The land question in smallholder development in South Africa - Institutional Constraints to Small Farmer Development in Southern Africa - page 207

Questions are also often raised about what the optimum tax structure should be to ensure
that collection rates are good and discontent is kept at a minimum. Hamid (1983) and
Hoff (1991a and 1991b) have shown that the introduction of a land tax in poor societies
with inadequate infrastructures for insurance in the presence of excessive farm risks can
exacerbate inequalities and lead to land being concentrated in a few hands. It is therefore
generally considered that a 'simple, possibly flat, tax that may be waived for very small
landowners' may be more manageable and lead to better collection rates, as examples
from Kenya and Indonesia show (Bird and Stock, 2002). How much discretion the local
authority should have in the administering of the land tax system is also a major issue. If
the implementation of a land tax will have the effect of strengthening fiscal responsibility of
the local authority, then it should have the opportunity to build up the necessary in-house
capacity in that area.
But pressures to deliver services within a tight budget constraint may lead to a revenue
maximization behaviour on the part of the local authority that may hurt rather than help
the investment climate. For instance, too high a tax rate may lead to investors leaving the
particular local area in favour of areas with more favourable tax regimes. Conversely, too
low a rate may put the local area at a serious disadvantage in terms of revenue maximization.
For these reasons, it has been suggested some central government intervention in setting
the broad bands of tax rates within which the local authorities can then exercise discretion.
According to Boadway (2001), both minimum and maximum rates help in avoiding two of
the most serious pitfalls of tax administration, namely tax competition and tax exporting.
Tax competition can arise when better-off local governments use lower tax rates to lure
businesses away from worse-off local governments unless there is minimum rate below
which they cannot go. On the other hand, if a maximum tax rate is not established and
enforced, there is a tendency to impose high tax rates on businesses with the intention
of passing on the tax burden to non-residents. According to Boadway (2001), this latter
situation delinks those who pay the taxes from those who benefit from them.
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Aghion, P., E. Caroli and C. Garcia-Penalosa (1999). Inequality and economic growth: the
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Aliber, M. (1996). Benefit-cost analysis of land redistribution: conceptual issues. In: J. van Zyl, J.
Kirsten and H.P. Binswanger (eds.) Agricultural land reform in South Africa. Cape Town, RSA:
Oxford University Press, pp. 563-588.
Banerjee, A., J. Dolado, and R. Mestre (1998). Error-correction mechanism tests for cointegration
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