Annual Land Value Tax.
In 2010, Kenyans voted in favor of a new constitution that clearly states as below:
61. (1) All land in Kenya belongs to the people of Kenya collectively as a nation, as communities and as individuals.
Therefore, the benefits derived from land must be shared by the people of Kenya .
As we all know, factors of production are Land, Capital and Labour.
The current Tax system taxes capital and labour in terms of VAT and Income tax.
Land.
Land as a component devoid of the actual building is God-given. It cannot be manufactured or increased. It’s a constant. All that man can do is to increase its value by adding capital and labour.
By the Government taxing Capital and Labour, this increases the cost of production hence negative impact on the economy. The VAT on goods and services only serve to increase the cost of acquiring the particular goods or services by the Mwananchi/Citizen.
Unfair Tax system.
To make the tax fair, a Land Value tax should be levied on the value of the bare land. This tax will not increase productivity since land is God-given and therefore tax on value of land does not increase the land’s productivity. Land as a factor of production is fixed –it can’t be increased or changed in any manner apart from the manner that God created it.
Tax on value of land will in essence reduce the need to tax labour and capital in VAT and Income tax.
Annual Land Value Tax.
Land Value tax will be a % of the annual rental income that the land can generate to its maximum. Each area in Kenya is Zoned by the Local Authority in terms of number of floors one can construct up, ground coverage and number of dwellings per acre of land.
This will be calculated and all land owners will be required to pay a Tax on the annual rental income based on such factors. For example, a land owner having a vacant acre of land in Upper hill or Nairobi CBD will be required to pay an annual Land Value tax just like his neighbor with a 10 floor building.
Upper Hill/Nairobi CBD example.
Assuming an acre of land in Upper Hill has a potential as below:
https://www.a4architect.com/2011/02/12/commercial-property-in-upper-hill-nairobi/
With an annual rent of KES 1000 per m2 x 20,000m2x12months =KES 240m. Assuming a Land Value Tax of 10%=KES 24m per acre.
In other countries such as Taiwan, Land Value Tax ranges from between 0.2% to 5.5.%.
The man with a vacant 1 acre plot will also be required to pay tax to Nairobi County to the tune of KES 24m per year.
This applies to all neighborhoods e.g Kitengela, Kayole, Ongata Rongai e.t.c
Umoja/Kayole /Easleigh,Ngara/Mathare North example.
Assuming a one acre plot in Umoja,Rongai,Kayole[KES 10,000 per month for 2 bedroomed], the potential is as below:
With an annual rent of KES200, 000 per month x 12=KES 2.4m.
Assuming a land Value tax of 10% =KES 240,000 per 1/8th =1.68m per acre.
The 1.68m per acre will be required to be paid to Nairobi County by anyone holding land in Umoja,Rongai,Kayole area as Land Value tax.
Nairobi City Annual Land Value Tax calculation example-KES 667 Billion .
Nairobi city is 171,985 acres in size. Assuming 20% of this is roads,20% is left to conform to permitted 80% Ground Coverage and 30% of this is public land, we have 52,000 acres in private hands.
For illustration purposes, we will take the median between the most expensive rent[Upper Hill and CBD] and the least expensive[KES10,000 per month for 2 bedroomed]=12.84m per acre as Land Value tax per year.
A more accurate Land Value will need to be calculated based on each Nairobi Zone.
Total revenue collected by Nairobi County will be 52,000acres x 12.84 m per acre=more than 667 Billion KES.
In a nutshell, the amount taxed on Land Value will be so much that Nairobi County will be able to afford to lay commuter rail, tarmac roads, hospitals, schools, housing for the poor e.t.c and still remain with much more money.
HongKong.
In HongKong, the Government raises 38% of its revenue through Land Value Taxation.
http://www.interest.co.nz/news/44914/opinion-merits-land-value-tax-lessons-hong-kong
Taiwan.
In Taiwan, the Government levies Land Value Tax at 0.2 % for owner-occupied residentials and up to 5.5% on other land usages.
http://www.globalpropertyguide.com/Asia/Taiwan/Taxes-and-Costs
Bridging the Gap between Rich and Poor.
This is a perfect classic example of wealth distribution and bridging the gap between the rich and the poor without resorting to Civil Unrest.
There will be no need to tax employees any more so as to sustain the economy. VAT and Income Tax can then be abolished and the Land value tax comes into play.
My assumptions of a 10% tax above are quite high-the figure can be brought down to a more acceptable value.
