1. Background
The purpose of this Chapter is to summarise the processes the Subcommittee completed prior to reaching its recommendations. This is done in three sections. The first section provides an overview of the most important findings and recommendations of the Interim Report of the Subcommittee. Section two repeats the Media Statement (No. 15 of the Commission) released by the Subcommittee after the release of the Interim Report, while the final section contains a summary of the most important arguments presented in the submissions received from the general public.
1.2 Interim Report of the Subcommittee
The Subcommittee stated in its Interim Report that there is no reason in principle why a rural land tax should not be given serious consideration in the South African circumstances. The Subcommittee found that there was sufficient international experience with the implementation of such a tax, and that its imposition would not represent a new tax in South Africa.
However, the Subcommittee reached two further conclusions, namely that:
Nonetheless, the Subcommittee concluded that it had gathered sufficient evidence to suggest that a rural land tax levied in the local sphere of government might have merit in South Africa. In addition, the Subcommittee argued that these issues could not be resolved in isolation from a more comprehensive and transparent public debate. To this end the Subcommittee recommended, including that:
1.3 Media Statement No. 15
On 11 October 1996 the Land Tax Subcommittee released a media statement in Government Gazette No. 17496. The statement expressed their preliminary views concerning the introduction of a land tax in the local sphere of government. The media statement is included in Appendix 1.
Altogether, the Subcommittee received some 600 submissions, mostly as a result of this media statement. The most important arguments raised in these submissions are summarised in the next section. No attempt is made to justify the conclusions statistically, nor are any claims made concerning the representativeness of the views submitted.
1.4 An overview of submissions received by the Subcommittee
The tax authority
The majority of those who addressed this issue were of the opinion that, if such a tax should be introduced, it should be levied and collected in the local sphere of government. A popular argument was that local governments do not currently control adequate sources of income to afford necessary services such as improved local infrastructure, etc. The notion was that this tax, if levied locally, should be used locally and thus also benefit local taxpayers. Respondents also emphasised the importance of adequate representation on those agencies that disposed of the tax by the taxpayers. This would not only make the tax more palatable, but would also improve its efficiency and equity. Furthermore, respondents believed that local governments are better located to decide on matters such as exemptions and rebates.
Most of the submissions argued that primary rural municipalities should be empowered to levy the land tax. Many respondents argued that, in those cases where a municipality did not have the capacity to implement the tax (and most respondents doubted that rural municipalities had such capacity), they should make use of agency arrangements. Adequate training of staff to ensure the effectiveness of the process and to minimise corruption was also emphasised.
Definition of the tax base
Many submissions strongly emphasised that, if a land tax is introduced, the taxable base should include all land in the Republic of South Africa. Arguments were based on the principle of equity, and the Bill of Rights, as enshrined in the Constitution. In this respect, the majority of the respondents also felt that tribal land should not be exempted from the tax base, although they were aware that this raised practical problems, especially regarding the definition of the taxpayer.
Some respondents proposed that, where the formal owner of the land cannot easily be taxed (e.g. the owner is the state, the President in trust or the tribe collectively), the traditional authority should be held accountable for the tax. In this way subjects occupying the land could be made responsible for their share of the tax.
Respondents were also unsure of the implications of communal ownership for the valuation of such land. Mass valuation methods to appraise use values were suggested, since it was felt that market values could not be ascertained in the presence of an inactive land market. A prerequisite was that these valuations ought to take into account differences in land quality.
Nonetheless, many interest groups vehemently opposed a tax on rural land. Organised agriculture reasoned that the equity principle should also be applied to the taxation of other assets. They argued that the taxation of land, which constituted two thirds of the assets of commercial farmers, was tantamount to the taxation of the working capital of agriculture. This form of a wealth tax would be unfair unless all other forms of capital were also taxed. By implication, therefore, the wealth of actors in other sectors of the economy should be taxed, otherwise property-owning farmers would be discriminated against.
Farmers also argued that the introduction of another tax would be damaging to the already low tax morale, leading to low compliance, as the agricultural sector is already heavily burdened by tax. They also argued that farmers do not enjoy most of the services that urban residents receive. Moreover, they often provide services for their own and their workers’ use, therefore they should not be liable for property tax.
The mining industry objected to the imposition of a tax on land on similar grounds: Mines had traditionally also provided services to workers. A land tax should, therefore, not apply in their case. There was even a suggestion that they should receive a rebate for the services they provide in lieu of municipal services, or that mining towns should be certified as municipalities so that they could also benefit from the implementation of a land tax.
The hospitality industry also opposed the institution of a land tax. Their arguments included the view that such a tax would run counter to the spirit of the White Paper on the ‘Development and promotion of tourism in South Africa’. Such a tax would undermine the competitiveness of the industry in the SADC region. They feel that any trade, which earns foreign exchange, should be stimulated rather than taxed. Furthermore, such a tax would undermine the equity principle, as many hotels are situated in rural areas, and thus do not enjoy urban services. In similar vein, they argued that national parks should be dealt with carefully. As there was a large demand for this land, its market value was very high. If, however, this land is exempted from the tax base, privately owned reserves should, for the sake of equity, be handled similarly in the interests of conservation and, ultimately, the economy.
The industry also argued that including government land in the tax base would be similar to a net transfer from the state to the concerned local government, except that administrative costs will impede effectiveness. Thus, they argue that should government land indeed be taxed, it must not advance through the entire system, but be paid by means of a net transfer.
