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129. The property tax as implemented in Central America suffers from a number of issues, including low tax rates, generous exemptions, infrequent adjustments for inflation, lack of updated assessments, resulting in low levels of statutory rates. Factors such as poor administration, incomplete tax rolls and low collection efficiency reduce effective tax rates. As a result, collection from property taxes have remained low. 130. Conclusions. There is a need for increasing property tax collections. This will not only help raise revenues, but will also provide equity to the tax system. Property tax collections could also encourage private savings. Taking into account those considerations, it is recommended to set high tax rates for luxury housing. To raise collection, it is suggested to create cadasters or update them if they exist. It is important to note, however, that the implementation of these suggestions and hence higher revenues from this source will take time to materialize.

# 2.4. Land Taxes

131. Despite the existence of land taxes in the Region, they are not sufficiently enforced and rates are low. As a result, collection from these taxes have remained insignificant.

132. Conclusions. There is a need for using the scarce land resources effectively, especially in countries where land is in short supply compared to population. To ensure effective exploitation, there is a need for introducing a tax, or--if it already exists--increasing rates to meaningful levels, on vacant land. This tax could help in raising the cost of holding land vacant for its owners and hence it could encourage efficient utilization of land. Owing to different levels of scarcity of land in each country as well as other country-specific factors, rates can not be harmonized, but the principle of application of the tax could be applied by all member countries in the Region.

# 2.5. Taxes on Financial Transactions

133. Taxes on Capital Gains. There are essentially two broad types of taxes on capital gains: one on real estate and the other on capital appreciation in financial securities. In Central America, collection from both of these taxes has been insignificant. In view of the rudimentary stage of development of financial markets in these countries and the need to promote financial savings, introduction of new taxes on capital gains is not suggested in the short-term. Furthermore, even if such a tax is imposed, capital losses should be made tax-deductible--an unrealistic proposition, given the low level of sophistication in financial matters and the underdeveloped nature of the financial markets. Additionally, such a tax will likely inhibit development of the financial and capital markets. Harmonization of policies on this tax is needed to avoid the flow of financial assets from countries with a tax or a tax with a higher rate than the rest of the countries to countries without the tax or with lower tax rates. However, it is suggested to enforce collection on capital gains on the transfer of luxury houses (to be defined in an appropriate way). To enable successful implementation of the tax, it is suggested to update cadastral values with frequent intervals. Again, harmonization of policies, but not rates, is suggested among the member countries. Each