Tuesday, 8 September 2009

Read the fine print

Michael Taft: There will be any number of posts and articles on different aspects of the Commission on Taxation Report. Here I’d like to address the issue of progressivity and the annual property tax.

First, the Commission’s proposed Annual Property Tax (APT) is not a tax as such. It only attaches itself to house property, not to property and wealth in general. For low and average income earners, a house constitutes their main or only major asset. For those on high incomes, their house constitutes a smaller proportion of their total assets. This limitation undermines the progressivity of a property tax from the outset.

Second, over 55 percent of APT revenue would, according to the Commission data, come from houses with a valuation of less than €300,000. This is where the broad range of low and average income earners live. This is not an ‘extending of the tax base’ – it is a layering of one more tax on groups already reeling from the increased income and health levies.

Third, using Commission, Revenue Commissioners’ and the EU Survey of Income and Living Conditions data, we can construct the average household’s disposable income (approximately €52,000 updated for 2008) living in an average value house (the mid-point of Band B and Band C). The APT would take between 1.2 percent and 2.2 percent of disposable income.

For income groups above €200,000 per year living in a house valued at €2,000,000 and €3,000,000, the APT tax take would be less – 1.4 percent to 2.1 percent.

Of course, these are back-of-the-envelope calculations and can’t incorporate regional differences and other income differences – but it shows that that APT would struggle to be progressive. And another thing must be borne in mind – while these calculations are done on the basis of total disposable income, if one were to calculate real-life disposable income (after housing costs, food, utilities, transport to work, child-related costs) – clearly APT would affect low and average income earners more.

Fourth, the Commission may be a bit optimistic about the tax take an APT would yield. They estimated between 10 percent and 25 percent of households of different bands would obtain a waiver from the tax by virtue of being on the Live Register. However, there are other categories that would probably get a waiver as well – pensioners including widows’ pensions, those on disability and invalidity benefit/pension and Carers’ benefit/ allowances. If these largely low-income groups were also granted a waiver, that would double the amount of the tax base excluded under the proposed APT.

That would mean that the yield from the tax would be between €600 million and €750 million. And one more twist – the ESRI’s simulation shows that the net yield from a house property tax would be 81 percent of the estimated gross yield. Now subtract the yield from stamp duties (which the Commission wants abolished upon introduction of the APT) and administration and enforcement costs and there is the potential that the APT could bring in less than €400 million.

So: a property tax that attaches itself to only one property asset, with low and average income earners paying the majority of the tax and potentially a higher percentage of their income than those on higher incomes; setting up a new administration; risking a further reduction in domestic demand with all the consequences that that entails – all for the sake of relatively small change in fiscal terms.

The one question that comes to mind is: who would bother?


Proposition Joe said...


"The APT would take between 1.2 percent and 2.2 percent of disposable income ... the APT tax take would be less – 1.4 percent to 2.1 percent."

Is there a typo in the above statement?

As far as I can see, the range 1.4-2.1% is not in any significant sense lower than the range 1.2-2.2%

In fact the midpoint of the 1.4-2.1% range is slightly higher (1.75% as opposed to 1.7%), but the difference is marginal.

Michael Taft said...

My mistake, Proposition Joe - I meant to say 'potentially less'. I accept we are talking about fractions here either way - but all that says is that the APT is not grounded in a progressive formulation. The Government could of course do that - but as it is, it looks like the Governent doesn't want to go near this.