Untax Productive Activities, Capture Economic Surpluses
South Africa May Modernize Its Tax System
Here are portions of a recent article in the Cape Argus (Cape Town, South Africa).
The South African economy has seen impressive growth over the past decade.
The Department of Trade and Industry reports that between September 1999 and June 2005, there was an average annual economic growth rate of 3.5%.
This is considerably higher than the decade preceding 1994, when there was average annual growth of 1%.
The rewards of economic growth and increased foreign investment have, however, not been equally enjoyed by all South Africans.
In fact, this growth in the economy has failed to significantly alter South Africa's socio-economic landscape.
Big business continues to be the main beneficiary. The only noticeable difference is the inclusion of a minority of black business elites.
Twelve years after the advent of democracy and 10 years since the birth of the Constitution, South Africa continues to face enormous developmental challenges.
The rates of poverty, inequality, homelessness and landlessness remain unacceptably high. Economic growth and a booming land and property market have failed to realise any tangible benefits for the poorest sector of the country.
Instead they have produced further inequality, marginalisation and exclusion of the poor. The number of poor people living on less than $1 a day (the international poverty line) rose from 9.4% of the national population in 1995 to 10.5% in 2002.
The scale of poverty and inequality in South Africa is evident in the number of people living in inadequate shelter, despite the fact that the right to adequate shelter is a basic human right contained in the Constitution.
According to the most recent estimates there are 2.4 million households living in informal settlements.
In an environment characterised by poverty, exclusion and unfulfilled want, social ills like abuse of women and children, substance abuse and domestic violence thrive.
Delft, one of the biggest housing settlements located on the outskirts of Cape Town, was recently identified by the Provincial Department of Social Services as one of the top three sites in terms of the incidence of child sexual abuse in the province.
Scores of people on government's waiting list have been relocated to Delft from informal settlements in other parts of the city and are being housed in temporary structures.
Unabated poverty, inequality and the slow pace of delivery of infrastructure, services and the land redistribution programme have created a mood of discontent and growing tension at grassroots level.
While the government has introduced several policies and other initiatives to address the enormous development challenges, it is clear that the government will need to access considerable resources to effectively address the manifold needs of the poor.
At the same time, the boom in the land and property market has seen house prices increase by an average of 20% a year between 2000 and 2006.
This has put home ownership out of reach of the majority of South Africans. Land and property speculation has been highlighted as one factor accounting for the significant increase in land and house prices.
What can be done?
It is clear that a market-orientated, trickle-down approach will not address the urban development and housing crisis.
The scale of this crisis calls for bold, decisive initiatives and strategic interventions in the market to make it work better for the poor.
These interventions should be aimed at redistributing the value derived from a soaring property and land market more equally (what is referred to as value capture), and simultaneously strive to protect and secure the right of the poor living in the city.
Value capture is a process by which the government recoups the surplus land value brought about by government interventions for redistribution to the poor. This increased value can arise from three sources:
- Changes in land use regulations through the use of planning and regulatory instruments, like zoning.
- Provision of infrastructure to a parcel of land.
- Growth of the population, which would create a demand for land, thereby increasing its price.
The rationale for value capture is the fact that the increase in land value often results not from the efforts of individual land owners, but from government interventions.
It is thus only fair that the increases in land value attributed to public resources be used for the greater public good.
These increases in land value can be recouped through instruments like development and zoning levies, land value increment taxation, land leasing and a land value tax, for example.
These instruments are being used in many countries to boost local revenue for the provision of infrastructure and services and to deter land speculation.
Disturbing issues in the Western Cape's land and property market certainly warrant a closer examination of the value capture concept.
These include the imprudent sale of prime government land and property to private developers and foreigners.
Another issue is rampant speculation in the Western Cape, where it has been reported that on the West Coast, buyers of "raw" land have realised profits of up to 1,000% after holding on to it for as little as six to 18 months.
Cape Town's property rating system also needs closer scrutiny. Attempts to update the valuation rolls in 1996 were abandoned after rich land and property owners objected.
Even though the city had a strong case and would probably have won a court challenge, rather than showing the necessary political will, the city acceded to the demands of the very wealthy.
Despite the recent update of valuation rolls in Cape Town, the property tax system is still characterised by inefficiencies and inequities.
Peter Meakin, a registered professional valuer, points out in a recent article that the rating system in Cape Town, which is based on an individual property rates system, means that owners of vacant land are taxed significantly less than home owners.
It is clear that such a system not only encourages speculation, but actually rewards those who engage in this unfair practice. Meakin estimates that the city is currently losing out on about R7.2 billion in vacant land value.
Besides the loss in revenue (revenue which can be used for the provision of housing and infrastructure for the poor), speculation also hinders economic activity in the city and impedes job creation.
It is clear that an urgent investigation is needed to quantify the revenue which has been lost to the city as a result of undervaluation due to the use of outdated valuation rolls as well as weaknesses in the current property rates system which actually encourage practices like speculation. Value capture mechanisms such as a land value tax should also be investigated.
This is a critical exercise in a city plagued by a huge housing backlog, a critical need for service delivery to poor and marginalised communities and a population who are increasingly voicing their frustration and impatience with the appalling and inhumane conditions in which they are forced to live.
Rich property owners in the city cannot carry on thinking that high property prices and equally high walls will continue to insulate them from the harsh realities of life in Cape Town's numerous and sprawling informal settlements.
If present housing delivery practice persists in indulging Nimby-ism (Not In My Backyard) then the rich should be forced to pay in other ways for the undoubted privilege of holding on to huge, well-located plots of land and sprawling gardens, while the poor are huddled in overcrowded, unserviced informal settlements sited bleakly on the margins of the city.
The creative utilisation of value capture mechanisms can ensure a more equal distribution of the benefits of a growing economy and can assist the state in meeting its constitutional obligation in terms of the progressive realisation of the socio-economic rights of all its citizens.
Mercy Brown-Luthango is the co-ordinator of the value capture programme at the Development Action Group (DAG).
The programme advocates mechanisms that allow greater value to be realised from the land and property market in order to fund urban development in the interests of the poor.
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