HouseHold Charge : a catalog of blunders

This is an expanded version of an opinion piece published in the Irish Examiner 31/March/2012. See http://www.irishexaminer.com/business/linking-services-and-property-tax-is-a-mistake-188984.html.

It would be hard to create a more perfect muddle than that around the household charge which has been a fiasco for this government and for the department of the environment in particular. It will be a godsend to the hard left, to whom any form of property tax (apart from a tax on ‘the rich’ we must guess) is anathema. It will be an albatross round the neck of Labor who will find themselves in government fining and taking to court possibly a million people, hardly the best thing to do when you want them to ever vote for you again.It has also had the unfortunate effect of forever muddying in the minds of the Irish public the separate concepts of charges for local authorities and the taxation of property. It will lead to a thief’s charter if the proposal to have council employees go round door to inform/enforce the tax is put in place as every skanger this side of the dawn will descend on the elderly and vulnerable.

It bears all the hallmarks of a botched, badly thourushed job, for that is what it is. We would have though that we had had enough experience of the messes that botched rushed policy making leaves behind with the bank guarantee to have made the system immune but it appears not. There are two elements that should have been separated but were not, the charging for local services and the taxation of property. As part of the troika agreement there is a requirement that we move to the norm of the OECD and put in place a sustainable system for taxing property. However, the most recent statement on the property tax was in the MOU of November 2011 where the government committed to bringing one in by end 2011. They didn’t. The world didn’t end, and as such they can and should delay to so long as they need to get it right.

That property in some form should attract a tax is something that almost all economists, for centuries, have agreed with. The basest reason is its immovability, but that argument in fact is more about the land than the house. There are compelling economic and social reasons to consider a land or site value tax, and these have been spelled out recently by Ronan Lyons and Constantin Gurdgiv in a series of research and policy papers. Gurdgiv has two interesting papers : one examines the issues around the macroeconomic impact of site and land value tax, the other on how such a tax can be used to finance sustainable infrastructural investment. The paper by Lyons, under the auspices of the excellent Smart Taxes Network, is perhaps the most developed analysis of such a tax and it is sobring to compare its clarity and analytical rigor with the mess that is the government proposal. The idea of a land or site value tax is in principle agreed between the Troika and the Government but appears to be running into resistance. The submission of the Network (with whom I am not associated although I know most members of same and admire them greatly even when we disagree!) on such taxes is well worth a read. The great philosopher and mathematician Condorcet and later Adam Smith formulated a number of basic principles of taxation. Smiths four principles, of which every economics student the world over is aware, are that tax should be

  • Equality: each person pays in proportion to their ability
  • Certainty: the tax is fixed and and not subject to arbitrary change over the period of its application
  • Convenience: the tax is easy (if not necessarily pleasant) to pay
  • Economy: Only that which is needed for the activities funded thereunder, no less no more.

There are a number of reformulations of this. An excellent study by some two Australian taxation experts is here. In general these reformulations consist of “sui generis” changes, to for example reflect the subject matter under discussion by a particular tax study. We can see that the proposed household charge is certainly not equal, and is not convenient. One might also argue that it is not economic if one examines in some detail the concept. Smith defines this principle of economy in four stages.

First, the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people.

The proposals here are to be administered by the local authorities. Are we to find that the purpose of the tax becomes the funding of those whose role it is to administer the tax? In other words, how efficient is the tax, given that it is now beginning to consume political capital. The 2007 election gave us a government that lost a vast amount of capital when it backed down from the anger of OAP’s in relation to what now seem trifling changes in access to medical cards. One might argue from a smithian view that a tax which costs, politically, more than it will yield is one that is not economic. The cuts to the local authority budgets last year were more than the amount to be raised by the household charge, and as such even with 100% compliance the spectres raised of closed libraries, unfilled potholes and drained swimming pools would still haunt us.

Secondly, it may obstruct the industry the people, and discourage them from applying to certain branches of business which might give maintenance and unemployment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so.

This is not an issue here thankfully. At least, not any more than the normal run of taxes.

Thirdly, by the forfeitures and other penalties which those unfortunate individuals incur who attempt unsuccessfully to evade the tax, it may frequently ruin them, and thereby put an end to the benefit which the community might have received from the employment of their capitals. An injudicious tax offers a great temptation to smuggling. But the penalties of smuggling must rise in proportion to the temptation. The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it; and it commonly enhances the punishment, too, in proportion to the very circumstance which ought certainly to alleviate it, the temptation to commit the crime.

This is the case here : the widespread resistance to the tax is in itself evidence that there is a problem. It is not so much that people do not like paying tax. It is that they do not see the fairness and justice of this particular tax at this time in this manner. A properly structured and explained tax would attract much less opprobrium. A part of this opposition is grounded on the widespread revulsion that not only are the politicians and bankers who drove the ship of state to the rocks not being punished they appear to be thriving.

Fourthly, by subjecting the people to the frequent visits and the odious examination of the tax-gatherers, it may expose them to much unnecessary trouble, vexation, and oppression;”

Do we really expect to see hundreds of thousands of people being fined? Taken to court and their salaries and pensions garnisheed, and expect them to mildly submit when no evidence is forthcoming that the architects of the crash are to suffer any loss? Does the labour party in particular not see that it is political suicide, for no gain, to do this? More problematically, in a country where there is (justified or not) fear amongst rural and elderly, the provision of a process whereby persons will call to inform/collect the tax will be, as I have stated, a thiefs charter

. In essence a properly structured land or site value tax can provide smoother revenues, allows the monetary capturing more easily of the part of the quasi-public good element of infrastructural improvements, and conforms well to the principles of good taxation. Such a tax incentivizes high quality land use, and can be adjusted to penalize wasteful use (such as hoarding or dereliction) More critically, we already have the bones of one to hand, calculated at a fine grained level, namely the Electoral Divisions and Census Enumerator areas, some 4500 of them round the country. To implement such a tax requires knowledge initially of the desired amount of tax to be raised and the surface area to be taxed, with each of the 4500 discrete areas then being allocated a charge reflecting the characteristics of the housing in its area, with the tax increasing exponentially the more valuable is the land on which it is levied.

