The political economy of property taxation: Interests, incentives and real estate in Kigali and Addis Ababa

Principal Investigator:

Tom Goodfellow

Project:

May 2014 - December 2014

It is now well-established that urban property tax is among the most underexploited revenue sources in Africa and across the developing world. Research from International Centre for Tax and Development and elsewhere is helping to explain why property taxation is so often ineffectual, highlighting the political economy factors that drive differential effectiveness both between and within low-income countries. Given that weak property taxation regimes persist across much of Africa, however, it is important to understand not only the causes of these but also some of their consequences. At present, many cities in Africa are economically booming in the context of weak or near-absent property taxation. This has direct development consequences and is also likely to feed back into the causes of the ineffectual taxation problem itself. Against a background of economic growth in many African states, and the ‘Africa rising’ narrative with which this is associated, cities on the continent are increasingly being viewed as the ‘final frontier’ for international property development (Watson 2014) as well as spaces for capital accumulation by domestic elites. High-end real estate is sucking up vast amounts of resources in many very poor countries, with a questionable developmental effect. This project aims to explore the idea that weak property taxation regimes, the reform of which is often obstructed by property-owning elites, exacerbate this problem and in so doing also bolster the very coalitions that block progressive local tax reform.

The research aims to engage with two related development issues in tandem: ineffectual property taxation, and real estate development and speculation that serves primarily to benefit elites, diaspora or international investors. It also aims to have a concrete impact, producing findings that could strengthen the appeal of property tax reforms domestically. By concentrating on existing de facto tax regimes, it will draw attention to the drawbacks and opportunity costs of ineffectual property taxation in a number of ways. First, it will highlight the extent of the ‘fiscal sacrifice’ being made by governments that fail to harness substantial revenue from the lucrative real estate sector. Second, it will provide reflections on how more effectively deployed property taxes might incentivise investors to channel capital in more developmental ways. Property tax reform is unlikely to be effective without elite buy-in; thus rather than focusing only on the pro-poor nature of the tax, the research seeks to assess whether it could potentially serve as a tool for building new kinds of growth coalitions in which elites also have a stake. Third, by employing a comparative case study method, the project explores differences in incentive structures across national contexts and their impacts on both tax yields and investment decisions, with the potential to generate cross-national learning.

Funder:

International Centre for Tax and Development