Department of Real Estate and Construction Management Division of Building and Real Estate Economics Royal Institute of Technology, Stockholm, Sweden

Master of Science Thesis Number 381

REVIEW OF REAL PROPERTY TAX ADMINISTRATION IN GHANA

Authors: Muna Negash Adem Osei Amanfo Kwateng

Supervisor: Hans Lind

JUNE 2007, Stockholm

PREFACE This thesis is based upon studies conducted during November 2006 to May 2007 at the Department of Real Estate Management, Royal Institute of Technology Stockholm, Sweden and Department of Geography and Resource Development, University of Ghana, Legon, Ghana. The empirical studies including the data collection was funded by Linnaeus-Palme Exchange Programme. This was realised through the collaboration of The Environmental Science Department and The Department of Building and Real Estate Economics of KTH, Stockholm on one hand and Geography and Resource Development Department of the University of Ghana Legon. We take this opportunity to acknowledge our gratitude to the programme coordinator – Peter Brokking for offering us the opportunity on the course of study and for his wonderful organisational work Our heartfelt appreciation goes to our supervisor Prof. Hans Lind. His invaluable guidance, advice and unique support made this study a successful one. Further, we would like to thank Professor Jan Erik Gustafson for his great co-operation and support and for championing the collaboration which yielded the sponsorship package. To all the teachers and the assistant teachers at the Department of Building and Real Estate Economics we say bravo for your wonderful impartation. We will not forget all the wonderful personalities in Ghana for their assistance. We thank Divine Appiah and Felicia Ayando, University of Ghana Legon for assisting us with the fieldwork. In addition, special thanks go to Mrs. Zaide and Mrs. Satti for making our stay in Ghana comfortable. Our sincere thanks go to Mr. Samuel Lee the Budget Department in the Accra Metropolitan Assembly, Mr. Desmond Osafo, Chief Inspector of Internal Revenue Service (IRS), and Mr. Alex Sarfo in the Greater Accra Regional Valuer in the Land Valuation Board, for taking time off their busy schedule to attend to our enquiring visits to their office premises. Finally, we are indebted to our families for their moral support during the entire studies.

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Master of Science Thesis Title

REVIEW OF REAL PROPERTY TAX ADMINSTRATION IN GHANA

Authors

Muna Negash Adem Osei Amanfo Kwateng

Department

Department Real Estate and Construction Management Division of Building and Real Estate Economics 381 Hans Lind

Master Thesis Number Supervisor

Key words: - Property rate, Stamp duty, Rateable value, Urban sprawl, Ghana

Abstract Property rate is a potentially attractive means of financing municipal government in developing countries. As a revenue source, it can provide local government with access to a broad and expanding tax base. However, the yield from property rate in the developing countries and for that matter Ghana is extremely low due to the way the tax is administered. This study focuses on the evaluation of a decentralized approach to administer real property tax and the mix of central government control. We explore the linkages between property tax and urban sprawl, with emphasis on residential properties. The aim of the research is to find the loopholes in the administrative processes and to determine the root cause of these problems. We also want to investigate the relationship between the system of property tax and urban sprawl. The study has unearthed that contradictions in the laws governing property tax administration create loopholes and ultimately, negatively impact the property tax revenue. We also show that vacant lands in the cities are under priced because their social cost is ignored. We found that property development in premature areas leaves a high social cost. The study suggests revisions of some of the laws and recommends appropriate alternatives to policy measures.

III

Table of Contents 1

INTRODUCTION........................................................................................................................ - 6 1.1 BACKGROUND .............................................................................................................................. - 6 1.2 THE RESEARCH PROBLEM ............................................................................................................ - 7 1.3. SCOPE OF THE STUDY ................................................................................................................... - 9 1.4 RESEARCH QUESTIONS ................................................................................................................. - 9 1.5 AIM AND OBJECTIVES OF THE STUDY ......................................................................................... - 10 1.6. RESEARCH STRATEGY ................................................................................................................ - 10 1.7. RESEARCH METHODOLOGY ...................................................................................................... - 11 1.8 SOURCES OF DATA ...................................................................................................................... - 12 1.9 DATA ANALYSIS TECHNIQUE ..................................................................................................... - 13 1.10. LIMITATION OF THE STUDY ..................................................................................................... - 14 1.11 ORGANISATION OF THE THESIS ................................................................................................ - 14 -

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THEORETICAL BACKGROUND.......................................................................................... - 15 2.1 TAX ............................................................................................................................................. - 15 2.2 TAX HISTORY .............................................................................................................................. - 15 2.3 BASIS FOR TAXATION. ................................................................................................................ - 16 2.4 CHARACTERISTICS OF A GOOD TAX............................................................................................ - 18 2.5 TAX BURDEN ............................................................................................................................... - 18 2.6 ECONOMICS OF TAXING A GOOD................................................................................................ - 19 2.7 TYPES OF TAXES .......................................................................................................................... - 22 2.8 TYPES OF PROPERTY TAX ............................................................................................................ - 22 2.9 THE THEORY OF THE PROPERTY TAX ......................................................................................... - 24 2.10 DEMARCATION OF PROPERTY TAX AS LOCAL TAX. ................................................................ - 29 2.12 SIGNIFICANCE OF PROPERTY TAX ............................................................................................. - 30 2.13 CALCULATING VALUE FOR THE PURPOSE OF TAX .................................................................... - 31 2.14 THE CONNECTION BETWEEN PROPERTY TAX AND URBAN SPRAWL ........................................ - 32 2.16 PROPERTY TAX REFORMS ......................................................................................................... - 35 2.17 REFORMS IN GHANA ................................................................................................................ - 39 -

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THE CASE: PROPERTY TAX ADMINISTRATION IN GHANA,.................................... - 40 3.1 DEVELOPMENT OVER THE PAST ................................................................................................. - 40 3.2 PROPERTY TAX ACCORDING TO THE LAW .................................................................................. - 41 3.3 THE CASE; PROPERTY TAX ADMINISTRATION –THE CURRENT PRACTICE .................................. - 53 -

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RESULTS OF INTERVIEW WITH AUTHORITIES ........................................................... - 59 4.1 INTRODUCTION .......................................................................................................................... - 59 4.2 THE POSITION OF PROPERTY RATE AS A SOURCE OF REVENUE .................................................. - 59 4.2.1 SOURCES OF REVENUE TO LOCAL GOVERNMENT .................................................................... - 59 4.6 REVENUE MOBILIZATION THROUGH TAXATION ........................................................................ - 61 -

5

DATA ANALYSIS - HOUSEHOLD SURVEY....................................................................... - 62 5.1 INTRODUCTION .......................................................................................................................... - 62 5.2 PRESENTATION OF DATA ........................................................................................................... - 62 -

IV

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ANALYSIS AND DICUSSION OF RESULTS ....................................................................... - 71 6.1. CONTRADICTIONS UNDER THE TAX ADMINISTRATION LAW .................................................. - 71 6.2 PROPERTY VALUE CAPITALIZATION.......................................................................................... - 72 6.3 PREMATURE DEVELOPMENTS (URBAN SPRAWL) ...................................................................... - 72 6.5 THE FORCES AT WORK IN GHANA.............................................................................................. - 73 -

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CONTRIBUTIONS TO POLICY ISSUES, SUMMARY AND CONCLUSIONS ............... - 75 7.1 CONTRIBUTION TO POLICY ISSUES.............................................................................................. - 75 7.2 SUMMARY OF FINDINGS ............................................................................................................. - 76 7.3 CONCLUSION .............................................................................................................................. - 77 -

