The Arabist

The Arabist

By Issandr El Amrani and friends.

Getting real about the real estate tax

The Boursa Exchange has a good post on what he sees as the Egyptian middle and upper class rejection of a new real estate tax could signify the slow but ineluctable rise of a demand for better representation in government: the classic "no taxation without representation" dictum that motivated those calling for American independence from Britain. 

As TBE points out the new tax would have been fairly light:

After all, the new tax burden would have been quite low: No payment for properties evaluated at less than LE500,000 (about $90,000), LE300 (about $55) for properties valued between LE500,00 and LE1 million, with the highest possible tax reaching just more than LE1000, for properties valued near LE5.5 million or more (approximately $1 million). (All of these figures might be off to a greater or lesser degree, but they are close enough to demonstrate the underlying point, that the new tax isn’t particularly oppressive.)

So his analysis of people being unreasonably whiny, I think, is accurate. But it does not tell us the whole story of why there is so much hostility to the tax. The real estate tax is not just a new income source for the government, although it does need it to balance the budget and control public debt. It is part of a wider attempt in the last five years, driven by Minister of Finance Youssef Boutros-Ghali and backed by the IMF and World Bank, to create a proper taxation system in a country where tax evasion had largely been the rule. This is an essential project for any government, whether or not it creates in the long-term calls for greater representation.

Look at the success of the tax law put in place several years ago. It might be criticized for nearly being a flat rather than progressive tax — anyone eligible to pay tax pays 20% — but it does exclude many considered too poor to pay taxes. Since the new tax law was put in place, tax collection has increased, fraud has decreased, and more people have registered (and that registration was made easier.) It is allowing the government to create a better picture of the population's income.

The new real estate tax, likewise, has a technocratic purpose beyond collecting monies. It would have allowed bureaucrats to update and deepen their understanding of who owns what, and build a map of property ownership across the country and thus enable an upgrading of the bureaucratic nightmare of land and real estate management. This is a legitimate exercise for any government, and may in the long term contribute to the greater expectations in governance TBE alluded to.

But, in the immediate, it also reflects some of the strange aspects of real estate in Egypt in the last decade or two, and the damage years of poor rule of law has had. Real estate is the favorite type of investment, and many middle class Egyptians have bought property even when they don't use it as an investment and to counter inflation. Since enforcement of existing laws are lax, and a city like Cairo constitutes by over 60% of informal housing, some of that property may have been built illegally, getting a straight picture of who owns what can be difficult. Many landlords also do not report their rent income to the authorities. Many people who bought property a long time ago — especially during the liquidations of the Nasser era — could never be abel to buy the property they currently live in. Egypt's narrow patch of Nileside land, where 97% of the population lives, lends itself to high property prices (I am constantly amazed at prices being charged even in the new cities, and you'd have to be quite rich to buy something in Zamalek where I believe the price is around LE15,000 per meter.) There is also years of accumulated resentment of the government to dispel. 

I tend to agree with Salama Ahmed Salama that the real estate tax was the victim of a crisis of confidence in the goverment, as well as a poor roll-out by the authorities:

The real estate tax took everyone by surprise. At a time when the public is suffering from the economic crisis and rising prices it was said that the real estate tax aims to plug the deficit in the state's budget. It was originally claimed that the tax would be confined to luxury and secondary homes. Later on, it transpired that it applies to all types of real estate, including regular dwellings.

The finance minister offered many arguments to defend the tax. But when the law went to the People's Assembly, many legal experts called it unconstitutional. This further weakened the public's trust in the government. It would have been better for the government to wait until it had the legal aspects thoroughly examined. But it preferred to act hastily and ended up looking lame.

Even before the real estate tax came along, the public was sceptical about the public bonds that the government suggested. Many citizens felt that the government wants to privatise the remaining part of the public sector through this method, so that a handful of private investors would get rich at the expense of the rest of the nation. The government had to cancel the project eventually, having further eroded the trust of the public.

This crisis of confidence is making legitimate efforts to create a clearer system of public accounting impossible, and points to the difficulty of implementing economic liberalization without political liberalization, particularly when economic growth bypasses many people. If Gamal Mubarak and friends are taking Deng Xiaoping as a model, they have to remember that China's authoritarian capitalism managed to generate real quality of life improvements. Their problem is that, aside from a small part of the economic elite, there is little to show for their policies thus far.

With the best of intentions, Egypt faces colossal problems in moving away from the disastrous handling of the economy where bad laws, poor implementation and corruption have forced most people into a shadow economy. Trust in government is going to be essential ingredient to any successful economic reform.