PERVERSE TAX EFFECTS WITH THE WRONG INCENTIVES

 HAS THE UK GOT THE WORST PROPERTY TAXES?

Yes (almost) PART 2. PERVERSE TAX EFFECTS WITH THE WRONG INCENTIVES — UK property taxes are the third LEAST EFFECTIVE at damping down surges in house prices. UK taxes make a bad situation WORSE.

Fair enough! The UK may have the heaviest tax burden on property, but it doesn’t have the worst performing. That prize goes to Japan, then the US.

This comes from some clever analysis by the OECD, on "The stabilisation properties of immovable property taxation". These guys have used advanced econometric techniques to squeeze some tentative answers from a huge international set of data. No doubt their methods could be challenged, recast with different techniques and maybe others might have come up with different results. But for now this is what an independent well-funded, respected organisation has come up with. tortured the data from a rang

Economic Stabilisers In economics it is well known that some taxes, such as VAT act as stabilisers against inflation. Because the tax rises in proportion to the price charged the total price rises faster. This is the principle behind the plastic bag levy, and the reason why the public accepts ‘sin taxes’. Pushing prices up faster than the market price deters consumption.

Turning the argument around — if we must have taxation, then it is better if it encourages more of what we want. Do we want to slow down or stop faster-than-inflation property price rises? Make sure whatever tax is levied supports this aim.

HOW TO USE TAX TO SLO DOWN HOUSE PRICES

No not a mis-print! Slovenia and Slovakia, two new breakaway European states are highlighted as having property taxes which are best at stabilising prices. According to the OECD Report their property tax regimes are best in slowing down house price movements, up or down. 

Something like VAT would be a stabilising tax. As prices rise, and without any need to change rates, so the tax take increases. The discouragement to the purchaser is proportionate to the price rise.

WHERE PROPERTY TAXES MAKE THINGS WORSE

In the naughty corner, Japan’s property taxes are the worst for making the swings up and down in  house prices even worse. Then comes the USA, followed by Great Britain! Despite us having the highest burden of property taxes here in the UK, the taxes are inflicted in such a bad way as to make house-price rises and falls more extreme.

 Economic de-stabilisers: What should we call taxes which make a bad situation worse? Trend exacerbators might be a good name but what about ‘Wobble-makers’?

Taxes which make things worse: The usual example given in the text books is UK whisky duty. Currently it is a flat-rate of £28.74 per litre of alcohol. This is the same amount whether it’s Aldi own-brand or Single-malt. This is good for discouraging alcoholism, but unless the Chancellor uprates the Duty every budget, its effect will be worn down by inflation.

Over the years neglecting to fully uprate duty on these flat-rate taxes has led to cheaper whisky and more alcoholism. That’s why the devolved administrations in Wales and Scotland are resorting to minimum pricing.

 

What is so good about the property taxes of the ‘SLOs’?

Here I am going far beyond the OECD paper. They merely report the fact of stabilising taxes. I can only draw very tentative conclusions about the property tax regimes. This is what Wiki tells us

Property Taxes in Slovenia: a bit vague, not much info

Property Taxes in Slovakia:

“According to the type of property there are classified 3 kind of taxes: tax on land (land tax), tax on building (building tax) and tax on apartment (apartment tax). The amount of annual property tax is mainly dependent on the area of the occupied land(measured in sq. meters), purpose of the property, number of floors etc. The amount of annual tax rate is highly effected by the specific tax rates that are set by municipal authorities. “

A significant amount about Land Taxation here!

Property Taxes in Japan

Not very easy to find out, but there seems a lot of transaction taxes

 

 

 

Full citation Blöchliger, H., et al. (2015), "The stabilisation properties of immovable property taxation: Evidence from OECD countries", OECD Economics Department Working Papers, No. 1237, OECD Publishing, Paris, https://doi.org/10.1787/5js0cqq93djg-en.

The ‘al’ referred to are Hansjörg Blöchliger, Balázs Égert, Bastien Alvarez and Aleksandra Paciorek