The proposal at hand is to use the flat household charge to defray part of the lost revenue accruing to local authorities from central sources. Local authority funding in Ireland is a mess and has been since the Fianna Fail government abolished domestic rates in 1977. The point of raising tax locally is to provide local services. During the boom councils were funded from motor tax, development levies and businesses were compliant with the ever-increasing business rates. Now the levies have dried up and the increased rates are part of the burden crushing business. The most startling thing is that the household charge will not even make up the reduced central government revenue. We are poor adopters of technology for government in this country but that should not stop us trying. Every PAYE deduction, every VAT transaction, every tax head in the country is associated with a taxpayer and they have an address. There is no reason whatsoever why the appropriate percentage of tax cannot be taken from central taxes and diverted at source to the relevant local authority. In 2011 approx. €160m of central government funding went to local government. Some 14b was raised in tax under the main headings. So why can say 1.25% of all PAYE taken from me not be sent to Kildare County Council in whose area I live? We could get more refined, to ensure for example minimum levels of per capita allocation across areas or other sharing arrangements, but this would begin to link earnings and local government expenditure. As time goes on more and more refinements could be imagined, but this would be a painless and effective way to start funding local authorities.

In 1804 a still insecure Bonepart ordered the kidnapping and execution of the Bourbon duc d’Enghien, a much admired (on all sides) French royal and general. The interesting thing for this debate is that Napoleon initially dispatched his kidnappers on what seemed good evidence. The road to perdition is paved with good intentions after all and what is a better intention in the fiscal realm than a stable local taxation process? After the Duc was secured and while under arrest, the evidence was found to be false. Rather then face the embarrassment of releasing the Duc, Napoleon ordered that he be tried on different, equally dubious charges, of which he was convicted and summarily executed. The great french diplomat, Talleyrand, a man who started life as that most aristocratic of Ancien Regime dependants, an aristocratic bishop (of Autun) and who served and survived the revolutionary, consular, Bonepartist and restored Bourbon regimes, another revolution and then Louis-Phillipe, was not impressed. He declared the murder “worse than a crime, it was a blunder”. This governments handling of the charge to date has been a blunder. There is no troika/legal/constitutional bar to deferring the charge until a proper system that adheres to the canons of good taxation is worked out.

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5 thoughts on “HouseHold Charge : a catalog of blunders

  1. james

    This is good, Brian, not because it is good, but because it is obvious.
    The Chef in Irelands kitchen is drunk, mixing oil and water without an emulsifier- as if it can be done, while insisting that it can be done (drunk and stubborn).

    You’ve created a path towards proper implementation, but who can see it through – the people who constructed the blunder, or who else? Some other government with the same attributes?

    Those we elect, make us seem backward, with every forward attempt.
    Those we elected, are forcing suppositories into us, when a sweet would have done.

    Reply
  2. John

    Sinn Fein has played a major role in stirring up opposition to this €100 tax.. Yet Sinn Fein is in government in Northern Ireland and has no problem with an average annual house tax(rates) of €1,500. Gerry Adams will pay a house tax in Northern Ireland and yet stirs up opposition against a similar tax in the south which is miniscule by comparison. The amount of publicity accorded to the anti campaign from the day of its inception has been incredible and has helped fuel opposition. Yet nobody in RTE or elsewhere has challenged Sinn Fein on its duplicity.
    Thousands have been duped into believing that the money was going to bondholders. This was an important plank in the Sinn Fein/Socialist Party campaign of misinformation Not a word from Joe Higgins, Ruth Coppinger or Sinn Fein about the €15 billion budget deficit. Why have economists, politicians and the media failed to pin down the hard left on the issue?
    Quite frankly I have never seen such nonsense over a €2 per week tax.

    Reply
    1. FRANK MURPHY

      John, the so called nonsense you refer to over 2E per week does not take in to account the ability to pay which in itself makes this an unfair tax , this is the classic cart before the horse politics Irish style !! if people knew what they may ultimately pay based on fair valuations / ability to pay , taking in to account whether employed or unemployed , then they may have subscribed to this tax ! the 100E is just the entrance fee to this scheme and people are rightly correct and nervous about signing up to a declaration for the Government to take from them whatever they decide ! what right minded person would bet not knowing the odds ! its arrogant of you in the extreme to refer to this amount as nonsense and clearly shows how you and the Government are out of touch on this issue . Also we should ask why and where did the 170 M Euro disappear to that was taken from the local authority’s , for what this new tax is partly proposed to replace ?……paying unsecured bondholders comes to mind …no wonder the people are sceptical !!! enough is enough the people have spoken and they don’t subscribe to the idea that putting more funds in to central exchequer coffers for the Government to use at their whim without accountability is such a good idea anymore !! If guarantees were given that this proposed tax to be collected locally were indeed to be used locally then that would be another reason for people to believe in this tax , instead of politicians deciding what local authority should benefit along political lines etc…. need i say more !

      Reply

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