The tax rate
The Subcommittee proposed in its media statement that the tax rate should fall somewhere between 1 and 2 per cent of the value of rural land. At one extreme, the Subcommittee felt that a rate of less than 1 per cent would not raise sufficient revenue to defray administrative expenses, while a rate of higher than 2 per cent would tax away the economic returns to holding land in agriculture, i.e. it would be tantamount to the nationalisation of land.(1)
The general opinion of the respondents seemed to be that the tax rate should be capped nationally or at least at a provincial level. Some respondents believed that, if this were not done, rural municipalities could be tempted to implement higher rates to achieve other goals, with negative consequences for the agricultural sector. However, respondents shared the opinion that the rate should be high enough to cover the cost of administering the tax and to generate a reasonable income.
Respondents also addressed the issue of differential rates for different categories of land and land use. While most seemed to support this notion, it is clear that it would increase the cost of administering the tax.
Methods of valuation of rural land
Many respondents were of the opinion that, if a land tax is introduced, market values should not be used to value the tax base, principally because market values do not reflect the real productive potential of the land. Where external factors such as the urban demand for land play a large role in determining market value, these farmers will be penalised to the detriment of the sector as a whole. In this vein, farmers and organised agriculture argued that market value results in the entrepreneur being taxed on unrealised capital profits. This could lead to serious liquidity problems, even if they were solvent. In addition, an unduly high tax rate could result in lower land values, which will eventually be reflected in solvency problems for farmers with high mortgage bonds.(2) Furthermore, they argued that it is difficult to ascertain the value of the unimproved portion of land in an active market, since improvements cannot easily be excluded from the market value. A tax based on market value would also deter new investment, especially in less directly productive improvements such as housing for farm workers. It may even lead to disinvestment from such assets. The mining industry was similarly concerned about the possible disincentive effect of a land tax that was based on market values.
Many respondents also felt that the proposal that the land be valued every 3 to 5 years may be too long. They believe that the longer the period, the greater the probability that landowners will postpone investment until shortly after a valuation has been completed, in order to obtain the maximum tax benefit.
The economic impact of a land tax
Regarding the economic impact of land tax, most respondents warned against the potentially damaging effects of a land tax on the economy of South Africa, especially as the overall tax burden, by the admission of the fiscal authorities, was too high. In agreeing with the Subcommittee regarding the confiscatory nature of a high tax rate, some observers noted that this would effectively make the municipality a co-partner in the enterprise, albeit without being liable for any of the costs of investment, or having to carry any of the risks.
Administrative aspects of a land tax
Few respondents addressed the administrative aspects of the tax directly. The most common view on this matter was that the potentially high cost of implementation and subsequent running costs should serve as fair warning that the costs and benefits of the tax needed to be weighed more carefully. In fact, many respondents believed that the same amount of income could be obtained from within the existing tax structure, but more effectively and at a lower cost. There seemed to be a general feeling that it would make little sense to introduce a new tax while the collection of existing taxes was poorly administered.
Methods of enforcement
Respondents suggested that an enforcement mechanism similar to that used in the case of urban property taxes be used. This stipulates that land cannot be sold or transferred before all outstanding taxes are settled. Legislation should also stipulate that the land might be sold by means of an execution auction by the local government to pay off the outstanding land tax liability. Respondents did not, however, address the impossibility of applying these procedures to communally held land.
Alleviation measures
Respondents agreed that agriculture should be given special consideration because of the seasonal nature of production and its dependence on an uncertain climate. While most respondents opposed any exemptions, there was considerable support for mechanisms such as reductions and deferrals. These respondents supported the notion that local governments are best positioned to decide on such reductions and deferrals, as they were best placed to take local circumstances into account. Notwithstanding this view, some respondents also argued that national guidelines should be set to provide objective criteria for reductions and deferrals in order to minimise the potential distortionary effects of different tax treatment in contiguous jurisdictions. Respondents generally recognised the inflationary effect of such measures on the costs of administering the tax.
A rural land tax and income taxes
The majority of respondents argued in favour of classifying the land tax as a deductible expense against income tax, in the same manner as RSC levies and property rates in urban areas. Several respondents argued, however, that high costs of administering the tax together with this measure could diminish the net revenue to the extent where the net fiscal take from the tax was too low to justify its existence.
A rural land tax and other taxes
The most obvious overlap of a land tax is with the existing RSC levies on turnover and wages in rural businesses. Most of the respondents argued that a rural land tax would be palatable only if it served as a replacement for RSC levies.
1.5 Conclusion
The Subcommittee was able to refine its own views on the costs and benefits, and the advantages and disadvantages, of a rural land tax on the basis of the numerous submissions it received both prior to and after the release of its Interim Report. However, after careful analysis of the material at hand, the Subcommittee came to the conclusion that two critical issues required further investigation before it would be able to recommend further action. These issues are the potential economic impact of a land tax, and the capacity of rural authorities to implement such a tax. In order to give justice to these issues, the Subcommittee prepared a tender for further research. The results of this research are discussed in the next two chapters.
The purpose of the research was to allow the Subcommittee to test alternative recommendations regarding the introduction of a rural land tax within the particular circumstances of South Africa against the generally agreed principles of an efficient and coherent tax system. In this regard the Subcommittee identified the following important principles(3):
(1) Land rents for farmland are traditionally around 4-5 per cent. A tax rate at this level would, therefore, tax away the incentive to own land, which means that existing owners would not be able to sell their land.
(2) In its Interim Report, the Subcommittee cited empirical evidence in support of this argument.
(3) Following Musgrave, R A and P B Musgrave. ‘Public finance in theory and practice’. Fifth Ed. Singapore, McGraw-Hill: p 216
(4) In the GEAR, this goal of fiscal policy is stated as: ‘… to avoid permanent increases in the overall burden of tax.’ ‘Growth, employment and redistribution: a macro-economic strategy.’ Pretoria, Department of Finance, 1996: p 7.
Contents Foreword Chapter 1 Chapter 2 Chapter 3 Chapter 4 Appendix Home