# II. EOLIJCy TAREIS

2.1 The low yield of the property tax is, in on immediate serse, the combined result of inappropriate policy and poor tax administration. To achieve a stustained increase in yields, both targets generally have tc. be addressed. While rate increases offer tlis prospect of quick revenue increases, taken alone they exaggerate the inequities in the iLicidence of t.e tax: an increase in the effective tax rate places the burden of the increase on those few idiviouals whose properties are on the tax rolls, accurately valtued, and from whom taxes are actually collectid.

2.2 Improvements in administration, on the other hand, offer the prospect of improving fairness, but they do not necessarily result in significant yields. Improvements in the comprehensiveness of tax rolls, the accuracy of property information, and the efficiency of collection do raise revenue by increasing the burden on those who currently underpay. If nominal tax rates rem.Ain low, however, yields will remain trivial. Under these conditions, the property tax-although aquitably administered--may not produce enough revenue to be worth collecting.

# A. Raising the Effective Rate

2.3 Effective tax rates, as measured by the absolute level of individual tax liabilities, tend to be extremely low in developing country cities. This is the combined effect of two distinct policy decisions: the level of nominal rates and the timing of general revaluctions.

2.4 Reduce Gentral Controls over Rates. In principle, there is no "right" level of property taxation. If the property tax is functioning as a price for municipal servicas, the "right" level is the level that reflects local preferences. But central government restrictions on tax rates can introduce a bias against higher rates, As central government derives no revenue from tb tax, it has no direct financial inter_st in higher yields. This calculation is reflected in the extremely low effective rates mandated by central governments in, for example, Indonesia (where the combination of a tax rate at 0.5% of capital value and an assessment ratio of 20% yields an effective tax rate of 0.1%) ard4 the Philippines 'where central government legislation fixes a maximum tax rate of 1% to 1.5% of capital value but mandates assessment i:atios that can reduce the net tax rate to as low as 0.1%).

2.5 Index Valuations. Exc3ssive standards can introduce a bias against timely revaluations. Although property prices are often extremely buoyant in developing countries, revaluations are required if these are to be reflected in tax assessments. The traditional pproach to revaluation is to rely on periodic field surveys, on a schedule determined by central government. This practice is the relic of a preinflationary age, when property prices were relatively stable, and field inspection **s** erved as a means of updating information on new construction, as well as adjusting prices. Under inflationary conditions, it _5/_ The counterargument--that central government must control all taxation to execute national fiscal policy **-** is sparious. The level of property taxation in developing countries is too small to be a significant element in fiscal policy.