Can we have a win-win property tax ?

this is an extended and linked version of a column published in the irish examiner.
There are many economic reasons to tax property, including household land or capital value. There is also the fact that taxing things that cant easily move is easier than those that do, and despite the recent collapse in the economy, household net worth in Ireland is still large, north of €500b, the bulk of which is made up of the value of homes. One taxes where the money is. The government, having made economic political and tactical errors a plenty in the introduction of the household charge, now seem determined to continue to do so with the “proper” property tax. We are told that this is going to be a tax on the market value of ones home, self assessed and returned (although with an option to deduct from PAYE) and that it will come into force in 2013 (although perhaps not until the middle of 2013 and thus requiring a full year tax to be paid over a half year). This makes little economic sense, and seems to be as a result of the government baulking at the rural lobby who felt that a land or site tax would be unfair to rural dwellers. Of course a valuation tax will fall disproportionally on urban dwellers, whose homes are generally more valuable than those of similar type located remotely. With nearly a million more people living in aggregate urban areas than rural as of the last census, this doesn’t seem politically sensible either.

That this tax is not a site and land tax is regrettable, as from an economic perspective this form of property tax is to be preferred. As the commission on taxation stated “We consider that there is a sound economic rationale for considering the introduction of a land or site value tax”, contingent on some practical problems being identified. The main element of these seems to be the ability to value the land-only element of a property. Recent work by Ronan Lyons and Smart Taxes has done that, at a micro level and as yet (6 months later) their methodology is unchallenged. Combined with the imminent (if partial) registry of house price sales, the main technical challenges to a land/site tax have been overcome. And yet, again we see that impartial, expert advice in the economic area is ignored, and instead of evidence based policy we have adhocratic iterative politicized fumbling.

Economically the OECD have suggested in 2008 the least damaging tax (in terms of adverse effects on future growth )is one on immovable property while at the top end of the scale personal income tax and corporation taxes are most impactful. Given this, the proposal to levy the tax via the PAYE system must be seen as a poor choice of collection mechanism. Regardless of the actual basis of tax, deduction from salary impacts as a tax on marginal labor and thus one of the main benefits of the tax will be lost

A further issue that has not been much discussed is the liquidity effect. Although as noted household wealth is large there is an increasing number of persons who are deficient in their mortgages, with the latest central bank figures showing a whopping 128,000 mortgages in arrears, representing nearly 17% of all mortgages outstanding by number and 16% by value. As these losses are washed through the banking system the state will ultimately be required to take this hit, no bondholder having been left unsaved. People who are 180 days behind on the mortgage are most unlikely to pay any form of house tax, no matter how sensible from an economic perspective this may be. With the revenue in charge of the collection this will rapidly result in either revenue seizure of assets (crystallizing the losses for the bank/state) or attachment orders (destroying further credit prospects). Combined with the indications from the Irish League of Credit Unions on the strains on household income and we see a crunch point appearing on the horizon.

And yet there remains a compelling case for taxation of peoperty and a compelling need for cash. One way that would do both, if the state want to tax the value of the house and do not want to exacerbate the financial strains on households, would be to remove the exemption of the personal home from capital gains. This would also, at a stroke, acknowledge that many people who purchased in the boom times and paid high stamp duty now feel it iniquitous to be asked to pay tax on homes that are in negative equity. The bubble prices being washed through any tax on disposal or transfer would automatically disregard that period. A 2010 analysis of this suggested that the annual take from such a tax would be of the order of €2.4b. Even allowing that this was based on 2006 data the removal of this exemption, with tax accruing to be paid only on sale (when funds are by definition available) or transfer (when funds can be obtained by a lien against or sale of the property) should yield much more than the planned 500m from the property tax. It is value based, something the government want, and it is unavoidable. Surely it is worth a debate?

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2 thoughts on “Can we have a win-win property tax ?

  1. Pingback: Kite-flying season in full swing ahead of Budget 2013 « NAMA Wine Lake

  2. Shari

    Hi Ya
    Your write-up on Can we have a win-win property tax ? | Brian M.

    Lucey is helpful & well thought out.
    I will be back in order to view your blog posts

    Reply

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