not considering the income earning capacity of property owners: If
PT fails to take into account the income earning capacity of property Weak enforcement: Low collection rate combined with weak
owners such as older people or those with unpredictable income enforcement is another problem in developing countries. Low
sources, it may result in distortionary income re-distribution political willingness of elected local officials to enforce taxes from the
and erode the wealth of individuals over time. This is particularly a wealthy and the powerful can further exacerbate the low collection
problem in developing countries where the capital market often is rates. Given the generally unpopular nature of PT among taxpayers,
underdeveloped and other means of holding wealth such as stocks politicians may also be less willing to have strong PT enforcement on
or other financial assets almost do not exist. poor people residing in poorer neighborhoods in order to maximize
their vote in elections. Furthermore, punishment for non-compliance
such as confiscation of properties may not be politically feasible.
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Box 1: Property tax administration in developing countries

Property tax administration in developing countries is generally Ineffective assessment of properties: This may result in an
characterised by the followings: underestimation of registered properties that further erodes
the tax base. Of the two commonly used property assessment
Narrow tax base: This is due to a large proportion of informally methods, market-based assessment is generally considered as a
owned properties and a range of legal exemptions and better tax base for efficiency and equity reasons (see Table 1).
preferential treatment to different types of properties or different Despite this, area-based assessment is widely used in developing
groups of society. countries because it is relatively easier to undertake and cheaper
to administer.
Exemptions: These can be provided based on different factors
such as the type of ownership and characteristics of the owner Low tax rates: Tax rates in developing countries are commonly
or occupier of the property such as exemptions to government- very low. Yet, increasing the tax rate on properties is largely
owned properties, properties used for charitable purposes, unpopular and may invoke negative reactions from citizens.
churches, schools, and hospitals. Such exemptions may create
inefficiency if they affect economic competition among Flat rates: When the administrative capacity is low, area specific
businesses and between businesses and the government. They flat rates may be considered while the property tax system is
may further narrow the tax base and create a disproportionate being developed.
burden on taxpayers or localities that do not get such exemptions.

Policy Implications Recommended Literature

Property tax is considered a cornerstone of current efforts to Bahl, R. (2009). Property Tax Reform in Developing and Transition
strengthen broad based direct taxation in many developing countries. Countries. USAID http://pdf.usaid.gov/pdf_docs/PNADW480.pdf
Yet, it contributes to limited revenues in most developing countries.
Given the above mentioned reasons for the poor revenue contribution Bird, R. M. and Slack, E. (2002). Land and Property Taxation: A Review.
of PT, the following factors may help increase its contribution over World Bank. http://www1.worldbank.org/publicsector/decentralization/
time: June2003Seminar/LandPropertyTaxation.pdf

1. Revising the PT administrative structure from efficiency and Kelly, R. (2013). Making the Property Tax Work? International Center for
equity perspectives such as the choice of the tax base, the tax Public Policy Working Paper 2013: 11. Andrew Young School of Policy
rate and exemption policies. Studies, Georgia State University. http://scholarworks.gsu.edu/cgi/
viewcontent.cgi?article=1041&context=icepp
2. Improving the technical know-how to generate more accurate
records on properties. This can be done for example through Monkam, N. and Moore, M. (2015). How Property Tax Would Benefit
Geographic Information System (GIS) mapping to help Africa. African Research Institute. http://www.africaresearchinstitute.
increase the coverage and training of staff to upgrade valuation org/newsite/publications/property-tax-benefit-africa/
techniques. Regular updating of the property registers and
valuation rolls is essential. Norregaard, J. (2013). Taxing Immovable Property: Revenue Potential and
Implementation Challenges. IMF Working Paper WP/13/129. http://www.
3. Improving collection rate by promoting public awareness imf.org/external/pubs/ft/wp/2013/wp13129.pdf
programmes to help increase compliance as well as by
strengthening the enforcement measures. Slack, E. (2011). Property Tax in Theory and Practice. IMFG Papers on
Municipal Finance and Governance, No 2. http://munkschool.utoronto.
4. Strengthening fiscal decentralisation by giving more autonomy ca/imfg/uploads/173/enidslack_imfg_no._2_online.pdf
to local government to administer PT collection if the aim is to
improve local service provision. Smoke, P. (2013). Why Theory and Practice are Different: The Gap between
Principles and Reality in Sub-National Revenue Systems. International
Center for Public Policy Working Paper 13–13. Andrew Young School of
Policy Studies, Georgia State University. http://scholarworks.gsu.edu/
cgi/viewcontent.cgi?article=1043&context=icepp

This Brief is an output from the project Taxing the urban boom in Tanzania: Interests, incentives and real estate in Dar es Salaam
and Mtwara. The project (2016–2017) is funded by the Norwegian Embassy in Dar es Salaam under the framework agreement
between the Embassy and Chr. Michelsen Institute on ”Development analysis as basis for aid transformation, public debate and
policy change”.

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