Countries that are able to collect sufficient tax from land use have been highly successful in industrialization. Good examples of this are the seven industrialized countries termed as the G7 countries.
Land is considered the ingredient and cause necessary for the affluence of countries, and the proper use of the value of public land and taxes creates this affluence. In the late 18th century, two economists Adam Smith and David Ricardo, regarded as fathers of classical economics, advocated the basic theories of economics that are still followed and practiced today.
Using pricing tool for three sources of revenue
The capital from land at the first stage of industrialization is the value of public land obtained during the process of conversion of public land into market land for use in the private sector. Taxes on land and property on land (tax on real property) used in the private sector are the source of capital from land which continues to be invested for further development. Additionally, other sources are the fees and duties for management of land, such as fees for land registration, and fees for land survey.
In late 20th century, Peruvian economist Hernando De Soto introduced ways to increase the value of land in the process of investment for development. His method aimed at improving the legality of plots of land and simplifying administrative formalities for land use rights. The appropriate approaches of planning increase the value of land, improve the infrastructure and public services, raise the value of public land as well as the taxes on such land in the private sector. This is the process of creating added value of land, rather than getting revenue from investment of land owners.
Hernando De Soto called it the mystery of the hidden capital in land. This theory is the ground for the newly industrialized countries to achieve success in industrialization by using the hidden capital in land, of which the Republic of Korea is a good example.
The revenue from land comes from three sources: (1) one source is the value of public land when it is put in the market in the private sector; (2) another source is the tax and fee from land use rights and management services; (3) and the last source is from increased value of land without investment from the land users (see chart below).
All these sources of revenue depend on land pricing tools. The requirement of this tool is to determine the land price in accordance with the market value. Determining a higher land price will hinder investment on land because of financial obligations that are too great. Conversely, determining a lower land price will cause a loss of revenue to the state budget.
Taxes & fees for land use rights and management services
Unclear concepts limit revenue
For Vietnam, the land law indicates three sources of revenue similar to the ones mentioned above, based on the details from the political economic theories on land. The source of taxes and fees is clearly described in the Land Law and other relevant regulations on taxes and fees, and the finance agency has provided clear reports. The source of public land is also stated clearly in the Land Law, but the taxable items have not been fully shown in the statistics.
In Build-Transfer (BT) investment solutions, for instance, the value of land in the exchange transaction is not recorded in the land revenue for the budget because there are not enough specific ways of collection and are not listed in the items collected for the State budget.
In general, the land revenue does not match the value of the land in the market. According to the statement by the Ministry of Finance, the total revenue from land makes up just about 10% of the total revenue of the State budget, amounting to about 20% of the total revenue from cities and provinces.
The revenue from the value of public land makes up about 85% of the total revenue from land while the revenue from taxes and fees is just about 15% of the total revenue from land.
As legally prescribed, it is reasonable when the revenue from the value of public land is higher than from taxes and fees in the first stage of industrialization, but the 85:15 ratio is too wide. It can be predicted that the revenue from land will fall sharply in the next stage of industrialization.
However, the revenue from taxes and fees in connection with land use at present is too low, compared with international practice. The basic rate of taxes on non-agricultural land in our country is 0.03%, which is too low, compared with the rate of 1-1.5% in other industrialized countries. In the future, such low tax rates will not ensure the good effect of tax revenue. Furthermore, this way of collecting revenue cannot work very well and cannot prevent negative occurences in the real property market like speculation, uncontrollable immigration, and housing problems for low-income people.
In reality, the value of public land, as well as taxes and fees in connection with land use, are priced far lower than the market price, substantially reducing the revenue, which causes a huge loss to the State Budget.
Vietnam is not only an emerging country but also a country that has been striving to switch from a government-subsidized country to a market economy. This means that public land and public property fixed on land are of great value. If the switch is done perfectly, the value of public land may create a huge amount of revenue for the state. Unfortunately, Vietnam, like many other countries, has failed to make good use of the value of public land and public property on land.
Public land and the land managed by private users is not defined clearly in the current Land Law of Vietnam. Unclear concepts are one of the causes that limit the revenue from land, leading to unclear revenues. That is because of poor management of the people land ownership system in the market economy.
Inappropriate use of public land in the market
Collection of revenue plays a key role in obtaining the initial capital when public land is put in the market. According to the Land Law, the revenue from the value of public land can be divided into the following items:
(1) Collecting the land use charge when the state hands the land over to the user and collects the handover fee, and collecting the land rental when the state leases the land out to the lessee.
(2) Collecting the land use charge and land rental when the state allows the change of land use purpose, as applicable to the case when a change of the land use purpose must be approved by a competent agency.
(3) Collecting the land use charge and land rental when the state recognizes the land use right for the current user in the case that they must pay land use charges and land rental.
(4) Using the value of land to invest in the infrastructure in the form of BT (build and transfer) in which the state pays the infrastructure investor with the value of the land.
(5) The value of land increases when the land used by a state-owned company is equitized.
As reported by the Ministry of Finance, the handover of public land with collection of land use charge or leasing out public land with lump sum payment make up 85% of the revenue from land in Vietnam, which means it is very important for the budget of the cities and provinces.
However, the system of collecting the revenue from the value of public land in this way is still considered to have several weaknesses, particularly collecting insufficient amounts of the revenue, and this happens in all the five forms of collecting charges and fees as mentioned above. From these weaknesses, it is necessary to consider significant conditions are applicable for the collection of revenue from the value of public land.
First, the Land Law must clearly define what public land is and what the land use in the private sector is. In Vietnam, public land can be defined as the land that is not being used; the land that the State has not handed over to the user, or leased out to the lessee; the land that is used for public purposes; and the land that State agencies and communities of residents use. In contrast, the land which is used for private purposes can be considered to be that land that is used by foreign organizations, households and individuals.
If we want to increase the revenue from land and prevent corruption in connection with land, it is essential to revise the Land Law issued in 2013 and clearly describe the strips of land as "public land" or "land used for private purposes". This is also an important part of the legislation necessary for better management of public land in the market economy.
Second, in the Land Law of Vietnam, there are always regulations on ineffective use of land and fines or penalties for more effective use of land. Such fines or penalties include taxes applicable to cases in which people have land but do not use it, do not use it as designated, or use it ineffectively. These regulations exist, but now there is no specific criteria for assessment of the effectiveness of use of particular types of land.
Therefore, it is urgent to revise the Land Law and introduce specific regulations on assessment of the effectiveness of use of land, paving the way for the planning of land use and decisions on improvement of land use and appropriate fines or penalties.
(To be continued)