An equitable GREEK property tax

The debate is ongoing about what would constitute a fair property tax in Greece given its current Macro and Microeconomic reality so it would be useful to add my own suggestions to the debate in the hope that some may be discussed.

Firstly the government has clearly got its causality wrong. Its starts with the premise that it needs to fund a certain gap in its budget, then works a tax policy around this number to ensure that it is reached without regard and analysis on the long term consequences of its tax policy actions. This method can be characterised by short sightedness and has devastating consequences on valuations as has recently been witnessed by the government's insane proposals.

The right approach would be, we need to fund this deficit so lets tackle each potential source of tax revenue and see what tax can be imposed based on the evaluation of the prospects for the long term growth of this revenue source. In this case property.

So lets focus on two important choices. 1- We need to raise money from the property market to fund the governments deficit and 2-We need to do it without major disruptions to the market, to be effective, raise as much money as possible and structured in such a way as to allow for the continued long term growth of the market. Sounds like an impossible task but it isnt.  

Taxing property on artificial valuations set by the government to trap tax evasion when the property market was booming is out of whack with current reality. It is unconstitutional as owners are taxed on unrealistic valuations, on some occasions two to three times higher than their market value, principles which are not commensurate with the basic workings of a free democratic society. A second problem is that this tax is imposed on ownership without regard on the asset holder's ability to pay. A household's property investment may represent a very high proportion of its savings which is the current reality and is thus forced to sell it to meet these enormous tax obligations in a collapsing market, the result of this heavy taxation which leads to confiscation individual bankruptcy and a dead end. This is self defeating and it only serves the appetite of the lurking vulture funds.

The first and foremost consideration and should be a basic principle of taxation is to tax what generates revenue this way you ensure:

1- Collection. The owner has the ability to pay the tax because he has received revenue from it .This includes rental income as well as revenue from the sale of the property. There are two types of taxes here, tax on rental income and tax on capital gains from the sale of the property.

2- Valuations are not affected. Since ownership is not taxed there is no pressure to sell the asset to generate revenue and values remain to a large part unaffected which means property owners have then the choice to sell, hold or buy in a healthy market. In fact if capital gains tax is imposed on short term ownership progressively more so that property buyers who buy to live are subject to much lower capital gains than a short term speculators, only in it for short term gains, the tax is fair and clearly non disruptive.

There is this theory in Greece that since a large proportion of black money has gone to buy property we must tax ownership and especially the expensive properties at high rates on an annual basis to catch this laundered money.

The problem with this proposal is that its flawed with devastating consequences on valuations and highly  disruptive for all households as Greeks have one of the highest proportion of home ownership already discussed in my previous blog http://www.rgdanon.blogspot.gr/2013/11/mr-stournaras-and-bad-economics.html . One of the big negatives from this tax is its recurrence. Property valuations are based on Net Present Value considerations (for those familiar) which implies that values are adversely affected. from its continuity.

May I remind readers that the PASOK government had originally  introduced this tax with the premise that it would be temporary, a one off occurrence. The result, an enforcement of a backlog of four annual property taxes during this summer period and the reintroduction of the tax on an annual basis from 2014 onwards.

What is even more suicidal is that this unbearable tax raid on Greek households is forced upon them during a fourth year of collapsing GDP and catastrophic unemployment. It is no surprise therefore that this policy leads with mathematical precision to depression.

Whats more this tax veil is not conducive to international investment in the property market an important consideration as the government looks to international investors for its growth agenda. The government may structure favourable tax treatment on a case by case basis with investors but investors will ultimately want to sell units from their investment to generate their profit which will be subject to these punitive government imposed taxes.

To summarise a revenue based tax together with a finite one off property holding tax would be a desirable mix for revenue generation. The effect?  the property market will return to normalcy, transactions will explode as the purchase tax is also reduced to 3% as suggested.  International property investment will surge and the government will increase its tax earnings from the increased transaction volumes well beyond its expectations bridging its deficit gap.

Oh and one more point in case it is not obvious from above. Objective values must be returned to current market values and all taxes must be based on these new government set objective values.

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