APPENDIX .......................................................................................................................................... - 83 APPENDIX A: ACCRA METROPOLITAN ASSEMBLY (AMA) SUB – METROS OF AMA ................... - 83 APPENDIX B: INTERVIEW WITH AUTHORITIES................................................................................. - 84 APPENDIX C: QUESTIONNAIRE FOR PROPERTY OWNERS (DEVELOPED AND UNDEVELOPED) ....... - 87 -

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CHAPTER ONE

1

INTRODUCTION

1.1 Background Studies conducted on property tax over developing country by eminent economist and others specifically over Ghana points to the fact that the property tax is a potentially attractive means of financing municipal government in developing countries. As a revenue source, it can provide local government with access to a broad and expanding tax base. In contrast to the mix of intergovernmental grants and indirect taxes that now dominate municipal revenues, it can also promote broader efficiency objective, linking the provision of municipal services more closely to their financing and rationing of the consumption of municipal services by price According Oldman (1992) who has reported extensively in Latin America, evidence abound to suggest that urban property tax revenues in developing countries have not kept pace with the growth of the base largely because of the way the tax is administered in most developing counties. At present, however, yields of urban property taxes in developing countries are extremely low. Virtually all developing countries that are market economies assign a property tax to their municipal governments. Its contribution to total public sector tax revenues is negligible and its share of municipal revenues is typically less than 20 percent. Dillinger (1992) In November 1995, the Municipal Development Programme (MDP) for Eastern and Southern Africa organized a regional seminar to analyze the property tax systems of the different countries in the region. Approximately 50 participants from 10 countries gathered in Harare, Zimbabwe, to discuss problems, challenges, and opportunities for action confronting their countries in the area of property taxation. From their deliberations they arrive at the following conclusions as being the sources of their problems; •

•

•

In several cases, central governments have been slow or reticent in devolving to local governments’ authority over the property tax: Rates, tax bases, and the systems for valuation are centrally controlled. Furthermore, to the extent that central governments do not benefit from property tax collections, they also lack incentive to improve policy and legislation. In cases where authority over the property tax is in the hands of local governments, improvements and innovation do not take place because of the perverse incentives resulting from discretionary grants and/or indirect taxes. Local governments find it politically attractive to rely on the easy money provided by central government. Most countries in Eastern and Southern Africa are faced with several administrative and procedural obstacles, including the absence or poor condition of existing systems for recording and valuing property. Other

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•

problems related to administration are the difficulties of assigning tax liabilities, valuation, collection, and enforcement of tax obligations. All countries face problems resulting from citizen unwillingness to make contributions through the property tax for nonexistent or poor quality services.

All these difficulties are encapsulated into administrative problems. Recent studies on property tax in Tanzania conducted by Kayuza (2006) also confirms the situation.

1.2 The Research Problem Property taxation in developing countries and for that matter Ghana is fraught with numerous problems. Problems begin right from the identification of properties, record keeping, determination of taxable properties, which properties should be exempted, the tax base and difficulty of assigning tax liabilities, collection of tax revenue, tax payers’ resistance to tax obligations, enforcement of tax obligations and dispute resolutions, division of responsibilities among agencies and institutions and their lack of cooperation, and much fascinating is the use of the revenue obtained, that is tax payers’ services. 1.2.1 Identification of properties and poor record keeping: Inability to administer property rolls adequately is one of the major problems of property taxation in Ghana. A good number of properties (old and new) are not listed on the valuation rolls, payment evasion is rampant. The ideal fiscal cadastre format, based on detailed maps giving individual boundaries and codes, do not cover a significant proportion of the properties Much of the revenue losses in property taxes could be linked to the fiscal cadastre, or the system of recording and valuing property. More often than not, the factors used in assessing properties are not clearly established on the property records, and in most instances, are not regularly updated. 1.2.2 Valuation: In Ghana the property tax base is inelastic. Property values—unlike income or sales of goods—do not rise automatically with inflation, increased population, or even improved economic activities. Instead, the tax office is responsible for measuring and valuing those various increases and then adjusting the fiscal cadastre to reflect underlying increases in property values. In most cases, they will need to identify the changes that increase the physical size of the tax base—such as new buildings or improvements to existing ones—and capture the rising cost of land and building values that affect properties—such as inflation, increasing population, and other issues. In many instances these procedures are not adequately conducted. It is common to find a property owner who will accept that the rate of tax is too small. In effect it is not the rate that is small but the value on which the rates are being applied. Part of the problem is that this procedure is expensive to administer relative to the tax yields; this is true even when no attempts are made to adjudicate titles. The technical staff needed to organize and supervise surveying and valuation work is in short

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supply. Thus, in effect, an increasing proportion of new construction goes unrecorded on the fiscal cadastre. Often, general revaluations are postponed or undertaken sporadically. The result is a stagnation of the property tax base, in spite of the rapid property development and growth in property values. In some cases, the system of valuation is so simplified that it does not attempt to reflect market values. The task of updating the residential building characteristics is based on two criteria: construction materials used and number of stories to a building. A building’s location, size, number of rooms or structural condition is not considered. Consequently, this system fails to reflect a wide variation in property values and does not promote raising substantial revenues through property tax. 1.2.3 Collection: Collection of property taxes is poor, often as a result of the failings of the fiscal cadastre. And, even where tax bills are served, they often go unpaid. Many cities fail to enforce legal penalties for non-payment. Penalty for non-payment is often a much politicized issue, which few tax administrators are willing to implement. Also, legal cases arising from non-payment can drag on for prolonged periods of time. The property tax liability/rates, tax bases, and the systems for valuation are centrally controlled by Government and universally applicable at all corners of the country. The tax is very much unpopular and District Assembly common fund, salary grant and ceded revenues form the bulk of the finance of local governments’ revenue in Ghana. However, property tax could theoretically be seen to have the potential to become a major and regular source of finance particularly for large metropolitan and urban councils. Compared to other sources of both central government and local government revenue this is not very significant so that the government is not motivated to improve upon management of issues. 1.2.4 Urban sprawl: Except in few urban centres that have benefited from earlier urban renewal and development projects, there is no systematic cadastral mapping, registration and titling programme in Ghana. Indeterminate boundaries of stool skin and family lands resulting from lack of reliable property maps and or plan and the use of old inaccurate boundary maps, lead to protracted litigation and freezing of land for development. Frequent development schemes, resulting in haphazard development, environmental degradation and frequent violent confrontations between and among opposing claimants. The inefficiency of the land markets is manifested by the unmet demand, in the urban market for housing, industrial and commercial land subsequently influenced the development of peri-urban land in a haphazard manner not supported by appropriate infrastructure services like roads, drainage water and electricity. Residential houses in the cities of Ghana are seldom improved to house more people. The cities therefore tend to grow spatially. The growth and expansion are dominated by individual acquisitions of building plot and the rate and sequence of development of these individual building plots are very spontaneous and haphazard. The expansion of the cities is characterized by uneven and pre mature development interspersed with rhododendron. The situation usually lead to a sparsely build up area. It is very expensive and uneconomical to supply basic amenities and infrastructure like water, electricity and telephone and access roads for commuting. It

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has been like the hen and egg situation. Opinion exist that land owners do not develop their land because basic amenities do not exist. Others believe that basic amenities are not supplied because it is uneconomical to provide for the few. First settlers therefore suffer for a long time before getting access to basic amenities. All these negative developments are the result of the inefficient land market. The situation is aggravated by some individuals who make it their part time investment by acquiring several plots of land with the aim of selling it in the future. Such individuals make huge gains because they acquire the land at a very low or moderate fee at the time that the areas are under developed. As the surrounding and adjoining areas are developing the acquired residential plots appreciate in value. They are able to keep it for as long as they desire because the cost of keeping such a vacant lot is underestimated and virtually zero. These lots are ultimately sold for a profit at the expense of the society. Many such transactions are informal and therefore the revenues that could be generated for national and local government are lost but these governments bear the cost of such development through increased demand for social services and a bating environmental and health problems associated with such settlements. The negative externalities of holding a vacant residential plot in a build up area is always underestimated; most often these transactions do not even attract capital gains tax. Holding a vacant building plot amidst a built up area has high social cost. It generates a situation of rapid but low density urban expansion. The scenario also hinges on the sanitation aspect of the urban area Undeveloped building plots tend to grow bushes, harbouring harmful insect like mosquitoes and dangerous reptiles like snakes. This is not only limited to residential lands only but industrial and commercial. These negative externalities affect the health of the people. In spite of the above problems property tax has very little attention in Ghana. One hardly hears or come across any form of awareness or discussion about property tax. It is a very unpopular tax.

