Property tax should fund infrastructure, urban development

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A view of Chuong Duong Bridge in Hanoi. Vietnam should collect housing tax to fund urban development, an expert says. Photo: AFP

Many countries collect property tax to fund urban development. But Vietnam does not even though the value of many houses is very large, thus losing out on a major source of revenue, vice chairman of the Vietnam Construction Federation, Pham Sy Liem, told Vietweek in an exclusive interview.

Vietweek: Many countries collect land and housing taxes and use them for infrastructure development. We only levy a low land tax and are considering collecting fees from automobiles to fund infrastructure. Should we change this?

Pham Sy Liem: Some countries collect fees on vehicles. However, we should consider four aspects when deciding on the fee. The first is the political aspect, whether the fee collection is agreeable to people. The second is the economic aspect since, to collect the fees, we also have to spend money, for example, to hire tax collectors. During the subsidy era, the state rented out houses to people, but the rents were not enough even to pay the rent collectors' salaries. The third is the social aspect whether the collection could ensure equity. The final one is the technological aspect whether it is feasible.

 
Pham Sy Liem,
vice chairman of the Vietnam Construction Federation

In other countries, vehicle fees are collected, for example, when they travel on highways. But the collection should be considered in specific cases. It should not be implemented in urban areas since they provide the biggest revenues. Development of transport could help boost the economy of a locality.

If the fee collection reduces traffic in urban areas, it would do more harm to tax revenues. If vehicles are banned everywhere, shops will have no customers. Our revenue from corporate income tax will obviously be hit.

I neither oppose nor support the vehicle fee collection, but only point out the principles we need to consider before deciding to collect. It is a source of funds for urban development, and for transport and infrastructure improvement.

There are many ways to collect fees for infrastructure development. In some countries, property tax and development charges are collected to improve infrastructure. For instance, a road is built, raising prices of land and houses along it by many times and thus raising the property tax revenues. There will be policies allowing road developers to earn additional money from property tax in a period of, say, five years. That would be enough for them to recoup their investment.

In Hong Kong, land prices could increase by tens of times when a road is built in an area. So to capitalize on the increase in land value, property developers often reconstruct buildings in the area, adding more floors. A development charge will be imposed once on the extra floor area when the reconstruction is licensed.

Thus, the best way is to collect property tax. Collecting vehicle fees is troublesome.

There is an opinion that the current land tax of 0.03 percent is too low. It should be increased to raise more funds for infrastructure development. What do you think about it?

The level is not too low, since the tax collection is stable, and does not depend on the weather or market fluctuations. It is a stable income for urban development. The land area is not small.

However, we do not collect housing tax even though the values of houses are very large. Penthouses are valued at millions of dollars, but are not subject to tax. We are losing out on the tax.

To reduce traffic in big cities, should we increase investment in transportation projects or in small towns to turn them into medium-sized ones?

Recently Victoria Kwakwa, the World Bank's Vietnam country director, wrote an article on urbanization, mentioning the Hanoi development plan. Under the plan, we will develop five satellite towns to reduce the population of downtown Hanoi, but it will cost billions of dollars to develop the towns' infrastructure. Meanwhile, we are not sure if people will move to the towns anytime soon.

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Obviously, I do not oppose a cluster of such satellite towns. However, the current trend in the world is to develop compact urban areas. Our ancient street area (in Hanoi's downtown) is a compact urban area since its population density is very high, some 800 people per hectare, compared to the average of 200 people per hectare. We are trying to reduce the density to 500. But even then it will remain a compact urban area.

If we enlarge more towns, it means we have to use more farm land for it. Expanding towns is thus not a good option in
our country.

Development of compact urban areas does not mean making people live in cramped spaces. In Japan, compact urban areas have high population density. But since it has underground roads, there is still land for parks. Downtown areas in big cities around the world are compact urban areas with skyscrapers clustered together. We should facilitate the development of compact urban area development.

How can we do that?

We have to study the capacity of the urban area. The population density should not be higher than the capacity, since it could harm the environment and health of local people. The capacity depends on infrastructure development. Thus, the urban development should be done at the same time as infrastructure improvement.

Is it difficult to raise funds for improving infrastructure when we start to develop an urban area?

The most important thing is whether we want to do it or not. We can mobilize funds from land (taxes) for urban development and infrastructure improvement. Many countries do this, only Vietnam does not.

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