Taxes, Land and Wealth

This is an expanded version of a column published in the Irish Examiner 25 August 2012. One of the defining characteristics of Irish governance is the inability to make decision based on evidence. All to often we substitute evidence-based policy, where a careful weighing of the consequences and analyses of different positions leads to a debate on alternatives and eventually to a rational decision, for political based policy. While democracy is, as Churchill stated, the worst form of government apart from all the others, it would be nice if once and a while political expedience could be put aside in favour of rational decision making. The emergent discord on land is one area where, as so often and to so much detriment, we see again that rational debate is being cast aside in favour of political point scoring.

Two examples in recent weeks show how strong the hold of the land remains, 120 years after the land war. We seem to be hurtling backwards in relation to household tax and to be ignoring evidence and history in relation to student grants. Both of these reflect an ongoing conflict between evidence and politics. The evidence of the past is that when these come into conflict politics wins. As we know, this time is never different.So it seems that there might not now be a site value tax, due, we are told (by Deglan De Breadun in the Irish Times and Fionnan Sheehan in the Irish Independent) to “anomalies” in the tax.

These anomalies seem to boil down to the fact that if I have a tumbledown shack and you a spiffy neat dwelling , next to each other, then we will pay the same tax. De Breadun states this explicitly ” Property tax is the new rates and, if it is not to incite serious public ill-feeling, must be seen to be fair. Although it’s still early days, the notion of a higher rate for owners of larger homes is being floated. That’s the way it is already with income tax: the more you earn, the higher the percentage deduction.How you assess the value of a house in the current uncertain market is another issue. Using the site as a basis for valuation doesn’t always make sense: you can have a mansion or a shack at a similar location” while Sheehan states ” The Government is moving away from a site-value tax because it would throw up anomalies. For example, two houses — one rundown and one modern — on the same-sized site would have the same property tax bill.In urban areas, houses on the same road tend to be more uniform — with the site and the house being, more or less, the same size and value.But in rural areas there are often houses of different sizes and values built side-by-side.”

Far from being an anomaly, defined as a deviation from the normal rule, this is in fact one of the points of such a tax. There are many issues which we would like to see in a tax, but theoretical arguments aside the reality is that tax can be and is used by governments to incentivize or discourage particular activity. Thus we had property based tax breaks in the boom period to encourage living over the shop, building in particular areas and so on, and we have carbon taxes that are at least in principle to act as a dampener on the use of particular fuels. The beauty of a site as opposed to what-is-on-the-site tax is that it will, all things being equal, encourage people to make maximum use of the site. In and of itself it will not be a silver bullet but it will encourage. If you have a site and have poor quality use made of it then the incentive is to make better use – build a house, improve the one that is on it, or sell the site to someone that is willing to make better use (as they see fit) of the site.

Instead, apparently the intention is to instead use a self reported market value of the property, to rely on the good citizenship of a society where over 40% are still avoiding paying a self reported tax (the household charge). This in an environment where a) there is as yet no public database of sales values, b) where the only data available are disjointed asking prices across various agencies, c) where the market for residential property can hardly be noted as being whatever might pass as “normal” and d) where there is no clarity on what the situation will be if one disagrees with the revenue. And the sad thing is that we have had exactly this tax before from 1983 to 1997. It was a massive failure, widely evaded and avoided and proven to be unworkable.

Leaving aside the advantages of site value taxes, repeatedly and lucidly explained by Ronan Lyons and Constantin Gurdgiev, for example the fact property value based taxes are prone to procyclicality (stamp duty anyone? ) while site value taxes are not, and the fact that the site tax captures to the state some value from increased infrastructure, the reality is that the political pressure is to avoid the perception of penalizing urban dwellers whose sites are inherently more valuable than those of rural dwellers.