1.3. Scope of the study The research focuses on the evaluation of a decentralized approach to administer real property tax and the mix of central government control. We explore the linkages between property tax and urban sprawl, with more emphasis on residential properties

1.4 Research questions • • • •

Why is little attention given to property tax as source of revenue? Are there incentives for property owners to pay taxes? Are tax payers’ services made observable and non partisan? Do the taxes cover all properties adequately?

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• • • • • •

Is there a relationship between tax payers’ contributions and communal development? Do vacant plot owners contribute in anyway towards development of the community where their properties are located? Does the system of taxation affect nature of growth of the cities? Are there links between property tax and sanitation? How the central government policy on real property tax is applicable at all corners of the country? Would the complete decentralized property tax administration help improve upon management of the issues; improve the identification of properties, help increase acceptability and willingness to pay and thus increase revenue and subsequently contribute to greater development?

1.5 Aim and objectives of the Study Taxing the people is not a form of punishment. At least, the patriotic residents have to pay with some degree of acceptance and enthusiasm. The aim of the study is to find the loop holes in the administrative processes and to determine the root cause of these problems. We also want to investigate the relationship between the system of property tax, and premature developments identified at the margins of cities and sanitation, especially within the sprawl and how vacant plot owners contribute to development of the community in which their plot is situated.

1.6. Research Strategy Real Property rating is administered by all the 110 district assemblies in a decentralized fashion. Property rating is a local responsibility even though the tax policies are determined by the central government. With this complex set of divisions, studying all the 110 districts would be very difficult, time consuming and would need large funds which is not available. A good strategy is needed here in order to know as much as possible about the operations of all districts but studying as few district as would be enough to draw explanations, answers, and solutions to the problems at hand. We adopted the explicative strategy. ‘’Explicative strategy originates from explicare (to unfold). This strategy is effective in order to understand complex phenomena in the contexts in which they occur. The aim of the explicative strategy was to focus our attention on one unit of analysis – a case – simultaneously accommodating as many relevant variables and qualities as possible’’ (Johansson, 2005) Researcher Robert K. Yin defines the case study research strategy as an empirical inquiry that investigates a contemporary phenomenon within its real-life context; when the boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used (Yin, 1984)

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Case study research generally answers one or more questions which begin with "how" or "why." The questions are targeted to a limited number of events or conditions and their inter-relationships. – Soy (1997). Case study research excels at bringing us to an understanding of a complex issue or object and can extend experience or add strength to what is already known through previous research. Case studies emphasize detailed contextual analysis of a limited number of events or conditions and their relationships. Researchers have used the case study research method for many years across a variety of disciplines. Social scientists, in particular, have made wide use of this qualitative research method to examine contemporary real-life situations and provide the basis for the application of ideas and extension of methods. Critics of the case study method believe that the study of a small number of cases can offer no grounds for establishing reliability or generality of findings. Others are of the opinion that intense exposure to study of the case biases the findings. Some dismiss case study research as unuseful, which is only useful as an exploratory tool. In spite of these critics, the case study approach has been used in this study because researchers continue to use the case study research method with success in carefully planned and crafted studies of real-life situations, issues, and problems. Our research object is a real life phenomenon which is so widespread but similar in nature. From the literature reviewed so far questions raised are composed of why and how. Therefore, selection of typical cases could represent a large geographical region and provide enough information based upon which generalizations could be made. Our research approach was exactly based on the careful planning and investigative methods of elucidating data, and therefore advancing facts and figures from a real world scenario.

1.7. Research Methodology The research object is the property tax administration. Since property tax is paid in all parts of the country we set out to select a typical case that can represent all the different municipalities that are responsible for property tax administration. Accra Municipality is used as the case. There are various reasons why we choice Accra Metropolitan Assembly for this case study. First, Accra is the capital of Ghana, the capital town of the greater Accra Region and the Metropolitan capital of the country. This single municipality has in it salient urban and rural characteristics. It has one of the highest rates of residential and commercial/industrial property development in the country. The municipality contributes about 45 percent of total revenue derived from property rate. Second, the metropolitan area and its 13 sub-metros have certain similar characteristics, which can be representative of other Districts in the country in terms of property rate collection and administration in Ghana. Third, for proximity in terms of easy and effective data collection from the various important authorities and ministries such as the Land Title Registry, the Land Valuations Board, Ministry of Local Government, and the Accra Metropolitan Assembly. Finally, the time and resource constraint when the whole country is studied, it is feasible and resource efficient to take the Accra Metropolitan Assembly (AMA) as the case study.

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1.8 Sources of data The study considered multiple sources of data, the processes of the tax administration is multifaceted and draw in it diverse government entities who collaborate to administer the whole process. The execution of the process also involves a third party participant that is the property owners who pay the property tax. Primary sources of information was also very curtail for this research. Information gathering methods as, interviews, survey and observation have been used to collect information from the field. Documentary evidence also provided substantial secondary source of information. 1.8.1 Documentary Evidence We made use of information obtained from documents in various forms, such as land policies, government depositories and Acts, newspaper and reports from different institutions. Literature from libraries, archives, documents review, articles, constitution of Ghana, data bases and online resources. Most of these documents were obtained from AMA, LVB and the IRS. 1.8.2. Interviews In case studies interviews provide one of the most important sources of information. Interviews can be conducted in three different ways. One is an open –ended interview in which the respondents can be asked about the facts of a matter and to provide their opinion of the events. The second one is the focused interview which involves interviewing the respondents for a short period following a certain set of questions prepared for the interview. The third type was in a form of structured questions like those used for a survey. For the purposes of our research, the case study used was the open-ended interview, which was deployed in collecting data from officials of the Accra Metropolitan Assembly, The Land Valuation Board and The Internal Revenue Service. We considered that the open-ended interview was appropriate because we were interviewing different authorities, and therefore needed information to assist in the corroboration of facts. Officials from three governmental institutions formed the interviewees. The first group of interviewees involved officers from The Land Valuation Board (LVB). Mr. Alex Sarfo, the Greater Accra Regional Valuer was the main respondent. The interview was conducted with to ascertain the valuation method used by the LVB and the various components involved in the valuation of property for the tax purpose. The second group of interviewees were officials from Accra Metropolitan Assembly. These were conducted with the Metropolitan budget officer and the rating officer respectively, in finding out the various sources of income to Accra Metropolitan Assembly and to gain an understanding how they administer the property rate and the funds administered on developmental activities.

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The third group of interviewees were officials from the Internal Revenue Service. Mr. Desmond Asafo, Chief Inspector of Internal Revenue Service was the main respondent. The interview was conducted in trying to understand land tax, what stamp duty is as use in the land policies of Ghana and on which properties it is charged. All these interviews were conducted based on the interview guide. We took notes and we were able to record some of the interviews.

