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Property tax is a potential source of government revenue that is received through the levy imposed on the value of a property. Property tax may be imposed by various jurisdictions in the country depending on the established laws on tax assignment and the autonomy of the regional and local governments of the nation.
Tax assignments across the various levels of governments are a significant concern, especially in the context of developing countries. The revenues gained from the property tax are usually assigned to the local governments as part of the fiscal decentralization strategy (Hyman, 2010).
Despite the consensus that property tax is usually considered local, most of the sub-national governments found in developing nations do not make effective use of the property tax. Averagely, the property taxes that such governments raise comprises of 0.6 % of the Gross Domestic Product.
This raises significant concerns as to why property taxes are not effectively exploited in developing countries to finance the provision of public services aimed at improving the economic well being of its citizens (Hyman, 2010).
In the light of this view, this paper discusses the role of property tax to in helping a developing nation to attain the goals of encouraging capital formation, increase the rates of savings of its citizens and encouraging foreign investment in the country. The paper also explains and justifies two features of an economic system for the developing country to implement.
It is arguably evident that taxation imposes significant influences on the capability and the willingness of people to engage in meaningful work, save and then invest (Hyman, 2010). The underlying impacts vary depending on the tax base, tax rates and the tax burden.
In the light of this, the developing country can make use of the least exploited property taxes to encourage saving, steer economic growth and reinforce capital formation. This requires the adoption of appropriate tax rates on the property levies so as to encourage savings and foreign investments.
It is important to note that savings and levels of investments are indirectly proportional to the tax rates; this implies that higher tax rates are a significant hindrance to individual savings and will not serve as an incentive for foreign investment.
At the same, the developing nation should not adopt a low tax rate that will hinder effective utilization of the property taxes for funding the provision of public services for its citizens, which makes significant contributions towards the goal of capital formation (Hyman, 2010).
The underlying argument is that a moderate tax rate and the effectiveness of the property tax policies are core towards ensuring that there is effective utilization of the property tax towards the attainment of the goals.
Ensuring that property tax functions effectively in the context of the developing country is a significant challenge.
In ensuring that property tax facilitates the attainment of the goals of the developing nation, the pace of fiscal decentralization, efficiency of the methods used in valuing property, readiness of the national government to facilitate access to productive tax bases by the local governments and keeping up with technological advancements are central in guaranteeing the efficiency of the property tax system (Hyman, 2010).
Fiscal decentralization helps in increasing the autonomy of the local governments in setting up the tax rates and expanding the tax base. Up to date technology will help in facilitating the process of property tax administration in the developing country.
This is because computerized technologies can play an integral role in facilitating the property assessment and valuation, which will help in cutting the administrative costs associated with levying property tax. Effective utilization of the property tax in the developing country can in turn facilitate the provision of public services, which is vital in capital formation (Hyman, 2010).
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Recommended features of an economic system
An economic system indicates the plan of action adopted by a country for its commodities, the goods produced and the manner in which the country executes its economic plan (O’Sullivan, 2003).
From a narrow perspective, an economic system is viewed in the nature of the interactions between the features of the economic system, which comprise of the consumers, the markets and the role that the government plays in regulating the means of production.
In the case of goals of the developing country associated with increasing personal savings, capital formation and encouraging foreign investment, the first recommendation is to adopt a market economy, whereby the government plays a small role in driving the economy. Under such an economic system, the consumers and their respective purchasing decisions are the key determinants of the economy (O’Sullivan, 2003).
In addition, the right direction for the nation’s economic development is mainly determined by the underlying market assumptions. Lack of central planning is a key characteristic of this economic system, this in turn helps in encouraging foreign investment due to the liberal policies.
In addition, domestic productivity is boosted resulting to capital formation. The government has the only responsibility of ensuring the stability of the economy so that its economic activities can be carried out effectively (Bhagwati, 2002).
The second recommended feature of an economic system suitable for the developing country is the aspect of industrial development. The focus on industrial development is an effective economic strategy that the developing can exploit to divert from the extreme reliance on agricultural sector.
In addition, industrial development plays an integral role in the modernization of the agricultural economy, which in turn increases its economic contribution. Industrial development plays an integral role in ensuring capital formation and increasing the rates of employment, which encourages individual savings (O’Sullivan, 2003).
Bhagwati, J. (2002). Free Trade Today. Princeton: Princeton University Press.
Hyman, D. (2010). Public Finance: A Contemporary Application of Theory to Policy. New York: Cengage Learning.
O’Sullivan, A. (2003). Economics. Principles & Tools. New York: Mc Graw-Hill.