“What I argue for is a progressive tax, a global tax, based on the taxation of private property.”
Thomas Piketty, Economist
Advantages & Disadvantages of Property Taxes
Property taxes (also sometimes referred to as millage rates or land taxes) is a tax levied on real estate.
Depending on the value or on the size of a property, property owners have to make a certain annual tax payment to the local municipality or the government.
Although the concept of property taxes can make sense, there are also many issues related to this tax scheme.
In this article, the pros and cons of property taxes are examined.
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Contents
Advantages of Property Taxes
- Additional tax income for the state
- Property taxes can make sense from a fairness perspective
- May improve the social cohesion of our society
- Property taxes can be considered as a reasonable burden for most property owners
- Additional tax revenue to invest in important infrastructure projects
- More money for education
- Especially useful in states with high government debt
- Additional investments in healthcare
- Can contribute to faster technological progress
- Property taxes may improve the overall safety level
- Financing of welfare programs
Additional tax income for the state
One important advantage of property taxes is that they allow the state to get additional tax income.
Many governments around the world urgently need money to finance their operations, to pay politicians and to sustain the overall system.
Hence, property taxes can make a significant positive impact on government finances, especially in areas with quite high land taxes and where the value of houses or flats is quite high.
Property taxes can make sense from a fairness perspective
Many people also consider it to be fair that people who are able to buy properties also give a certain fraction of money back to society.
In many cases, people are only able to afford a house if they are rather wealthy or if they have a good income.
However, many people don’t have this kind of wealth and therefore, people who have quite a lot of money should pay some of this money back to our society in order to finance many important projects.
May improve the social cohesion of our society
Another advantage of land taxes is that they can significantly improve the social cohesion in our society.
In many countries all over the world, the gap between the poor and the rich is enormous and while a small elite often owns the majority of the whole wealth of a country, the general public often does not participate at all in this wealth.
Hence, in order to redistribute some money to poor people who urgently need it to survive, property taxes can be a great way to do so since people who own a fortune in properties have to pay taxes while poor people who don’t own property don’t have to pay anything.
In turn, social tensions can be lowered since poor people feel that the level of justice increases and their level of frustration may become lower.
Property taxes can be considered as a reasonable burden for most property owners
Let’s be honest. Nobody really likes to pay taxes, but the government often needs money to afford important projects that benefit the general public.
Therefore, in order to finance those projects, property taxes can be a great way to do so since property owners are often able to afford paying those taxes since they often have much more wealth compared to the average person.
Consequently, in order to collect taxes from those who suffer the least from it, property taxes may make more sense compared to other taxes like the value-added tax that affect even the poorest among us.
Additional tax revenue to invest in important infrastructure projects
Another advantage of property taxes is that it gives governments the opportunity to get additional money for important public infrastructure projects of many sorts.
For instance, from time to time, roads have to be maintained or public transport has to be improved.
All those things can be quite costly and having additional tax revenue due to property taxes can be a blessing in order to be able to finance those projects.
More money for education
Many countries all over the world also have difficulties to provide the general public with good education.
Many children are still not able to attend school since their parents can simply not afford it.
Through the implementation of property taxes, additional money could be collected from the rich in order to finance a certain minimum level of education for the poorest among us.
Only then will it be possible for poor people to escape poverty and to have a better life in the long run.
Especially useful in states with high government debt
While a few countries on our planet have plenty of money, many countries currently struggle to finance their government operations since they simply have quite high national debt and have to pay quite a lot of money for interest.
Especially in those states where government debt is excessively high, additional tax revenue from the introduction of property taxes may be quite welcome and may even become necessary in order to prevent the financial failure of a state.
Additional investments in healthcare
In some countries, the overall healthcare system is of quite poor quality and many people also suffer from a lack of health insurance.
In case of serious health conditions, this can lead to serious trouble for those people since they will often not be able to financially afford the necessary medical treatment.
In turn, the life expectancy in those countries is often quite low.
In order to improve the overall medical standards and to increase the life expectancy of millions or even billions of people on a global scale, governments all over the world can introduce property taxes in order to get sufficient additional tax revenue so that they would be able to provide everyone of the local population with a minimum guaranteed level of health insurance, independent from his or her current income.
Can contribute to faster technological progress
Another benefit of property taxes is that the implementation of those taxes may also speed up our technological progress.
In many countries all over the world, far too little money is spent on research and development.
In turn, this also slows down our technological progress.
However, our technological progress is crucial in order to be able to solve our environmental problems.
Hence, by implementing property taxes, there would be additional money that could be spent on R&D and therefore, our technology and global technological progress would likely speed up significantly.