1.8.3. The Survey Conducting a survey is often useful way of finding evidence especially when it is related human factors. A well designed survey should provide quantitative results rather than qualitative once. A questionnaire was administered for property owners. We conducted the survey in to the 13 different sub-metros who are under the Accra metropolitan Assembly. We selected 9 developed property owners from each submetro which will sum up to total respondents of 117. Regarding the vacant landowners, we selected 20 respondents. It was very difficult to find the vacant landowner that is why we settled on this number. This was conducted by giving the questionnaire to the property owners, assisted them to fill it, and collected at the spot. It was administered thoroughly, with 100 percent responds.

1.8.4 Direct Observations

Direct observations are also another method of collecting data. The researcher can use direct observation which will enable him or her to get answers from the respondents without asking questions. It is done informally; with out much concentration to the quality of data collection. Observations can also be used as evidence that confirm the responses of the respondents to certain issues or events. A direct observation was deployed in conducting this case study. For instance, there was a question to property owners on their opinion as to how the undeveloped plots affect them. Some of the property owners were not able to provide us with the opinion about the effect of the vacant plots, but we were able to find out what would be the possible effects through direct observations. Beside this, by moving from one sub metro to another it gave us the opportunity to observe the different service provided in each sub metro and the situation of the basic infrastructure.

1.9 Data Analysis technique Qualitative data is analyzed through the use of logical reasoning that is deduction, induction and abduction approach. We have used statistical methods to analyse qualitative data. We have also evaluated our finding against theoretical thinking.

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Analytical software packages, particularly, the Statistical Package for Social Sciences (SPSS) and the MS EXCEL was also used in the data analysis to generate the tables, charts and graphs.

1.10. Limitation of the study The case study is limited to Accra Metropolitan Assembly. This is because of the time and financial constraints. The field work took us longer time than we expected due to the inability of public officer to honour their appointment. The studies coincided with an ongoing revaluation exercise and this made public officer much busy to attend to us, with some officer postponing appointments for several times. Respondent to our survey misconstrue us to be investigators for the AMA because of the ongoing revaluation exercise. Long bureaucratic procedures in Ghana and poor data recording system, for example, it was extremely difficult to find the vacant land owner and their sample size was therefore limited to twenty ( 20).

1.11 Organisation of the thesis The literature review, definition of the purpose of the case study, and determination of the potential audience for the final report guided how we designed, conducted, and publicly reported the thesis. The Thesis consists of five sections and seven chapters. Sections; (1) is an abstract of the dissertation (2) overview (3) the main text of the thesis (4) References (5) Appendixes to the main text. The main text has been organized into seven chapters that is (1) Introduction and method of the research (2) Literature review (3) The case: Property Rate Administration in Ghana (4) Results of Interviews with Authorities (5) Data AnalysisHousehold Survey (6) Analysis and Discussion of results (7) Contributions to policy issue, Summary and Conclusions.

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CHAPTER TWO 2

THEORETICAL BACKGROUND

This section carefully reviews scholarly literature on property tax. It provides an extensive and sufficient guide for the research and to assist other researchers who seek to replicate or delve more deeply into the thesis research topic

2.1 Tax The information presented here draws heavily on wikipedia encyclopedia of tax A tax is a financial charge or other levy imposed on an individual or a Legal entity by a state or a functional equivalent of a state (for example, tribes, secessionist movements or revolutionary movements). Taxes could also be imposed by a sub national entity. Taxes consist of direct tax or indirect tax, and may be paid in money or as corvée labor. A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government, a payment exacted by legislative authority." Black's Law Dictionary (1979) A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name.

2.2 Tax History Tax dates back in Ancient Egypt around 3000 BC - 2800 BC. The Pharaoh would conduct a biennial tour of the kingdom, collecting tax revenues from the people. Early taxation is also described in the Bible. In Genesis (chapter 47, verse 24) there it states "But when the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children." Joseph was telling the people of Egypt how to divide their crop, providing a portion to the Pharaoh. A share (20%) of the crop was the tax In other parts of the world taxes have been levied in one form or another. In 1660 King Charles II of England created a new committee of the Privy Council, the Lords of Trade and Plantations, charged with formulating colonial policy. Parliament passed the Navigations Act of 1660, which strengthened the ban on foreign shipping initiated in 1651 and declared that certain enumerated goods – sugar, indigo, and tobacco – could be shipped only to other English possessions. Duties were applied to these commodities. In 1673 Parliament passed the Revenue Act of 1673. The act imposed a "plantation duty" on certain American exports and closed loopholes that colonists had employed to export tobacco and other products directly to European markets. It also created a staff of customs officials to collect the plantation levy in American ports. This staff was the first revenue-collecting administration in the British New World.

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Throughout history, taxes had been run by kingship and monarchies. In the United States for example, it was until the latter part of the 17th century that the so-called Glorious Revolution ushered a sea change in political philosophy. A subsequent protestant uprising in Parliament drove James II from the throne and into exile, after he had levied new taxes without Parliamentary consent, abrogating the corporate charters of towns and guilds, and declaring that his son and heir would be raised as a Catholic. William of Orange, a Protestant Dutch Prince, accepted an invitation to rule with his English wife, Mary, as "constitutional monarchs" who would accept the rights of Parliament. The long-held understanding of the "divine right of kings" gave way to notions of a constitutionally limited monarchy, permanently checked by the authority of Parliament. English revolutionaries, or Whigs, believed that the enhanced capacity of the Legislative body, particularly its role as the final arbiter of taxation, best protected the traditional rights of English subjects from regal capriciousness. (Virtual Tax Museum 2007)

2.3 Basis for Taxation. Governments have enumerable responsibilities. Some of these include economic infrastructure (roads, legal tender, enforcement of contracts, etc.), enforcement of law and public order, protection of property, public works, social engineering, welfare and public services (including education systems, health care systems, pensions for the elderly, unemployment benefits, and public transportation. Energy, water and waste management systems are also common public utilities) and the operation of government itself. A number of revenue sources are available to a government to execute these responsibilities. Among the many sources is tax. Taxes consist of one prominent, prudent and feasible source of revenue for the government. Governments therefore tax the people in their country as they produce to earn income for themselves. Taxes form a high percentage of revenue to nations. The statistics below portrays the importance of tax revenue as related to the GDP of the respective countries Taxation as a percentage of GDP in 2003 was 56.1% in Denmark, 54.5% in France, 49.0% in the Euro area, 42.6% in the United Kingdom, 35.7% in the United States, 35.2% in The Republic of Ireland and among all OECD members an average of 40.7%

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Table 1.1 OECD countries by total tax revenue as percentage of GDP (as of 2005).

#

Country

Tax in % of GDP(2005)

#

Country

Tax in % of GDP(2005)

1

Sweden

51.1

13

Hungary

37.1

2

Denmark

49.7

14

New Zealand

36.6

3

Belgium

45.4

15

Spain

35.8

4

Norway

45.0

16

Germany

34.7

5

Finland

44.5

17

Canada

33.5

6

France

44.3

18

Turkey

32.3

7

Iceland

42.4

19

Ireland

30.5

8

Australia

41.9

20

Switzerland

30.0

9

Italy

41.0

21

Slovakia

29.4

10 Czech Republic

38.5

22

United States

26.8

11 Luxembourg

37.6

23

South Korea

25.6

12 United Kingdom

37.2

24

Mexico

19.8

Source; Retrieved 20060908 from: http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_G DP. Funds provided by taxation have been used by states and their functional equivalents throughout history to carry out many of these functions outlined above. Governments use different kinds of taxes and vary the tax rates. This is done to distribute the tax burden among individuals or classes of the population involved in

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taxable activities, such as businesses, or to redistribute resources between individuals or classes in the population. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled, or the retired by taxes on those who are still working. In addition, taxes are applied to fund foreign and military aid, to influence the macroeconomic performance of the economy (the government's strategy for doing this is called its fiscal policy), or to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less expensive.

