A Fair Assessment

• Author: John Norregaard
• Position: a Deputy Division Chief in the IMF's Fiscal Affairs Department.

In an upscale neighborhood in Cape Town, South Africa—a country that like many others has been challenged by increasing income inequality in recent years—a 1,600-square-foot apartment may have a price tag of about $480,000, costing the owner about $2,700 in annual property taxes to the local government at current rates.

In contrast, the owner of an apartment in a much less attractive area, valued at, say, one-tenth of the first one, would not pay a tenth the property taxes, $270 a year, but a proportionally much smaller $150 a year.

Property taxes allow governments to redistribute from the rich to the poor, thus reducing inequality in their constituencies (although ideally the focus should be on the redistributive impact of all government taxes and expenditures combined). But governments generally do not make as much use of property taxation to address income and wealth inequality and raise revenue as they could. That is because property taxes are also an unpopular tax—perhaps because they are hard to evade—that can be difficult to administer.

The term “property tax” is often used in a broad sense to include a spectrum of levies, such as annual taxes based on the value (or size) of immovable property, taxes on sales of real property, net wealth taxes, taxes on inheritances and gifts, and taxes on transfers of securities. Here, we use the concept in the traditional and narrow sense of regular taxes on immovable property. These taxes have been used since ancient times—for example, in China and Greece (The Economist, 2013)—and luminaries such as Adam Smith, David Ricardo, and Winston Churchill have emphasized their benign features. Recently there has been a dramatic interest in boosting revenue from property taxes in countries as diverse as Cambodia, China, Croatia, Egypt, Greece, Ireland, Liberia, and Namibia (see Norregaard, 2013, for details).

Why this recent upsurge of interest?

Potential revenue

Property taxes on immovable property yield fairly modest amounts of revenue in most countries. Their average yield in advanced economies is about 1 percent of GDP. That is two and a half times the average level in middle-income countries, which garner 0.4 percent of GDP. (Little is known about their revenue importance in low-income countries.) And there are huge variations in revenue raised within the two groups, especially among advanced economies (see chart). These large disparities in tax yield doubtless reflect differing degrees of popular...