Each neighborhood will have a different land value based on the maximum rental income per year.
Effects on Land Value Tax to the Kenyan Economy.
- Reduction of Urban Sprawl-maximum utility of Infrastructure.
People holding large lands and are not utilizing their lands to the maximum value will be required to pay the Land Value tax just like their neighbors who have utilized the maximum value of the land. This will result in people holding land within areas whereby the Government has already laid infrastructure such as Sewer, Tarmac road, Electricity to develop the land or sell to developers.
Government spends a lot of money to lay roads, water, and electricity around the country. Some people own undeveloped lands that are within such serviced areas. These lands do not utilize the services hence a loss to the economy. The loss to the economy is a gain to the land owner in that he can sell his property at a very high price because of the services present.
For example, someone holding a 1 acre land in the CBD of a fast growing town such as Kitengela will have the land value rise very highly every year. The reason the value is rising is mainly because of the improved Namanga road, lower bank interest, population increase e.t.c. These are situations that the land owner has not contributed to adding the value. Since these situations are caused by the community in totality, the added value needs to be shared by the same community that resulted into the added value.
The community can only benefit once the owner of the vacant plot pays the Annual Land Value tax to the County Government.
The County Government then improves the roads, schools, hospitals, e.t.c.
The Land Value Tax comes ensures that this high land value due to the services present is turned back to the community that has contributed as opposed to only the owner of the land.
- Ensuring that all Tax to Government is paid.
The current tax system in Kenya hereby Government taxes businesses and individuals in Income tax and VAT is not fool-proof. Many businesses and individuals employ the services of hawk-eyed lawyers to utilize all opportunities for tax evasion. This tax is in a way punitive since it punishes individuals and businesses for working hard-the harder they work, the higher they pay in tax.
This tax increases their cost of production hence pricing them out of the market.
A tax on land does not increase the cost of production since land is not man-made.
Land is immoveable so it’s easy for Government to see and audit the tax to be levied to all land owners.
- Reducing the bubble-effect to property.
The current system in Kenya whereby vacant land owners in areas where there are good roads, schools hospitals, high populations are able to sell at a very high price is slowly turning towards a bubble. For instance, for the last 10 years, property value has been increasing by 20% each year. A 200,000 plot a few years ago is now costing KES 2.5m and growing every year.
Land in Konza was selling for KES 200,000 an acre 2 years ago. It now costs KES 4m per acre, representing a 2,000& land value increase.
At this rate, the future of the current generation already in Primary schools is not guaranteed. They will never be able to afford the high price of land.
According to Ministry of Youth Affairs, 75% of the Kenyan population is below 30 years of age.
http://www.youthaffairs.go.ke/
This is the population that is faced with the very high land prices while the salaries and wages remain the same or are not available in cases of joblessness.
This is a perfect recipe for Civil Unrest unless the Government foresees this and effects mechanisms to ensure affordability of land.
When people holding vacant lands are forced to pay the Land Value tax, they will develop their property or will sell to developers. The effect is that there will be a lot of buildings, thereby reducing the demand for high rent hence affordability. Instruments such as the rent tribunal will not be needed in this case.
Also, there will be a lot of land for sale, thereby reducing the demand for land hence lower land prices that current. This will allow for affordability of land for housing and business purposes.
- Increasing Job Opportunity.
When persons holding vacant land are forced to pay the Land Value tax, they will develop their land or sell to developers. This will cause an increase in the amount of job opportunities beginning from the construction industry. Other job opportunities will spiral off the construction industry hence a thriving economy with less unemployment.
In the Rift Valley for example, the owners of the vast agricultural land will be forced to ensure their lands are productive enough to pay the Annual Land Value Tax. They will then employ superior farming techniques which will result to employment and increase in production for local use or export. This will ensure there is abundant food hence reducing price of food in Kenya and at the same time increasing job opportunities in the agriculture sector.
Conclusion.
Annual Land Value tax is a concept that should be embraced in Kenya. This concept is in line with the new constitution whereby people are assured of their right to housing.
This concept was developed by Henry George (September 2, 1839 – October 29, 1897).
Land Value tax is currently being used in some states in U.S.A such as Pennsylvania.
Also some states in Australia such as New South Wales.
Hong Kong also utilizes this system.
Ireland plans to affect this system from 2013.
It’s my hope that the Government will utilize this concept for a better Kenya.
Architect Francis Gichuhi kamau.
+254721410684.
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