2.4 Characteristics of a good tax These features of a good tax were first put forward by Adam Smith and it is still upheld by modern Economist. According to Stiglize and Driffil (2002), for a tax to achieve its purpose of raising revenue to finance government activities, it should have these characteristics; Fairness - When economists talk of fairness, they focus on two principles, that is horizontal equity and vertical equity. Horizontal equity means that individuals who are in similar situations should pay identical or similar tax and vertical equity means that people who are better off should pay more taxes. Efficiency - The second criterion for a good tax system is efficiency. The tax system should interfere as little as possible with the way the economy allocates resource and it should raise revenue with the least cost to taxpayers and the government as well. Administrative simplicity - The procedures for collection of the tax should be easy and less expensive relative to the income generated. It should be difficult to evade Flexibility - The fourth criterion is flexibility, as economic circumstance change, it may be desirable to change tax rates. With a good tax system, it should be relatively easy to do this. Transparency - Tax payers are consumers of public services; they should know what they are paying for and what each person is paying.

2.5 Tax burden An important feature of good tax systems is the percentage of the tax burden as it relates to income and consumption. The terms progressive, regressive, and proportional are used to describe the way the rate progresses from low to high, from high to low, or proportionally. The terms can be applied to any type of tax. A progressive tax is a tax imposed so that the tax rate increases as the amount to which the rate is applied increases. The opposite of a progressive tax is a regressive tax,

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where the tax rate decreases as the amount to which the rate is applied increases. In between is a proportional tax, where the tax rate is fixed as the amount to which the rate is applied increases. Progressive taxes reduce the tax incidence of people with smaller incomes, as they shift the incidence disproportionately to those with higher incomes. Regressive taxes reduce the tax incidence of people with higher incomes, as they shift the incidence disproportionately to those with smaller incomes The Law establishes from whom a tax is collected. In many countries, taxes are imposed on business (such as corporate taxes or portions of payroll taxes).When a government imposes a tax; the people who pay the tax in a legal sense have the incentive to change their behaviour to avoid the tax. By doing so, they shift it to someone else. Therefore after tax payers have fully adjusted to the new tax, who actually pays? Who ultimately pays the tax (the tax "burden") is determined by the marketplace as taxes become embedded into production costs. Depending on how quantities supplied and demanded vary with price (the "elasticities" of supply and demand), a tax can be absorbed by the seller (in the form of lower pre-tax prices), or by the buyer (in the form of higher post-tax prices). If the elasticity of supply is low, more of the tax will be paid by the supplier. If the elasticity of demand is low, more will be paid by the customer and contrariwise for the cases where those elasticities are high. Austrian economist Ludwig von Mises teaches that the actual burden of any tax is determined by the market process rather than by the taxing authority. The supply and demand for a good is deeply intertwined with the markets for the factors of production and for alternate goods and services that might be produced or consumed. Although legislators might be seeking to tax the apple industry, in reality it could turn out to be truck drivers who are hardest hit, if apple companies shift toward shipping by rail in response to their new cost. Or perhaps orange manufacturers will be the group most affected, if consumers decide to forgo oranges to maintain their previous level of apples at the now higher price. Eventually, the tax incidence falls on the citizens in forms such as higher prices, lower wages, increased unemployment, decreased quality of goods, etc. The tax burden flows back to the factors of production depending on the elasticities thereof; this includes workers (in the form of lower wages), capital investors (in the form of loss to shareholders), land and property owners (in the form of lower rents) and entrepreneurs (in the form of lower wages of superintendence)

2.6 Economics of taxing a good

Figure 2.1 indicates a good in a free market. This diagram could represent any good. At this equilibrium quantity, Q1 units of the good are sold at price P1. Social surplus, here equal to the consumer surplus plus the producer surplus, is maximized (assuming that there are no externalities).

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Figure 2.1 A good in the free market with no tax.

Figure 2.2 shows a marginal tax on production of a good. The tax charges a fee whenever a producer wishes to produce an extra unit of the good or, in the case of transaction taxes, when a consumer receives a good. When a marginal tax is placed on production, the market price will rise to P2, and since fewer consumers wish to purchase the good at the higher price, the quantity produced falls to Q2. The government receives the amount of the tax for each unit sold, amounting to the region shown in grey. This is the revenue the government receives for this tax. The social surplus is now the consumer surplus plus the producer surplus plus the government revenue.

Figure 2.2 A good in the free market with tax

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Note that in this situation, where price elasticities of demand and supply are equal, the price of the good that consumers face (the market price) only increases by half the amount of the tax, the other half of the tax is borne by the producer. Thus both consumer and producer surpluses shrink by equal amounts. This property occurs infrequently. Who bears the cost of the tax is determined by the price elasticities of the demand and supply of the good. For goods with inelastic demands (at least in the short-run) like cigarettes, and gasoline almost all of the tax is paid by the consumer. Alternatively, for goods with inelastic supply curves, like event tickets where seats remain fixed, land, the producer bears almost all, if not all, of the tax. In addition to administrative costs, there are effects on economic efficiency that can result due to marginal taxes, in the form of a loss in social surplus (abc). This loss is often called deadweight loss which is a loss created because potential trades (in the amount of Q1-Q2) are not executed. The deadweight loss is proportional to the square of the tax rate. Thus if the tax rate is doubled, the deadweight loss will quadruple. This means a small tax on a broad tax base would normally be more efficient, or result in less deadweight loss, than a large tax rate on a narrow tax base (taxing a particular good heavily).

a b c

Figure 2.3 Net Societal Losses

The resource collected from the public through taxation is always greater than the amount which can be used by the government. The difference is called compliance cost, and includes for example the labour cost and other expenses incurred in complying with tax laws and rules. The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism rehabilitation centre, is called hypothecation. This practice is often disliked by finance ministers, since it reduces their freedom of action. Some economic theorists consider the concept to be intellectually dishonest since (in reality) money is fungible. Furthermore, it often happens that taxes or excises initially levied to fund some specific government programs are then later diverted to the government general fund. In some cases, such taxes are collected in fundamentally inefficient ways, for example highway tolls.

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Neo-classical economists, argue that all taxation creates market distortion and results in economic inefficiency. They have therefore sought to identify the kind of tax system that would minimize this distortion. Economists have known for centuries that the most economically neutral tax is a tax on land because land is in fixed supply: taxes on personal income, retail sales, etc. will reduce the amount of those activities, but a tax on land cannot reduce the amount of land.

2.7 Types of taxes Taxes are sometimes referred to as direct tax or indirect tax. In economics, direct taxes refer to those taxes that are collected from the people or organizations on which they are ostensibly imposed. For example, income taxes are collected from the person who earns the income. By contrast, indirect taxes are collected from someone other than the person ostensibly responsible for paying the taxes. These are the numerous types of taxes available to government; Capital gains tax Corporation tax Excises Income tax Inheritance tax Poll tax Property tax Retirement tax Sales tax Tariffs Toll Transfer tax Value added tax Wealth (net worth) tax

2.8 Types of Property tax Two broad divisions are made, that is Real /immovable property tax and Personal property tax. Dealings about these two types of properties also create further opportunities for taxation. These dealings include transfer of property, property transactions and many more. These property dealings bring about taxes such capital gains tax, wealth transfer tax, stamp duty, estate duty. All these taxes that come about as a result of property transaction and transfer of ownership are one off payment described in Wikipedia dictionary of tax as event driven. However, real property tax, also know as property rate is a recurrent tax paid annually.

