Tax the land, not the people

Land tax can ensure equality and efficiency

Tax the land, not the people
Although reviving of the economy has been on top of this government’s agenda, the recent increase in withholding tax on bank transactions by people who do not file their taxes shows the extent of revenue pressure on the government. Apparently, this measure of indirect taxation is to get the non-filers into the income tax net, but it will also negatively affect salaried people whose pays are already taxed, along with the traders and businessmen who have to do bank transactions on a daily basis. The move will also discourage savings.

Tax revenue is one of the most pressing issues for Pakistan in the next financial year. Tax reforms have been in progress for more than a decade, with the assistance of the World Bank, but the tax to GDP ratio has not improved significantly.

The imposition of a withholding tax on bank transactions by people who do not file their tax returns is being taken as a ‘win-win’ solution after the government negotiated with businessmen to reduce it from 0.06 percent to 0.03 percent. Neither the imposition of such indirect taxes, nor the compromise were prudent decisions. Such levies bring changes in the economic behaviour of the people, discouraging economic activity and encouraging informal economy. The FBR has also been unable to force the rich to file returns, even those 15 million individuals who have been able to improve their living standards despite a sluggish economy.

The biggest source of tax for the FBR is land. The idea of land tax was originated by the Economist David Ricardo and later developed by his follower Henry George, who argued that the labour and capital should be left freely to flourish but land value should be taxed. That would be in line with the principle of equality and efficiency.

The critical issue is how to tax land. There solution may not be simple. The value of land would be subject to value addition tax as land value rises and fluctuates like shares in stocks. It will be a complex procedure, but not when it is contrasted with taxing business or bank transactions. It surely does not distort any economic activity and since the supply of land is fixed, it would not be affected by the tax.

Joseph Steiglitz, a Nobel-winning economist, argues for imposing a land value tax in his book The Price of Inequality, because it does not destroy incentives and there can be no tax evasion. Although he talks about agricultural land, urban land tax can also harness the value of assets. Land and productive capital count as wealth. Land becomes valueable because of location and facilities. Although it is tilled, its actual value comes from other economic activity. Landowners, in a way, enjoy an income that they get from benefits coming from the infrastructure, communication links, access to customers and other businesses. After buying land, they keep on renting on these activities without any tax, and contribute nothing to the source they are benefiting from.

There are two kinds of land that could be taxed – agricultural land and real estate property. Agriculture tax is not a federal subject and therefore does not come under FBR’s mandate. It is also difficult to change the landowners’ behavior for land-value taxation, and they will resist. Such taxes are never debated, and cannot be placed high on the political agenda of the lawmakers because they are themselves not convinced. A land based tax will result in new gainers and losers, and will be a politically difficult decision. But if Pakistan has to become a modern economy, the FBR will have to do an evaluation exercise. Land ownership details are always registered with the land revenue department – this data could be used to include land owners in a federal list.

The present tax revenue from agricultural land is minimal, although agriculture had a 21 percent share in the national GDP in 2014-15. Since Pakistan has inherited a feudal system, land distribution remains highly unequal. The Pervez Musharraf regime encouraged corporate farming, but that raised serious concerns from the farmers community.

Pakistan has allocated a vast area for corporate farming mainly purchased by the UAE and foreign multinationals. There are fears that would destroy local agriculture and natural resources. There will be food security, but water scarcity.

Once the system of land tax will be reformed, the phenomenon of land grabbing will also come to an end. Pakistan’s economic survival is not possible until its tax base is broadened. In the words of Benjamin Franklin, the only things certain in life are death and taxes.

The author is the chairperson of International Relations and Political Science at the International Islamic University, Islamabad