The draft law on property tax is currently raising a controversy due to its impacts on the vast majority of the society. TheLEADER had an interview with Lead Economist for the World Bank in Vietnam, Sebastian Eckardt on this matter.
In the latest proposal announced on last April 13, the Ministry of Finance put forward a tax plan for houses and land combined with a value of over VND700 million VND ($30,900) at the rate of 0.3 percent to 0.4 percent, if issued at the moment, it will cause a possible tax overpayment. What is your point of view on this?
Sebastian Eckardt: I think the specific design of the property tax law needs to be very carefully assessed and it needs to be a proper impact evaluation both in terms of the overall revenue and also the impact on household distribution and so on. After that, the threshold should be informed by that analysis.
We are actually continuing to work with Ministry of Finance to do some of the analyses, what we shared are the preliminary results, which suggest that the thresholds have different impacts.
I think it is important to do a much more comprehensive analysis to really have a good sense of where the thresholds should be set.
What are the outcome of the meeting between the World Bank and Deputy Prime Minister Vuong Dinh Hue relating to the draft law on property tax?
Sebastian Eckardt: We exchanged some international experiences at the request of the Government. We also shared some of the initial analyses and we agreed that we continue to provide that kind of information to Vietnam, so that the impacts are assessed.
We can even help to do some of these assessments so that some of the international experiences can be reflected in the design.
World Bank estimated that about 1.8 million households (7.2 percent of households) will be affected by this tax and there will be approximately VND3,000 billion ($132,450,000) in state budget revenue coming from this tax but at the same time, the tax administration costs will be quite high, account for 10% to 20 % of the tax revenue, so in your opinion, how can the Government balance this situation?
Sebastian Eckardt: The property tax is based on international experience. It is very efficient and progressive. However, the biggest disadvantage of the property tax is its high administrative cost.
There are very big costs in terms of building cadastral, information system and valuation of property and so on. It is not a very easy tax to administer in proportion to the revenue yield, thus this needs to be taken into account.
At the same time, it would be possible to look at land as a major tax base first because land already has a system in place and you can maximise that system to maybe gather a little bit of revenue to make the system more efficient to create better incentive around the system.
One of consternations there is that you do not want to create a tax that costs you more to administer than you actually gets, that would be inefficient. This is a very important factor that should be taken into account and it should again be included in the impact assessment. You need to make sure that you can administer any law that you put in place in a way that is efficient.
At the dissemination workshop for the report of World Bank on last April 5th, it was mentioned that despite the considerably effective effort to reduce poverty in Vietnam, nine million people are still living under extreme poverty. Do you think this draft law of property tax goes against the mission to reduce poverty of Vietnam?
Sebastian Eckardt: I think the property tax can be designed in a way that does not affect the poor, actually one advantage of property tax is that it is naturally progressive. In particular, it taxes the richer household rather than the poor and in addition, it is possible to actually give tax deductible.
You had examined and saw that in the the draft law, it actually have VND700 million or VND1 billion exemption threshold, so only houses with value above those thresholds would be taxed, thus most of the poor households would actually not be subjected to the property tax.
This is because there is a very small part of the poor households sectors that have a lot of assets but poor incomes i.e owning a big house but they do not have a lot of recurrent income.
Generally, property tax actually is a wealth tax so it usually taxes more affluence, more wealthy households rather than the poor. It is very different from consumption taxes as consumption taxes usually tend to be a lot more regressive. They usually taxes the income of the poor more than the rich and with property taxes, it is the other way around.
Property tax has almost been applied in most of the countries around the world, can you share experience on the property tax abroad? In other countries, what is the purpose of collecting property taxes and will it contribute to the state budget or will it be distributed somewhere else?
Sebastian Eckardt: If you look across the world, most countries in some ways or forms tax real estate property because it has these efficiency and equity impact and it has good incentives effect, especially at the local level since the tax can be used to capture some of the infrastructure investments. Specifically, when you build a new road, the property value around that infrastructure investments usually goes up.
Additionally, while the infrastructure is typically financed by the public, the gains of increased property value go to the households that owns those property. With the property tax you can capture some of these values that are generated by infrastructure investments.
Moreover, households that pay property tax usually want to make sure that the Government gives them something in return, so it also gives incentives such as strengthening the accountability especially of local Government.
It is not so much only about the fiscal revenue but it is actually much more about incentives around how you mobilize funding and finance infrastructure, especially at the local level.
Do you think now is the right time to apply this tax in Vietnam given the current income per capita?
Sebastian Eckardt: I think in the economic side, it needs to be assessed. There are many countries with all different scales of income that still use property tax. If you look into the region, Vietnam currently stands out in terms of having a very low non-agricultural land tax rate compared to even Philippines, Indonesia and other places that are not that far ahead of Vietnam.
Ultimately it is a political decision that needs to be decided by firstly, the Government and then of course the National Assembly, which is representing Vietnam’s citizens. Tax policies in the world ultimately come down to politically desirable and feasible ones.
I think it is not purely an economic decision but it is a political decision in terms of whether this is the right time or the right tax for Vietnam.