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2.8.1 Real Property tax This is a tax imposed on residential, commercial and industrial properties. Real property by definition consists of land and its improvement. A property tax is a tax imposed on property by reason of its ownership. A property tax is usually levied on the value of property owned, usually real estate. Property taxes may be charged on a recurrent basis (e.g., yearly). A common type of property tax is an annual charge on the ownership of real estate, where the tax base is the supposed value of the property.

2.8.2 Emergence of Property Taxes The emergence of taxes on land predates the feudal era and various forms of taxes on land were collected in countries such as England and United States. The earliest form of land tax in England was the “geld” which occurred between the tenth and twelfth century” and was essentially tribute money” calculated on land belonging to a family which was used to finance the military of the Anglo-Danish invaders(Public Records: Doomsday Book 2003). During the period 1016 to 1135, which was the Feudal era in England, the crown did not own all land but instead it was owned by wealthy people known as lords who allocated the lands to peasant farmers in return for the obligation to perform some kind of service. (Public Records: Doomsday Book 2003). The tax on Property as it exists today was adopted in Europe in the late nineteenth century. According to OECD (1983), the tax was introduced in Ireland in 1838 and was a tax on immovable properties known as rates. The property tax plays a key role in the revenue profile of municipalities due to the income earning attributes of property. This primarily arises out of the unique quality of property in that it is immovable. This unique feature implies that property is permanently located and therefore a local resource, which has the capacity to generate revenue in perpetuity and for that matter serves as a reliable asset from which municipalities, can raise revenue. The property tax is by far the most important and well-known tax associated with property. This annual tax is usually paid by residents of a locality to the local government Authority for the provision of social and economic services. In most countries the local Authority under the control or supervision of a central authority does the valuation, assessment, collection and usage of the property tax. However the point of departure in Sweden is that the revenues are paid into state coffers and forms part of State revenue. For a period of over 150 years from 1695 a window tax was levied in England, with the result that you can still see listed buildings with windows bricked up in order to save their owner's money. A similar tax on hearths existed in France, with similar results. The two most common types of event driven property taxes are stamp duty, charged upon change of ownership, and inheritance tax, which is imposed in many countries on the estates of the deceased.

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In contrast with a tax on buildings, a land value tax is levied only on the unimproved value of the land ("land" in this instance may mean either the economic term, i.e., all natural resources, or the natural resources associated with specific areas of the earth's surface: "lots" or "land parcels"). Land tax has long been recognised as the only tax which does not distort market relations or carry an excess burden. This holds true only as long as the tax does not exceed the land's economic rent. Some political economists like Henry George (See Georgism 1839-1897), claim that because land is not the product of labour, is in fixed supply, and because its value is publicly created and not the result of any activity of the owner, it should be the only tax base. When real estate is held by a higher government unit or some other entity not subject to taxation by the local government, the taxing authority may receive a payment in lieu of taxes to compensate it.

2.9 The Theory of the Property Tax It has become necessary to consider the theoretical base of property tax because it is the view in theory of the property tax which points to the best administrative directions. Opinion differs in theory as to the basis for the organization and administration of property tax. Economists have expressed diverse views to determine the type of authority, jurisdiction under which property tax should be managed. The discussion here is taken from review article by Jeffrey P. Guilfoyle (2002)

2.9.1 The Benefit View The classical view, championed by Samuelson (1954) argues that decentralized system of pricing cannot efficiently determine optimal levels of public goods. Thus when rates are determined independently in different communities, some services would be inefficiently supplies. Writing in response to Samuelson, Tiebout (1956) argues that while this may be true for public goods provided at the federal level, it is not necessarily true for local public goods. Tiebout develops a list of assumptions under which it was possible for local public goods to be provided at an efficient level. Tiebout’s model consists of a large number of local governments that finance expenditures via a head tax. Consumers reveal their preferences for local goods through their choice of residence. Consumers preferring a high level of public services live in a locality with high taxes and services. Consumers preferring a low level of services live in a locality with low taxes and services. Tiebout’s model contains a number of highly restrictive assumptions. One of these assumptions is that local expenditures can be financed via a head tax. Subsequent authors have examined the implications of replacing Tiebout’s head tax with the more commonly observed property tax. This modelling change has led to the ‘‘benefit’’ view of the property tax. This view argues that the property tax does not necessarily lead to inefficiencies. Hamilton (1976) argues for the benefit view of

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property taxation. He first notes that, in a system of communities that are homogeneous with respect to house values, the property tax can be seen as a system of average cost pricing for public services. Hamilton assumes that all households in a community consume the same level of public services and place the same value on these services. Homogeneous communities can be achieved through a binding zoning requirement. That is, all households in a community are required to consume a minimum amount of housing services, the tax on which is exactly equal to the cost of providing public services to each household. No household has any incentive to consume more than the minimum level of housing services because they would then be paying for more services than they receive (and would be better off in another community). If the zoning requirement is in fact binding and communities are homogeneous, public services are provided efficiently and the property tax is nondistortion. The zoning requirement keeps households from adjusting their housing consumption in response to the tax. However, we noted that appearance and quality of a property, be it residential, commercial or industrial, does not necessarily reveal the preference of the occupants for public service. Occupants of expensive properties may not even prefer public services, but would have to pay the property taxes anyway. This then could serve a good strategy in the income redistribution policy of the government. The binding zoning requirement has been strongly criticized by Zodrow and Mieszkowski (1983). They argue that these assumptions would turn any tax into a nondistortionary tax. The choice of tax instrument at the local level would become irrelevant with the appropriate zoning restrictions since all taxes would become a nondistortion fee for public service. Hamilton, however, extends his argument to communities that are not homogeneous. He argues that capitalization effects can lead to average-cost pricing for public services in non-homogeneous communities. In a neighbourhood with inexpensive and expensive houses and no capitalization, residents of the inexpensive houses enjoy public services at a lower cost than their neighbours in the expensive housing. This makes living in a relatively inexpensive house desirable. Therefore, people will compete to live in fiscally advantaged housing, driving up the price of such housing. Thus, inexpensive houses, although they have lower property taxes, sell for more due to the capitalization of the fiscal benefits. Likewise, housing that is relatively luxurious compared to other houses in the same community will sell at a discount. If differences in fiscal surpluses are fully capitalized, then there is no advantage to buying an inexpensive house in a rich neighbourhood. The price of the inexpensive house is increased by the present discounted value of the difference between its taxes and service cost. This has potentially important implications. First, it means that property taxes do not lead to horizontal inequity. Everyone gets exactly the services that they pay for. Second, because people pay for exactly the services that they receive, they demand an efficient level of public services. We also note here that if zoning is to be adopted then the property tax should not be a local tax but rather a national tax. Otherwise it will rather create a wider income disparity in the sense that richer communities would be supplied with more and quality public services.

