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Taxing agricultural land:
A policy instrument for land use intensification, local development and land market reform

Malcolm D. Childress, Peter Hansen, David Solomon, Rogier van den Brink

University of Witwatersrand / World Bank

10 July 2007

Paper presented at - "Land Redistribution: Towards a Common Vision, Regional Course, Southern Africa, 9-13 July 2007"

SARPN acknowledges the World Bank as a source of this paper:
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Executive summary

A “land tax” is a tax on the value of land, which is paid by the owner. It is different from a property tax, in that a land tax taxes the value of the land only, whereas a property tax taxes the value of the land and the fixed improvements made on it (e.g. a house, a farm building, and irrigation canal).

The main arguments in favor of land taxation are based on economic, land use, administrative and social justice considerations. The principal economic argument is that a pure land tax is non-distortionary, because it has no negative effects on investment or production. Because the land tax is a fixed cost that must be paid whether or not the land is used for production, it does not penalize production and creates an incentive to develop land to its most profitable use. In this regard, land taxation discourages underutilization of land and land speculation. Administratively it is a preferred type of taxation because of its transparency; land is immobile and cannot be hidden or disguised as a bookkeeping transaction. From a social justice perspective, it captures the economic rent that arises from a scare natural resource due to population presence and public infrastructure investment which increase the market value of land. As such, it is inherently equitable to tax such “unearned increments” that arise from public actions. From an institutional perspective, the tax can be viewed as a payment to society for the benefits conferred to the landowner for the guarantee of private property.

Empirical evidence exists, reflected in the land taxation literature from around the world, to support the above arguments. For instance, when the rate at which the land is taxed is economically significant and the taxation procedures are well-administered, the effect of land taxation on intensifying land use is strong.

Nevertheless, it is also apparent that achievement of these effects in the developing world has been elusive due mainly to low tax rates, low assessed values and limited administrative capacity. Fortunately, several improvements in land tax administration, such as area-based valuations and (community) self-assessment, have proven to be effective answers to the earlier administrative challenges.

The idea that the intensification of land use as a result of more effective taxation will also lead to some redistribution from less efficient to more efficient farms through markets is supported by international experience, but not necessarily in a way which will benefit the small farmers who usually must cope with disadvantages vis-à-vis large-scale commercial farmers in land and credit markets, access to new technology and marketing. However, through the reduction of the non-agricultural value of land, the land tax does assist small farmers in reducing one of their disadvantages in the land market. Improved land taxation is an important element of a package of land policies geared towards achieving greater rural employment and eventually less concentrated land distribution, but can never be the only instrument to promote land redistribution.

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