Property taxes may improve the overall safety level
Too much inequality in a country often leads to high levels of unlawful behavior and other unpleasant incidents.
Hence, in order to improve the overall level of safety in the respective region, property taxes may greatly help in this regard since more money could be spent on the poorest people.
Moreover, with higher property taxes, also more police officers could be employed, which would further improve the overall safety level in the respective region.
Financing of welfare programs
In many countries all over the world, poverty is a serious problem.
Many people often don’t know how to make enough money to afford basic things for their daily life.
Many of them also suffer from serious hunger and even starvation.
Hence, in order to improve the overall living conditions of those people, welfare programs are urgently needed.
In order to finance those welfare programs, property taxes can be a great way to do so, especially in countries where the gap between the rich and the poor is quite high and property owners can easily give away a small fraction of their overall wealth.
Disadvantages of Land Taxes
- Lower incentive to buy a home
- High property taxes may deter investors
- Harder to get a loan
- Introduction of property taxes may lower the value of existing properties
- Higher amounts of equity needed to buy a home
- High property taxes may lead to financing issues
- Taxes always distort free market forces
- Some people may greatly underestimate property taxes
- Implementation of a land tax may lead to less construction of new homes
- May imply a significant financial burden on average-income families
- People may relocate in order to save money related to property taxes
- Can be problematic from a legal perspective
- Different methods for determining the value of properties lead to different outcomes
- Lawsuits related to the introduction of property taxes
- Value-independent property tax models can be quite unfair
- Landlords may try to lower their land tax payments
- Property taxes also imply some administrative work
Lower incentive to buy a home
As we have seen until this point, there are many advantages to property taxes.
Yet, there are also some problems related to this concept.
For instance, one disadvantage of property taxes is that they can reduce the incentive for people to buy a home.
People will anticipate that they have to make a certain tax payment every year and therefore will be less eager to buy houses.
In turn, more people may live for rent.
Even though renting a house or an apartment can make sense for a limited period of time, owning a home is often much more convenient since you don’t have to fear that someone kicks you out and once you paid back your loan, you will finally entire own your home.
This also implies that you created some value for yourself and at one point in time, you could also sell your home if you want to.
Therefore, owning a home has many important advantages and taking away the incentive to buy a home due to high property taxes may not be a good idea.
High property taxes may deter investors
Investors try to invest their money in the most lucrative assets they can get.
However, if property taxes are levied in a country, investors will be less inclined to invest in those regions since their return on investment would become lower.
In turn, with lower investment levels in the housing industry, also the overall amount of housing space might become lower and the problem of housing shortage may increase significantly.
Harder to get a loan
Through the introduction of property taxes, banks will also become less eager to provide loans to private customers.
Property taxes negatively influence cash flows since people will have to pay property taxes in addition to the monthly loan repayments.
In turn, banks may be less eager to provide loans to customers since they will anticipate that the overall risk for default increases as well.
Hence, families who would have been eligible to get a loan without the presence of land taxes might now no longer be eligible for getting this loan and therefore, their dream of owning their own home may get destroyed due to the implementation of property taxes.
Introduction of property taxes may lower the value of existing properties
Since buyers will anticipate that they have to pay property taxes when they buy a house, they will also factor this in when it comes to those buying decisions.
Thus, a property can lose a significant fraction of its value solely due to the implementation of high property taxes, which may be considered to be quite unfair from the perspective of current property owners.
Higher amounts of equity needed to buy a home
Since banks will be less inclined to provide loans to customers since they fear that the overall probability for default increases due to the implementation of property taxes, banks will also likely require customers to have more equity in order to grant a loan.
However, equity is often the main problem when it comes to buying a property and increasing levels of required equity would make it really hard for many people to ever buy a home.
High property taxes may lead to financing issues
In case people have already bought a home in the recent past and property taxes will be introduced in the near future, this can also lead to serious financing issues.
People may have bought a house that had been on the upper end of their budget.
If those people will have an additional burden to pay property taxes, they may no longer be able to fulfill all their financial obligations and may even lose their homes in the long run.
Taxes always distort free market forces
The implementation of taxes can make sense from a redistribution perspective so that the poorest in our society can have a better life.
However, from an overall welfare standpoint, taxes are never a good idea since they prevent free market forces to work properly and therefore, a deadweight welfare loss occurs.
Therefore, taxes of any sort decrease the total overall welfare of a country and therefore, they should only be justified if the social gain from redistribution outweighs the total overall welfare loss.
Whether property taxes meet those criteria or not has to be evaluated on an individual basis.
