Monday, January 28, 2008

Please pass the PALT

Economists have been dreaming it for years: land reform by Progressive Agricultural Land Tax. The current land reform scheme in the Philippines (whose funding is running out in mid-2008) requires the State to acquire farm land from landowners until their properties are no larger than 5 ha, the legal retention limit. Acquisition requires "just compensation". Experience over the last 20 years of implementation has shown the colossal problems with this scheme. First, land ownership needs to be properly documented to determine whose guilty of breaking the law (on excess landholdings) and ensure legal transfer of property. Second, value of land needs to be set, opening a litigation abyss.

The beauty of the PALT is that it entails the same documentary requirement (done anyway under the second scheme) but avoiding the second set of problems associated with land valuation. Farm lands above the 5 ha retention limit are subject to an additional tax, which can be graduated by size class (say, 5.0 - 24.0, 24.0 - 50.0, above 50.0). The objection by Skinner (1991) that the PALT is administratively impractical is moot.

The tax rate can be made sufficiently punitive as to induce land fragmentation (say, 5, 10, and 20 times the regular real property tax assessment). The PALT is effectively a fine imposed on landowners who violate the law (RA 6657) on maximum farm land holdings.

Administration is simple: one need only to enact a national PALT, which is assessed on top of the local government real property taxes. Collection of the PALT can be done by a separate national government Bureau reporting to the Department of Finance. (Staffing can be done initially with personnel from the Department of Agrarian Reform.) Land sales can be facilitated by the Land Bank of the Philippines, who stands ready to acquire lands (at manageable prices) using money from the Agrarian Reform Fund (which is the current set-up). The land can then be resold to deserving farmers or landless farm workers (who amortize their lands under the usual discipline of formal mortgage contracts).

The PALT can even do away with some documentary requirements. It will not require remediation of land titles where these are defective - it can use the same documentation as the real property tax. Of course safeguards would need to be introduced: the PALT Bureau can institute its independent documentation of landholdings (in cases where local assessors are incompetent, ignorant, or corrupt); it can introduce a tax on idle lands and conversion from agriculture to nonagriculture (to prevent landowners from evading the tax); revenues can be shared between local and national government (the latter earmarked for infrastructure spending to benefit Agrarian Reform Communities); and so on.

What have I gotten wrong? Let me know. Otherwise Congress should pay heed as the debate on extension of the agrarian reform heats up.


t11s said...

Splitting up farms worked so well in Zimbabwe!

Why do people in these countries want so desperately to enact policies to keep them poor and hungry?

"The Philippines is relatively weak in business freedom, investment freedom, property rights, and freedom from corruption. The government imposes both formal and non-formal barriers to foreign investment. Inflation is fairly high, and the government subsidizes the prices of several basic goods. The judicial system is weak and subject to extensive political influence. Organized crime is a major deterrent to the administration of justice, and bureaucratic corruption is extensive."

"Import and export restrictions, quotas, service market access barriers, import and export taxes, burdensome import licensing requirements, restrictive and non-transparent standards, labeling and other regulations, domestic bias in government procurement, inconsistent and non-transparent customs valuation and administration, export subsidies, widespread corruption, and weak protection of intellectual property rights add to the cost of trade."

Sue said...

t11s is right...