117
curtailed transfers.' Assertions were also made that parties have been falsely underdeclaring the actual
price at which leaseholds or other interests are changing hands. Theoretically, this tax should be
eliminated or reduced to a nominal level, both to encourage more frequent transactions in land and
improvements and to remove the present powerful incentive to falsely declare a transfer price below
the real price charged and paid.
If accompanied by an adequate educational campaign, it is likely that revenues would actually
rise if this rate were to be cut in half. For that to happen, buyers, sellers, and functionaries would
have to be informed the government is serious about enforcement of tax collection and accurate
reporting of the actual sale price. There are a number of ways to encourage honesty. One is to provide
by law that in the event of any property acquisition by government, the purchase price (or
compensation if expropriated) may not exceed the amount declared as the purchase price, adjusted for
inflation. Another method, used in various Latin American countries, is to forbid banks to lend more
than a fraction (say 60 percent) of the declared purchase price when the property is mortgaged to the
bank in order to guarantee repayment (see figure 4.1). Fines or penalties represent a third option.
Figure 4.1: Central American experience with tax declarations, bank credit, and
compensation for land expropriated in land reforms
Legal requirements linking value declared for tax purposes to bank credit and to compensation in
the event of expropriations are common in Central America. For example, in the 1970s, Salvadoran banks
still made loans to commercial farmers at interest rates below the expected rate of inflation. In 1976 and
1977, landowners were required to declare the value of their lands for annual property tax purposes. The
farms were taxed at a rate of 1 percent a year, on the value declared, with the revenues going mostly to
finance road construction and maintenance. When farms larger than 500 hectares were expropriated in the
land reform of 1980, it turned out that about 90 percent of the owners had declared values for tax
purposes that were clearly less than the market value of the land. On the other hand, about 10 percent of
the large farms had been declared at more than their actual market value. In most cases, this appears to
have happened because the owners expected to obtain bank loans with the land as collateral. By paying 1
percent a year on inflated declared values, they could increase the amount of money they could borrow at
an expected negative real rate of interest on the order of 10 percent.
Since the beneficiaries were supposed to repay, over 30 years, whatever amount of compensation
had been paid to the former owners, false overdeclaration years before also meant that the land reform
beneficiaries might have to pay more than the land was worth. In practice, however, inflation has cut the
real value of prices set at the time of expropriation, and beneficiaries are not actually being asked to pay
more than the land is worth, even when a former owner had overdeclared its value in 1976/77.
Source: Strasma 1966 and 1990.
In any event, quite apart from the temptation to declare falsely the price at which leaseholds
or improvements change hands, the transfer tax is a poor way to recover government's expenditures
to provide access and services in land. The first transfer, from government or traditional authority,
is not subjected to the transfer tax, and if the property remains in the hands of the first transferee, no
transfer tax is ever collected. It would be far more equitable to lower the rate of the transfer tax, while
creating and enforcing a significant annual tax or ground rent.
It is in fact quite difficult to determine whether the transfer tax has curtailed transfers. A 7.5 percent transfer fee would
not be a serious constraint if landholders were allowed to greatly discount or underreport the purchase or sale price.