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The irony of a tax on vacant land


THE LAND and building tax bill, aimed at replacing the outdated house and land tax, has been put on hold for review by the Fiscal Policy Office after being widely scrutinised in public.

It is a progressive tax bill designed to achieve three major objectives: to narrow the income gap, to raise government revenue, and to deter land speculation. The validity of the first two objectives, which are related to macro issues, is logically sound. The last objective, which is related to issues at the micro level, however, remains debatable.
Advocates for a tax on vacant land may argue based on previous statistics that more than 90 per cent of the 127 million rai covered by all the land documents issued by the Land Department were owned by only 10 per cent of the population, or 6 million people. That totals 114 million rai (18.25 million hectares) held by that 10 per cent, and more than 70 per cent of that was kept vacant and undeveloped for speculative motives.
Hence these advocates give full support to the proposed new tax| on vacant land, which would be 1-3 per cent for the first year, 2 per cent for the fourth to sixth years, and the maximum rate of 3 per cent beyond the seventh year. Their main argument is that such a tax would be an effective deterrent to land speculation. With this measure, advocates hope that poor farmers would be able to access farmland at a lower price, since a lot more land should be made available in the market.
However, the issue of speculation, especially on urban land and its surroundings, is much more complicated than this. The truth is that not all vacant land is from speculative motives. Many such land plots are, in fact, planned for dynamic long-term development alternatives. The land-conversion process is often irreversible or prohibitively expensive. Keeping vacant land could then be viewed as keeping a future development option alive.
If the exact cause of vacant urban land is not speculation, then taxing it will only make matters worse. Large private developers, when facing this new land tax, may inefficiently convert their land into high-density buildings at a much earlier stage than optimal. They might also use their market power to charge higher rent and to shift some parts of the tax burden to the renters.
In this situation, taxation of vacant land would not always increase the farmland supply, but instead might lead to inefficiently high-density urban land use and inefficiently high prices.
Analysis clearly shows that an effective land tax bill needs to be well balanced between social benefits at the macro level and the benefits of privately owned companies at the micro level.

Prof Arayah Preechametta is a lecturer on macro economic study at the Faculty of Economics,
Thammasat University

Published : October 23, 2015

By : ARAYAH PREECHAMETTA SPECIAL