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For the property tax to be non-distortionary, however, it must also not distort housing decisions. Hamilton (1983) argues that the property tax can be converted into an efficient price for public services if capitalization causes the following relationship to hold. V+ T = C (H) + C (LPS). (1) Equation (1) states that efficiency requires that house value, V, plus taxes, T, must equal the cost of providing housing, C(H), plus the cost of providing local public services, C(LPS). If this relationship is to hold, then fiscally advantaged housing, which has a higher value, must somehow cost more to produce. In Hamilton’s model, (1976), fiscally advantaged housing costs more to produce because its fiscal advantage is capitalized into land values. Inexpensive housing is built on land zoned for that purpose. This land, because it can be used for houses that will sell at a premium, sells for a higher price than other land in the community. Hamilton implicitly assumes that property taxes are fully capitalized into land values. He assumes that land is in fixed supply; therefore, the tax is not distortionary. This analysis would imply that land zoned for inexpensive housing in a heterogeneous community would sell for more than land zoned for more luxurious housing. Zoning ordinances are required to keep this land price differential in place. Otherwise, the amount of land used for inexpensive housing will increase and the land devoted to relatively expensive housing will decrease. If inexpensive housing is allowed to expand until the land for inexpensive housing and the land for relatively more expensive housing sells at the same price, households owning cheaper houses will pay less for their public services than households owning relatively expensive houses. Redistribution would occur through the provision of public services. Residents no longer get only what they pay for, and the outcome can no longer be expected to be efficient. Based on his analysis, Hamilton draws the following conclusions. First, with full capitalization, there is no horizontal inequity. Consumers get the services that they pay for. Second, efficient supplies of housing and public services exist when: land value is the same in all homogeneous (with respect to house value) communities; in mixedvalue communities, land-value differentials exactly reflect the present value of fiscal surplus differentials; the mean value of land (per acre) is the same in all communities, regardless of their housing or service mix. Finally, the property tax generates an incentive for the production of an inefficient amount of low-income housing. This incentive must be held in check through zoning restrictions for efficiency to be maintained. Hamilton cites some evidence that the above conditions may in fact hold. He argues that empirical studies (1976) have shown that land zoned for low-income housing does indeed sell at a premium. He also cites empirical studies (1983) that find a large degree of property tax capitalization.

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2.9.2

The New and Classical Views

The new view of the property tax generally examines the property tax in a standard capital taxation framework. These models follow the Harberger (1962) approach to examining the taxation of capital. Harberger models generally assume perfect competition and that the overall capital stock in the nation is fixed. Additionally, the capital stock is assumed to be perfectly mobile within the nation, so that the after-tax return to capital in all sectors of the economy is the same. Housing is viewed as the output of a production process that combines land and capital in the production of housing services. These models examine the effects of a property tax in one or more sectors. Although the results vary somewhat depending on the model specifications, they often produce the result that the capital portion of a uniform national property tax reduces the after-tax rate of return to all capital in the nation by the amount of the property tax. The property tax impacts other sectors in the economy because capital is perfectly mobile. When the property tax is imposed, it reduces the return to capital in the housing sector. Capital flows from the housing sector, increasing its pre-tax rate of return, into other sectors, reducing their rate of return. This continues until all sectors have the same after-tax return to capital. Capital generally bears the full brunt of taxation in these models because it is assumed that the total capital stock is supply inelastic. If the property tax were the only tax in the economy, it would have two effects. First, the property tax would result in an inefficiently low allocation of capital to the housing sector. Second, the overall rate of return to capital in the economy would be reduced. This rate reduction would have an effect on the long-run capital formation in the economy. This long-run effect is the subject of much debate in the literature and is beyond the scope of this analysis. Of course, there are other taxes on capital, most notably the corporate income tax. Gravelle (1994) argues that housing, especially owner-occupied housing, is taxed at a very low rate compared to other forms of capital. She cites studies that find that the preferential treatment of housing accounts for about half of the distortions arising from the misallocation of capital. Because of this, the property tax may actually help to correct the misallocation of resources resulting from the corporate income tax. The new view also has implications for the income redistribution effects of the property tax. The property tax finances local public expenditures by reducing the rate of return of capital in all sectors of the economy. This means that, for a uniform national property tax, capital owners bear the full burden of the tax on the capital portion of housing. Because capital tends to be concentrated in the hands of relatively wealthy individuals, the capital portion of the property tax is progressive. This result directly conflicts with Hamilton’s findings that no redistribution occurs through the property tax. The property tax, of course, is not uniform throughout the nation. Under the new view, tax differentials between communities (that is, differences between local tax rates and the national average tax rate) give rise to ‘‘excise’’ effects. A tax rate higher than the average will be either shifted forward into higher housing prices, or shifted backward to a relatively immobile factor. Different models have different predictions as to the degree to which this will occur. The predictions of these models generally depend on the elasticity of substitution between land and capital in the

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production of housing, and assumptions concerning the mobility of consumers and the degree to which land is in fixed supply. The predictions of the new view models are based on the assumptions made concerning various parameter values. For example, Hobson (1986) finds that the degree of property tax shifting depends in part on the relative sizes of the elasticity of substitution between housing and other consumption goods, and the elasticity of substitution in housing production, as well as the mobility of the resident population.

2.9.1 Property Taxation in the Present In the United States Property tax revenue is the single largest source of local government tax revenue (Petersen and Strachota, 1997). ‘‘Thus, while local revenue systems now are rather diversified, the property tax still accounts for three-fourths of all local taxes, and nearly half of all locally raised general revenues’’ (Petersen and Strachota, 1997). The property tax is the only tax to be levied in all fifty states and Washington D.C. (Brunori, 2003). As an ad valorem tax, property taxes are based on the estimated value of the property (Petersen and Strachota, 1997). The dollar amount generated by the property tax is a product of the tax rate and the tax base. With a constant assessment ratio, it is assumed that the tax base increases in direct proportion to the growth in market values. In such a case, a constant property tax rate generates a stable revenue stream (Petersen and Strachota, 1997), which makes this revenue source attractive for local government financing. In all developed countries, property tax exhibit similar characteristics with respect the reliability of its revenue generating capacity as in the US economy. In developing countries therefore, it should generate rapidly increasing revenue because of the rate at which new projects are commissioned.

2.9.2 Property Taxation in the Future Property taxes endure ‘‘because they produce reliable, stable, independent revenue for the governments closest to the people and there is no clearly superior alternative for providing fiscal autonomy’’ (Mikesell, 2003). The property tax has been an enduring component of government finance autonomy’’ (Mikesell, 2003). Thus, the picture for the future seems to be that the property tax will continue as a fundamental source of local government revenue for many years to come.

A well functioning property tax system could offer many benefits to the nations of sub- Saharan Africa. A dependable and locally administered source of revenue would greatly benefit local democracy and economic development. (Franzsen 2007)

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2.10 Demarcation of Property Tax as Local Tax. According to the Royal Institute of Charted Surveyors, any real property taxation should fulfill the following criteria; a. Predictability of yield and buoyancy of income b. Ease and cheapness of collection c. Ease in preventing avoidance and evasion: capacity to provide local identity and acceptability; d. Equity both with regard to the ability to pay and the equality of treatment between different areas and different categories of contribution e. Ease of understanding These conditions also provide very effective local taxation. The Public sector in most countries including Ghana is composed of Central Government and Local Government. The first two roles of the public sector described by Dillinger 1992 are best carried out by the Central government because it usually demands a holistic approach. The last is best provided by local government which is close and know the needs of the people. Property tax is a tax on residential, commercial and industrial properties. Property tax in many countries is based on the benefit principles (Man 2001) and therefore it is most often regarded as local tax with the fees being portrayed as user fees. It is still debatable whether the tax is a user fee or for ownership of property. On the contrary other economist has the view that since property taxes are not necessarily tied to the provision of services, they become a tax on ownership and of immovable properties and do not depend on beneficial use of properties. Dillinger (1992) has expressed the case for property tax as a local tax. He assert that in principle there are many alternative means of local government revenue but property tax is one most important for reason of its immobility.

