Sunday, March 12, 2006

Island Parable

"Chinatown"

Once upon a time there was a distant, beautiful, and exotic island owned by a poor and lonely King named "Red." In the beginning, no one but King Red himself lived on the island. This made it a very lonely place. It also caused the King to be very poor.

Over time, however, many people came to visit King Red's island. Some liked it so much they decided to stay the year around. Others liked it too but they lived on the island only some of the time, like weekends when their homes were within a day's drive or in the winter months when the Northland was cold and snowy.

With all of the people moving to King Red's island and others being born there, businesses were sure to follow -- and they did. Shopkeepers and chefs, innkeepers and barkeeps all started commercial enterprises on the King's island. Soon, commerce was brisk and business was booming. All of the King's island subjects were happy.

The King was happy, too, because now he wasn't lonely. And, he was growing rich from all the taxes which the shopkeepers, chefs, innkeepers, and barkeeps charged their customers and passed along to King Red's treasury.

Soon, however, problems arose and the people grew restive.

Land Tenure

The first problem was confusion over who really owned the land. Since the deed to the island was owned by the King himself, the people began to grow nervous about how long King Red would allow them to live there. Although the King was happy to be getting rich from all the subjects living and working on his island, he adamantly refused to allow anyone to own even a small part of it.

"We own the deed to this island," King Red said, using the royal 'we'. "All of it, forever. Including the homes and business you have built on our land at your own expense."

However, seeing that his subjects were concerned that some day he might change his mind and kick them all out, the King agreed to sell the island people limited-term leases.

"We are the Government," the King said, again employing the royal 'we', "We own the deed to all of this island, but we will let you rent small parcels for a limited time."

To subjects who had built homes in the part of the island called "Chinatown" the King sold them 70-year leases with a right to renew for a like period. To subjects who lived and worked in that part of the island known as "Beachland" the King sold 99-year leases with a right to renew for a like period.

Now the people are happy, the King thought to himself, and they will continue to build and remodel and improve the buildings and businesses that sit on my land, so I can become even richer.

Property Taxation

Soon, though, a second problem arose. Grown greedy from seeing so many homes and businesses being built upon his island, King Red decided he could get even richer by imposing a new tax on island subjects. He called it an "ad valorem tax."

As one scholar wrote later:
"Since the supply of land is fixed, the landowner (the state government in the case of China island King) would bear the ultimate tax burden even if land users paid the property tax directly to the government. This is because the new tax would dampen the demand for land use rights and in turn reduce the fees that local governments could receive from leasing public land.

Because the Chinese government King Red is both the landowner and property tax collector, lessees who leased land in the past and paid the entire leasehold value without anticipating the additional property tax burden would wonder why they should pay more land tax to the government. Thus it is essential to have a rationale for taxing leasehold land, so as to convince lessees to comply with their property tax obligation.
Other problems with taxing island land soon surfaced. As the same scholar wrote:
One technical issue [was] valuation of leasehold rights for tax purposes. Since the new property tax will be value-based, assessors will face the challenges of estimating the leasehold value of land independently, based on market data that normally reflect a combined value of land and all improvements. Most property valuation methods presume that land is freehold, and that developed real estate markets are present. Neither of these assumptions can be applied to China Chinatown or Beachland. Although there are practices that separate land and building values for tax purposes, the divisions are generally based on crude assumptions. How can assessors modify the existing (or invent new) valuation techniques to accommodate these special Chinese Chinatown and Beachland conditions?

More important, leasehold value is highly sensitive to the lease term and conditions, both of which can vary significantly from one case to another. At this moment, time-tested mass appraisal techniques for assessing large numbers of leasehold sites do not exist. Do these issues imply that property assessment for tax purposes under the Chinese island leasehold system requires a case-by-case approach? If so, do local governments have the capability to carry out such detailed property appraisals for the collection of the new property tax? The Chinese King's government must find ways to deal with these practical matters if it decides to tax leasehold rights as private property.
So, the King established a detailed property appraisal system and thought to himself, using the royal 'we', "Now my subjects will continue to build and remodel and improve the buildings and businesses on our land so we can become even richer."

Tax Reform

A new problem appeared. The taxes became too heavy... there were so many different kinds of taxes and assessments that it bewildered the people and impeded efficient and uniform collection ... off-island enterprises like pizza delivery, building contractors, and professional services which were conducted on the island by enterprises headquartered elsewhere were given preferential tax treatment resulting in a structure "unfair to equal competiton" ... and the tax system "did not reflect the allied cost of ecological degradation caused by the utilization of resources."

Although reforms were studied endlessly and often proposed, consensus about what to do eroded as a sharp debate over ideology erupted. The King wanted to maximize taxes while retaining absolute control. The island people thought this was a communistic idea which time had been shown impractical and would ruin the economy.

"What do my subjects know, anyway?" the King thought to himself. Using the royal 'we' he comforted himself by adding, "Have we not always been conservative and against raising taxes and anti-communistic in our thinking?" And he answered himself by saying, "Yes, we have."
Ideology

Island people increasingly grumbled that King Red was a hypocrite. They said he criticized communist ideas even as he imposed the same ideas on all his island subjects. This led them to wonder why they had no right to pick their own King or write the day-to-day rules for the island they lived and worked on.

A sharp debate over ideologies erupted.

"Is this island a democracy or is it a communist dictatorship?" the island people demanded to know. "We want the right to decide our own local government. If we're paying taxes on land we don't own, why should King Red be the only one to decide how the island is governed? Who elected him, anyway?"

And so the island people petitioned the King to allow the island people to elect their own government.

"No way," King Red replied. He tore up their petition stomped on the tiny shreds. Then, using the royal 'we' he added, "We own the island. We decide who will be king -- and that King is us."

Burdened by higher and higher taxes and deprived of democratic self-governance, the island people and the businesses began to move away. First by two's and three's and later by the dozens and the hundreds.

Eventually, the island kingdom was emptied of everyone except King Red himself. With no one left to tax, the King soon was reduced to his former condition: lonely and poor.

And there our fable ends except for the --

Moral: China is as stunningly beautiful as Pensacola Beach, it's grappling with many of the same difficult governmental problems -- and its people are governed just as democratically as those who live on the beach.

1 comment:

Kenneth said...

So what are you saying? Beach govt is like a communist?