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Property tax: the economic booster Trinidad and Tobago needs

 

 



By Kiran Mathur Mohammed / TT Newsday

PORT SPAIN
Petroleumworld 09 24 2021

The government’s property tax could be the booster shot this economy needs.

I understand that sounds absurd. No one likes taxes. When you’re living in a country with widespread waste and graft, an instinctive willingness to raise the pitchforks against the taxman is even more understandable.

After all, surely higher taxes should discourage economic activity, not the other way around? And most times they do.

But this property tax is different.

The narrative so far, even from its supporters, is that the property tax is a necessary evil in order to buttress public finances during a downturn and pay for local services.

For its opponents, a tax is an affront, given the economic ravages of covid19.

What both sides are missing is that this could be a positive economic boost.

Context is necessary. A whole generation of investors has experienced 20 years of consistently rising property rises, artificially buoyed by oil and gas money. When growth tanked, along with the 2015 energy price crash, property prices held stable.

A large part of this is because there is very little cost to sitting on idle property. It is seen as an inflation hedge that is unlikely to decline very much in value.

The result – a significant over-investment in property. But that over-investment has not resulted in lower prices – because most owners just sit on their property, rather than sell or lower rents. The market therefore remains stagnant, and hundreds of millions if not billions are trapped in unproductive uses.

Just before 2015, a horde of businesspeople invested in gated-property developments in the $3-$4 million range. Many of these continue to sit idle – out of reach for young people. Most owners don’t even care if they don’t collect rent.

This has contributed to stagnation and decline in a developing economy that is in desperate need of productive, foreign-exchange-earning assets. Raising capital for a new business or an export-producing idea is that much harder when you’re competing against a property as an asset.

The property tax can change this. By imposing a cost on idle property owners will be incentivised to hustle either to sell or rent their property. In the first place, this will largely result in lower rents and prices for young people.

Crucially though, more people will start to look for alternative investments, such as private equity or local stocks or bonds. With mortgage-backed lending slightly less attractive, banks will equally be nudged towards lending to non-property investments, helping to unlock some of the $8 billion they had in excess cash reserves as of June 2021. The result could be an increase in economic activity.

By jolting investors and banks out of their risk-averse stupor, it can move the frontier of what people may consider investing in. Suddenly your niece’s environmentally-friendly packaging company or your nephew’s friend’s tech start-up looks more interesting.

Our mutual funds, brokerages, publicly traded companies, and others should take this as a new opportunity to roll out new investment options, and to deploy capital in more interesting forms of private equity.

Businesses need to get ready to be investible. Risk aversion isn’t entirely to blame. Deal-flow is just as much of a problem. Too many entrepreneurs still fail to demonstrate the potential of well-defined addressable markets, or even to present decent projections.

It is not just start-ups. Managers and owners should dust off their capital expansion plans. We should have thousands of investor-friendly businesses with pitch decks at the ready, preparing to scale.

Our economic system, from our overvalued currency to our antiquated labour laws to our forests of red tape, is designed to keep us from taking risks. Hemingway wrote that one goes bankrupt: “gradually, and then suddenly”. Risk aversion is the luxury of the financially secure – which TT is not.

Too often we attack our political system for rewarding populism. This tax is hardly that. It is in fact almost universally unpopular – which is why it has been treated as a hot potato, tossed from one party to the other.

But tax like this is good news for our political system. When more people are directly paying taxes, it will make us even less forgiving of poor execution, infrastructure, or governance. This is a policy that will strengthen our longer-term institutions. Young people should celebrate that.

We need to start taking more measured, calculated business risks that play to our strengths in strong export industries. The property tax can be the nudge we need to get moving.



- Kiran Mathur Mohammed is an economist and co-founder of medl, an IDB Lab and Microsoft-backed social impact health tech company. Send feedback to kmmpub@gmail.com. 


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