2.11 The economic case of property taxation Among the three distinct role of the government, service provision is assigned to the local government authority for the reason that each local area has its own taste and the local authority is much more likely to understand and efficiently provide the needed services. These services have to be financed through taxation, but by what tax and who is to pay. Since service provision is the responses of the needs of the local residents it stands to reason that they could pay as they use. For the reasons of varying taste then municipal revenue should not only function as a means of raising funds but also as a price for municipal services whose usage could be restricted and rationed. However, there are cases where rationing municipal services by user charges is not feasible. Charging for the use of a congested road is a case in point. Dillinger (1992) advances several reasons to support the view that user fees are not appropriate. Rather local service should be provided by general tax the best of which is the tax on ownership of property in the community. Relying on user charge can also lead to inefficient levels of service provision because of the pubic good nature of some municipal services. For example, while some of the benefits of refuse removal

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accrue directly to individual customers, the safe disposal of refuse has a wider public heath benefit. If the levels of services were confined to what individuals were willing to pay in the form user fees, the service would be under provided. While no individual consumer has incentive to reveal his willingness to pay for wider public health benefits, all would be better off if they were provided. These services must be financed through taxes, but taxes can also function as prices, relying on the local political system to reach efficient consumption decisions where the nature of the service does not permit decisions to be made efficiently by individual consumers. This outcome depends upon the outcome of the responsiveness of local government. It also depends upon the nature of the municipal tax. If a tax is to function as a price, it must have particular characteristics. It must be a benefit tax; a tax whose incidence corresponds to the distribution of the benefits of the service it fiancés. This is the primary argument for the property tax. While no tax performs perfectly in this role, the property tax is more effective than the alternatives.

2.12 Significance of property tax Property tax derives its significance from the number of advantages that it has over other type of taxes. In his Master thesis at KTH Futa (2004) outlined some of these advantages. He wrote that the reliance on revenue from Property Tax to finance the provision of infrastructure and other services at the State or local level is due to the quality of property as being immovable. As a result the OECD (1983) report indicates that the primary function of the Local property tax is to finance local government services for the benefit of the local community. In this regard, the IAAO (1997) and the OECD (1987) reports specify the benefits of the property tax to include the following: Firstly it is noted that since the property tax is independent of income taxes, it enables those with low income yet with substantial property holdings to make an appreciable contribution to the provision of local government services. Additionally it enables municipalities to derive revenue from its residents who do not reside in the localities yet maintain properties there. IAAO (1997). Secondly the property tax system is transparent as compared to other forms of taxes. Property owners can always compare what they pay with what others pay for their properties and have a fair idea of whether they are paying too much or too little taxes. Furthermore provisions are always made for appeals and as such dissatisfied taxpayers can always appeal against any perceived unfair tax levied on them. IAAO (1997). Thirdly the property tax is essentially a local tax since the tax base is immovable and permanently fixed within the locality. Consequently it provides a regular source of revenue and the property itself acts as collateral security in the case of default. OECD (1983).

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However property tax is not without limitations. Fatu (2004) presented these demerits of property tax in his studies; The property tax is based on unrealized property wealth, which may not necessarily translate into personal income wealth. The tax is perceived as regressive since all property owners are levied the same tax rate based on the value of their property. These cause considerable hardship to the poor and the vulnerable in society. Secondly most residents are at pains to justify the imposition of property taxes since invariably the tax would have to be paid from income, which has already paid income taxes, and as such it is viewed as double taxation on income. Moreover, sharp increases in property taxes after a period of revaluation cause appreciable increases in taxes, which draw a lot of resentment from property owners. Thirdly, it is sometimes difficult to perceive the linkage between the tax and the project, which the tax is financing. For example a property tax, which is used to finance recurrent expenditures, would not find favour with taxpayers. Fourthly, the property appraisal process is a cumbersome and time-consuming exercise especially when revaluations are due. Thus the administrative cost could be high in term of personnel, and logistics required for a revaluation exercise. 1AAO (1997). Generally it is considered that though the administration of the property tax requires a lot of skilled personnel and logistics for assessment, it should not exceed more than 3% of the value of the revenue collected. (Futa 2004) Fifthly, capital appreciation from property is realized only when the property is sold and as such though values may rise as a result of capital appreciation, the gains are realized only when the property is sold but however this increased appreciation can also be subjected to capital gain tax. Lastly a property tax reduces the market value of the property since the taxes are deducted from the rent before the rent is capitalized, thereby producing a lower market value than if there were no property taxes.

2.13 Calculating value for the purpose of tax In Considering standards and options for valuation, it is important to distinguish tax valuation from the valuation governments undertake when they intend to purchase a property outright. In the latter case, a high standard of accuracy is required the valuation must produce an absolute value of the properties at a common point in time. As the former involves an exchange equal only to a small percentage of the property value, accuracy can be justifiably traded off in the interest of cost and administrative simplicity. What is essential in a tax valuation system is objectivity so as to reduce opportunities for dispute or collusion and a methodology appropriate to local skills and the market information available in the local jurisdictional. (Dillinger 1957)

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2.14 The connection between property tax and urban sprawl Urban sprawl has not been considered as pressing issue in Ghana. However the inefficient spatial expansion of the cities leaves less to be desired. We identify urban sprawl as one of the most serious factors causing traffic connection and motor accidents in the cities. We explore linkage in the current property tax and the urban land development that create urban sprawl. Brueckner (1999) first provided a clear analysis of the issue has shown that there is a connection between property tax and urban sprawl. He showed that the property tax has the tendency to reduce the intensity of land development, which follows from its taxation of improvement, causes a city to expand spatially in order to accommodate its population

Before him, Carlton (1981) and LeRoy (1976) analysed certain effects of the property tax in a spatial context, without considering its impact on urban expansion. Sullivan (1985 presents simulation analysis of the spatial effect of property tax but his use of a complex model that includes both business and residential property makes it hard to see the operation of the expansive force. Mill 1998) investigates the special effect of property tax in a business-oriented model who not residential land, so that the above reasoning does not apply. Arnott and MacKinnon present simulation results for a purely residential model but their use of an apparently non-standard framework makes it difficult to appraise the results. In the United States, it was a very important policy issue in the Clinton Administration. Long commutes, traffic congestion and the disappearance of agricultural lands on the urban fringe have led many observers to conclude that American cities have expanded excessively. Many economists caution that urban special growth is a natural result of fundamental forces. These is rising population, increased household income. In addition it is a natural consequence of heavy investment in transportation infrastructure which eases commuting and encourages suburban living. Dillinger (1992) argues that the operation of urban growth cannot be faulted as inefficient unless the operation of the above fundamental force is distorted by market failure. The argument supporting urban sprawl, arising from a tax-induced reduction in development intensity was presented by Brueckner (1997) in a model. The property rate in Ghana is a tax on improvement; therefore the ideas expressed in this model could well be one of the driving forces behind premature development and the consequential disappearance of agricultural land in the urban fringes in Ghana. We therefore elaborate on the model in order to test its applicability and explanatory power in the urban area of Ghana.

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2.15 The Basic Model To begin the discussion of tax-induced urban sprawl resulting from the lower intensity of land development, an analytical framework must be specified. It is convenient to adopt the framework used by Brueckner (1986) to analyze land value taxation, a framework that is common to many models in urban economics. Under this approach, housing is produced by combining capital and land. Since the production function exhibits constant returns to scale, the analysis can focus on the choice of capital per acre of land, “improvements” per acre. Letting S denote improvements per acre, housing output per acre of land is given by the function h(S), which is increasing and strictly concave, reflecting diminishing returns to improvements (thus, h'>0 and h"