Monday, 19 July 2010

Property Tax (Capital v Income)

Nat O'Connor: The Minister for Finance has rightly pointed out that any property tax - a tax on capital - must still be paid out of income (Irish Times). However, this is not a good reason to stall proceeding with its introduction. It has been rightly pointed out that successful opposition to property tax from wealthier constituencies would mean cuts to services and/or other taxes increasing. It seems likely that the absence of a progressive property tax will mean that people on low and middle incomes will suffer more - through other tax increases and/or service cuts.

But any new property tax must be designed to be progressive. A progressive tax is one where those who can afford to pay more, do so. In that way, money is redistributed from those with more to those with less. In the case of housing, progressivity would require property tax on valuable houses to be multiples of that charged on more modest housing. This will require a system of rates and bands, similar to income tax, and some kind of professional property valuation will be essential.

The Minister is also quoted as saying "One of the problems with capital taxation at present . . . is that we’ve seen this huge reduction in the value of property so that the capacity of the capital taxes to raise money has reduced accordingly," (Irish Times) On one level this doesn't matter. In theory, yes, if property worth €3 million is now worth €2 million, then a 0.1 per cent property tax would bring in less money. But there's nothing to stop the Government raising the amount of tax to 0.15 per cent, in order to restore the amount of money coming in. Should property prices go up, the Government has the option in the annual budget of changing the rates and bands for property tax. On another level, there is certainly a maximum amount of tax that can be taken from capital, which falls as the total value of capital falls. But Ireland is starting from a low base in this regard, so there remains considerable scope to expand taxes on various forms of capital.

The more pressing problem for the tax would be where people are 'asset rich-cash poor'. In other words, someone might have a valuable house but a relatively low income. It is certainly not desirable for the state to be forcing people to sell up and downsize because they cannot pay their property tax. No one is going to tolerate that. Moreover, it would lead to a homogenisation of social classes within different areas; so that only high earners could afford to live in expensive areas, driving out those who inherited property, who retired on a low income pension, etc. Repeated evidence from housing studies shows that tenure mix and social mix is the best way to create vibrant residential areas.

On the positive side, the introduction of property tax could be a long-term stabiliser for tax revenue, which is least damaging to economic growth. In particular, it could stablise local government revenue. That is, it could provide a steady flow of cash coming in every year, without the 'boom and bust' that affected stamp duty and VAT in particular. From that point of view, one solution to the 'asset rich-cash poor' dilemma is for the state to simply take a longer-term view, rather than seek all tax annually. Let people build up a tax bill that will take effect when they eventually sell their property or pass it on as inheritance. Provide a waiver on paying much interest on the tax bill where people genuinely cannot pay, but charge interest in other circumstances to encourage most people to pay annually. But don't pursue arrears aggressively.

This would also solve the dilemma of what to do if a significant number of people refuse to pay. Once a legally robust mechanism is put in place for the state to intercede in any sale or inheritance of property, people will see that non-payment is just putting off the inevitable.

Of course, the value of tax owed will decrease annually, which is why those entitled to a waiver should be charged a small amount of interest, depending on inflation, whereas a mildly punative level of interest could be levied on those not entitled to a waiver.

Such a longer-term approach to collection would also allow the tax to extend to pensioners and others living in valuable housing, without burdening their income. A maximum effective rate of taxation could also be put in place for people entitled to a waiver so that the entire value of a house is not taken in tax. For example, this would facilitate older people 'downsizing' and purchasing a small home.

One major concern, from an equality perspective, is that the debate about 'property tax' is still narrowly focused as a tax on people's homes rather than a discussion about whether we comprehensively tax all forms of property (this argument is expanded here). This disproportionately puts the emphasis on people on middle incomes, rather than wealthier people who may have financial assets and other forms of property. Where other property is already taxed, we should look at making the effective level of tax paid more uniform across different forms of capital, and also seek the principle of progressivity to be extended so that those with larger amounts of assets pay increasingly higher rates of tax.

