Zenou 2006) and vacancy rates (Segú 2020).<sup>3</sup> Although high property taxes may result in wealth effects,<sup>4</sup> revenue from land taxes is less volatile than revenue from income or business taxes that vary with the business cycle, making projected public revenue from land taxes ideal for financing long-term local investment, as recognized by the fact that municipal bonds are often backed by property tax revenues.

Instead of a recurrent property tax, many countries levy high transaction taxes, partly as such taxes can be collected easily from landowners who come to register their transfers, thereby avoiding the fixed cost of an apparatus for property tax collection, including maintenance of land records and a tax roll and property valuation. In a digital environment, the cost of establishing the infrastructure for property tax collection is much lower while the benefits from having this infrastructure in place increase dramatically. Studies show that transfer taxes’ modest contribution to public revenue comes at very high cost in terms of governance risks and economic distortions as transfer taxes (i) push property transactions into informality, undermining the registry’s quality and currency; (ii) encourage corruption via underreporting of prices, often in return for a side payment to officials who turn a blind eye reducing the informational content of registry price data; and (iii) impose high deadweight losses.

For example, in the United Kingdom, transaction taxes caused large distortions in the volume, timing, and price of property transactions (Best and Kleven 2018) and negatively affected land markets and labor mobility (Eerola _et al._ 2021; Hilber and Lyytikainen 2017). A 1.1 percent land transfer tax in Toronto led to significant welfare losses (Dachis _et al._ 2012) and, if decisions on whether to own or rent are accounted for, it was estimated to incur a deadweight loss of 79 percent of revenue (Han _et al._ 2022). Replacing transfer taxes with an equivalent recurrent land tax on a much larger base is easy technically and can increase revenue, welfare, efficiency, and transparency. If combined with the abolition of transfer taxes, establishment of a recurrent property tax could thus be attractive politically and yield large welfare gains.

# **2.2 Key aspects for effective administration of property taxes**

_Tax map completeness._ Lack of a complete cadastral map is the most fundamental impediment for effective revenue generation from property tax. Historically, creating the fiscal cadaster that is needed to underpin land taxation required manual mapping and data collection, a process that took developed countries years

> 3 In developed countries, the visibility and salience of property taxes (Cabral and Hoxby 2012), while increasing accountability (Presbitero _et al._ 2014), often make getting political support for them challenging (Bahl and Wallace 2008). Fiscal policy and land use regulation interact strongly, and governments must align those policies carefully if they are to achieve their land use objectives (Blochliger et al. 2017).

> 4 With imperfect credit markets and limited liquidity of the underlying asset, rising property values will result in higher property tax bills without increasing incomes, reducing owners’ liquidity, an issue that can be addressed through deferment of tax liability, which is more pronounced in rural areas (Hoff 1991). The wealth effects generated by house price movement affect labor market participation (Liu and Yang 2020), consumption, mortgage defaults, and attitudes toward property taxation (Wong 2020). While deferment of bills by putting a lien on the property is a response widely practiced by developed economies (Slack and Bird 2014), provision of liquidity to constrained taxpayers has been raised as an alternative policy instrument (Brockmeyer _et al._ 2020).

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