Some people may greatly underestimate property taxes
Another problem with property taxes is that many people simply underestimate the financial burden that is associated with buying a home.
People often just look at the price of a home and completely neglect the additional property tax payments associated with it.
In turn, many people may get into financial trouble due to those “hidden” property taxes and the financial problems that they can cause.
Implementation of a land tax may lead to less construction of new homes
Another downside of property taxes is that it may lead to less housing space over time.
Investors and real estate companies will be less eager to buy land and to build properties due to the decreasing property prices associated with the implementation of a land tax.
Hence, in the long run, there might be fewer housing opportunities and the housing shortage issue may be exacerbated.
May imply a significant financial burden on average-income families
While some people who own a home are wealthy, others are barely able to finance their homes and the introduction of property taxes may lead to a serious financial burden for those people who are already short on money right now.
Thus, property taxes may not only take away from people who can easily afford it, they may also lead to a state where many people may have to sell their homes due to financial problems related to the implementation of the property tax.
People may relocate in order to save money related to property taxes
Some people may also decide to relocate to other states or even to other countries if property taxes will be introduced.
Some people are really tax-adverse and will not be willing to pay more taxes under any circumstances.
Therefore, property taxes may also lead to a state where many highly-qualified people will leave a country, which can lead to serious adverse economic effects in the long run.
Can be problematic from a legal perspective
Also from a legal perspective, the introduction of property taxes can be rather problematic.
In some countries, legislations may prohibit the implementation of those taxes since they may interfere with other laws.
Therefore, the concept of property taxes may also not be feasible from a legal standpoint.
Different methods for determining the value of properties lead to different outcomes
There are also some issues related to the determination of the tax burden for every individual property.
There are different official methods of valuing a property and by applying those different methods, also different property values will be determined.
Hence, there will also be plenty of room for discretion and individual judgement regarding the taxes that are levied on properties and chances are that some people will not be happy about the amount they have to pay.
Lawsuits related to the introduction of property taxes
Some people may also be willing to engage in lawsuits since they feel that they had been taxed too much and are no longer willing to pay property taxes anymore.
In turn, this will also imply plenty of legal effort, which may further question the concept of property taxes.
Value-independent property tax models can be quite unfair
Depending on the region you live in, property taxes may also be independent of the true value of your property.
In such a case, property taxes can be considered to be quite unfair since the amount of taxes a person has to pay should be linked to his overall wealth level in the eyes of many people out there.
Landlords may try to lower their land tax payments
Another downside of the implementation of land taxes is that property owners may also try to find loopholes in the system in order to pay fewer taxes.
For instance, this could mean using expert assessment in order to lower the book value of the property.
Consequently, some people may pay far fewer property taxes compared to what would be officially demanded from them.
Property taxes also imply some administrative work
In order to collect and administer those taxes, plenty of bureaucratic work is necessary to keep everything in order.
In order to do all this administrative work, many additional people will have to be employed.
In turn, this also implies significant administrative costs, which in turn may eat up part of the additional income from the implementation of those taxes.
Top 10 Property Tax Pros & Cons – Summary List
| Property Tax Pros | Property Tax Cons |
|---|---|
| Property taxes can help the state raise money | Fewer people may buy a home |
| May be considered as fair | Financial problems of existing property owners |
| Can help to lower the wealth gap | Property investors may get deterred |
| Property taxes can improve social cohesion | Drop in property prices |
| Higher level of safety | Property taxes make it harder to get a loan |
| Additional money for public infrastructure | Property tax distorts free market forces |
| Important to finance welfare programs | Total welfare loss |
| Additional money for education | May be problematic from a legal perspective |
| Can help to improve overall healthcare | Loopholes in the system |
| Can speed up technological progress | Implies some administrative work |
Do Property Taxes Make Sense?
As we have seen in the previous discussion, there are many advantages and disadvantages of property taxes.
Governments and municipalities should evaluate on an individual basis whether implementing those tax regimes makes sense in the respective region or if those property taxes may do more harm than good in the long run.
Sources
https://en.wikipedia.org/wiki/Property_tax
https://www.investopedia.com/terms/p/propertytax.asp
https://www.iaao.org/uploads/a_brief_history_of_property_tax.pdf
About the author
My name is Andreas and my mission is to educate people of all ages about our environmental problems and how everyone can make a contribution to mitigate these issues.
As I went to university and got my Master’s degree in Economics, I did plenty of research in the field of Development Economics.
After finishing university, I traveled around the world. From this time on, I wanted to make a contribution to ensure a livable future for the next generations in every part of our beautiful planet.
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