If a tax system as a whole (inclusive of tax breaks, etc) does not adequately redistribute wealth, then a relatively small number of people and companies in every generation will acquire more and more assets. This is not sustainable. If established in a progressive way, property tax could be a useful way of ensuring that a steady redistribution of wealth occurs in every generation.


Antoin O Lachtnain said...

Where is the evidence that there is a vast pool of non- low and middle earners' income sitting somewhere ready and waiting to be taxed?

I am really puzzled by the contradiction that keeps coming up.

On the one hand I keep reading that it is necessary to put money into the economy because fiscal stimulus is needed.

On the other hand I hear that there is a need to take money out of the economy because the government doesn't have enough tax.

At the same time, the ability of the government to manage money and projects is seriously questioned.

Nat O`Connor said...


There is a gaping hole in the state's finances that will need, in part, to be filled by increased tax revenue. I think it is better to plan sustainable tax reform and a long-term fiscal policy.

In terms of fiscal policy, I broadly agree with Prof Fitz Gerald in the ESRI who is calling for a permanent upward shift in the amount of taxation taken. He repeated this point of view in the MacGill Summer School (Irish Independent) where he said that "substantial increases" in taxation were required, but they should be "job friendly".

In contrast, although tax revenue is currently spiking as a proportion of GDP due to the collapse in the economy, the Government's medium-term strategy appears to be to return to a 'low tax, low spend' economic model. I don't think most people want this. For example in health, people may pay lower taxes, but they pay a premium in health insurance, charges, etc. A national health system, funded by everyone, could reduce health costs for many people.

Property tax is less harmful to the economy than consumption taxes like VAT or income tax. It is also more stable throughout the economic cycle, and hence a brake on boom-bust effects on state revenue. On the assumption that tax increases are necessary, it is more 'job friendly' than alternatives.

As for putting money into the economy, it is for exactly the same reason - consolidating the state's tax revenue in the short-term. If the state spends money in a targetted way, it can boost GDP. National debt (as a proportion of GDP) will fall and economic activity and employment will increase, which in turn increases tax revenue. Targetted stimulus in a downturn can more than pay for itself through the multiplier effects it will generate.

The key thing is for the state to stop spending money where it is inefficient and to avoid taxation that depresses the economy.

At the same time, the ability of the government to manage money and projects is seriously questioned.

There is no doubt that any move to a new fiscal policy of higher taxes, must move in tandem with major reform of public services, so that people can have confidence in what their money is buying them.

Antoin O Lachtnain said...

You are talking about a wealth redistribution measure. That is fair enough as a position and I can see where you are coming from.

Tasc seems to have a lot to say about distributing wealth, a bit to say about collecting wealth, but very little to say about actually generating it. Surely generating wealth should be the focus?

If we are not careful here, we will soon end up with a 'high tax, low spend', 'tax and pay interest' economy.

Nat O`Connor said...

"Surely generating wealth should be the focus?"

That's the point of the targetted stimulus. In a slump, government spending is not competing with the private sector and can benefit from lower prices. As a result, capital investment by government more than pays for itself through the multiplier effect in the economy.

That's one area of wealth generation we have been proposing for some time. Most other economies worldwide engaged in some stimulus and, as a result, had much shorter recessions, less unemployment and now have stronger GNP growth as well as GDP growth.

A government can always afford targetted stimulus in a slump because it gets the money back through increased tax receipts from a larger economy.

As I wrote in another post, one target for such a stimulus would be to add value to housing that is poorly served by amenities. That will be job-intensive and also counteract the collapse in the housing market by adding value in a sustainable (non-bubble) way.

But all that said, the government does have to reduce stimulus once the economy picks up and support private enterprise. In this respect, others on this blog have suggested measures like tackling Ireland's high energy prices, removing tax incentives that distort markets, and offering short-term subsidies where jobs are retained.

Long-term, we need to reform and invest in education, including pre-school education, as that is the single most powerful intervention a government can make to boost the economy over the lifetime of those who get the benefits of it.