Fiscal Instruments for Sustainable Development: The Case of Land Taxes

Economists argue that land rent taxation is an ideal form of taxation as it causes no deadweight losses and has therefore no adverse effects on growth. Nevertheless, pure land rent taxation is rarely applied and, if so, revenues collected remain rather small. Property taxes share some of the characteristics of land taxes and generate small revenues, inter alia also in developing countries. This report revisits the case of land taxation for developing countries that are often characterized by large informal sectors, low public spending and poor tax or land administration institutions. We first provide a comprehensive overview of direct and indirect welfare and development effects of land rent taxation, ranging from increased efficiency in the fiscal system and in financing infrastructure, over environmental effects due to changes in land use to distributional effects. Barriers and constraints of implementing land taxes are also discussed, particularly the existence of a land registry, the role of administrative costs, compliance, evasion and political economy aspects. We extend this review with an in-depth analysis of current land tax systems and reform options in six case study countries. For four countries, we provide an additional quantitative analysis based on micro-simulations with household data that allow us to quantify revenues and distributional effects of various land tax regimes. Our main finding is that land taxes provide a large and untapped potential for financing governments. Formalizing and securing land tenure by establishing a land registry is a pre-condition that further provides substantial co-benefits for various sustainable development objectives. Widespread concerns regarding the feasibility and costs of implementing land taxes are rarely valid, as land taxes are in these aspects comparable to other taxes. Political will and investment in the quality of administration are, however, decisive. Considering some key principles in designing the land tax can help reduce administrative costs, avoid adverse distributional effects and increase compliance.