PROPERTY TAXES

A hand grenade exploded in Danish politics this week, namely the report of the commission of experts into property taxes.

Property taxes are, in principle, good things. There are fewer houses than people; they don't run away or try to hide themselves in offshore havens; they are easy to collect (you give the bill to the person living there); they put a natural damper on asset bubbles; and they are broadly progressive (richer people tend, on average, to live in bigger and more expensive houses). Done right, they generate lots of income (some kr.40 billion a year in Denmark).

However, in rich societies, where most people own their own house, they also represent traps for the unwary. The biggest of these is failing to keep up with valuations in the market. Mrs. Thatcher's government in the 1980's made that mistake, tried to rectify it by replacing the rates with the hated poll tax, and ended up ejecting its leader.

In Denmark, there are two property taxes, one administered nationally on the value of the house and one administered by the local authority on the value of just the land, without the building (the justification being that the local authority is responsible for sewerage and other local services to that land). The first problem came at the beginning of the noughties when the former right of centre government under Anders Fogh Rasmussen froze the national tax. With the economy booming and house prices rising sharply, this made all houseowners happy at first (it also gave a huge hidden windfall to already rich people, which was rather un-Danish). Local authorities, on the other hand, whose spending budgets were being squeezed by the central government, continued to base their tax on the value of - ever increasing - land values, and even to increase the % on that value. The result was that similar properties, particularly on the borders between local authorities, ended up being valued markedly differently for tax purposes.

That system was made worse (as had been done 20 years earlier in the U.K.) by taking responsibility for valuations away from independent valuers and handing it in 2003 to the tax authorities, themselves hard pressed by budget cuts, personnel reductions and other "efficiency" measures. The result was a system in which less than two in three valuations were correct (i.e. more than one in three were wrong). Not surprisingly, the number of complaints went through the roof.

Against that background, it was entirely reasonable to kick the problem into the long grass, and ask experts to come up with a better system. On one level, they have done that; the chances of getting a correct valuation will rise from an estimated 62.9% to 67.5% under their proposals. However, that still leaves householders with the knowledge that more than 30% of all valuations will be wrong. You don't have to be a politician to work out that 30% is way, way too high.

The experts have tried in vain to explain that no system exists that can value all properties correctly. But that is a message that the politicians do not want to hear. Those of the left have a problem in that they are currently in Government and so have responsibility for fixing things; those of the right have a problem in that their ill-advised tax freeze helped create the mess in the first place. Against that background, it will be interesting to see how they address a problem that affects roughly two thirds of the population, all of whom can vote.

Walter Blotscher