The ultimate logic of the site tax would be that it would extend to all forms of land, residential, commercial and agricultural. And in dealing with land tax it is the principle that is important. At present there is a rift in cabinet on the issue of the inclusion of the capital value of farmland in the determination of third level student grants. For decades it has been clear that farmers and self employed persons can have significant levels of wealth but low (declared) income, and evidentially gain disproportional access to such grants. But again, in the face of evidence we have done nothing. If we are to move to the logic of land taxes we will begin to further incentivize farming to move activities to higher value uses of existing land. The underlying idea is that land assets convey an “imputed rent” and one should be incentivized to make best and most productive use of them. But there is a logical end point that leads to wealth tax. If a farmer has land valued at €500,000 and is to be assessed on this then we must for equity also assess the self employed person with a shop or business worth €500,000 the same. and what of people with non-capital asset wealth? It’s a good job logic is not a strong point in Irish political discourse…. A wealth tax will not bring in tens of billions, the dreams of the ULA notwithstanding. But it would bring in some, and would crucially show that while the rich are different (richer for one) they are not in fact running the show. Coupled with a proposal I have made before to link citizenship with tax status, and we could see the bitter pill of increased taxation being sugared by a recognition that we are in fact all in it together.

9 thoughts on “Taxes, Land and Wealth

  1. Bryan Kavanagh

    Well said, Brian! Unfortunately, too few people know or understand the incredible benefits of a tax upon land values, so there is much humbug spoken about it. If we’d had one, it would undoubtedly have kept the lid on land values (viz, capitalised land rents) and obviated this financial collapse around the world.

    But it’s not too late, because reversing the process that brought this on, by untaxing labour and capital and capturing publicly-generated land rent for the public–instead of letting the rentier class steal it–offers a quick way out of this incredible morass.


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  3. Fergus Monaghan

    What about a wealth tax on public service pensions? In many cases they are worth millions. Far more valuable than the average land holding.

  4. Bryan Kavanagh

    Forget “the average land holding”, Fergus, it’s the combined total value of the land of Ireland that becomes the tax base, and whereas Joe Sixpack’s part of that would be negligible, the sum total of the 0.1%’s holdings would be a quite incredible percentage of that total. The Land Values Research Group in Melbourne has produced a graph of Australia’s total land values since 1911 which I’d expect would closely parallel yours in Ireland if you had the data. I’ll bet your public servants’ pensions didn’t achieve a bubble like this!

  5. Colin McGovern (@cmcgovern)

    The only thing that occurs to me here as a criticism is that when people are motivated by money to change their environment, the decisions they make are often short term (think of the ugly multi-storey car-park replacing a set of old buildings that define the character of a town). Tax incentives around the country encouraged the endless building of holiday homes that nobody needs any more but which are often blights on the landscape. I would hate to see a tax like this have such an unintended consequence.

    I might have missed it but while I realise you mentioned that Ronan Lyons and Constantin Gurdgiev have made the case for a site value tax, I don’t know that I’ve ever actually seen *evidence* that it has the effect you think it does. It seems reasonable to me to suppose it’s somewhat utopian that the country would be changed for the better as a result – can you link to examples where it has worked?

    1. Bryan Kavanagh

      Australia, New Zealand, South Africa, Singapore, Hong Kong – and many others, have land taxes. The US used to have them, but switched to a property tax which includes buildings, therefore penalising construction. [Studies conducted by the Land Values Research Group in the state of Victoria showed that on the many occasions a municipality has switched from a property tax which included building values to one based on land values only the rate of construction and renovation has increased in comparison to surrounding cities which did not make the change – even during recessionary periods.

  6. judy Osborne

    I trust you have heard about the debate being hosted by the Smart Taxes network in Trinity College Dublin on 24th September. A panel including Karl Deeter, Constantin Gurdgiev and Ronan Lyons who support Site Value Tax will respond to hard questions from the audience in the Synge Theatre at 7.30pm. smart Taxes have also published a book: The Fair Tax. available in many good bookshops or from Emer O’Siochru. who edited the work.


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