Michael Taft: Taxing Wealth: A Common Sense Tax Proposal

at

From top: Minister for Finance and Public Expenditure and Reform Paschal Donohoe TD addressing the Dail about  Budget 2018 last year on TVs in Arnotts; Michael Taft

We need to broaden our tax base, keep taxes on the productive economy as low as possible and shift taxation on to unproductive capital, unearned income and environmentally-degrading activities.

That’s why Dr. Tom McDonnell’s proposed net wealth tax (A Household Net Wealth Tax in the Republic of Ireland: Some Considerations) is so welcome. It ticks all these boxes.

During the recession and austerity years, the wealth tax featured as a proposal. Since then, it has disappeared from the public debate.  Now is the time to put it back on the agenda.

There are a couple of starting points to this discussion:

* A wealth tax is merely an extension of the property tax to all property – both real and financial property. The exemption of financial property from the current property tax is a significant subsidy to high-income groups.

  • There isn’t a pot-of-gold in a wealth tax. It can raise significant sums (see below) but it is only one piece of a broad tax mosaic.

What kind of wealth is held in Ireland? The ESRI report – Scenarios and Distributional Implications of a Household Wealth Tax in Ireland – reproduces data from the CSO:

Nearly 60 percent of all wealth is held in land, buildings or other real assets, excluding farms. Financial assets are in blue and make up 12 of the total. In total, there was over €480 billion in gross assets in 2013. A net wealth tax, however, would tax wealth after debts are deducted. Debts made up 25 percent of gross wealth.

What would a net wealth tax look like?

Tom proposes a high threshold, a minimum of exemptions and reliefs and a low, single rate tax. An example of this would be a threshold of €1 million net assets (only the value of assets above this amount would be taxed); no exemptions except for pension rights; and a net wealth tax rate of 0.5 percent.

A rate of 0.5 percent may seem low but a government would have to balance the desire to increase revenue with the danger of capital flight / tax avoidance (though capital flight is less of a danger than in the past given the cooperation of taxing authorities in the EU and beyond). 0.5 percent is not high enough to frighten the tax-avoidance horses.

How much would such a tax raise?

It depends on the design. The ESRI provides nine scenarios based on different thresholds, exemptions and rates. I don’t intend to go through all of these (they are on page 24 of the ESRI report, link provided above). There are two scenarios that are close to the above design:

* First, a threshold of €1 million (double if married) with additional relief for children and a tax rate of 1 percent with few exemptions. This would have generated €248 million in 2013 and affected just 1.5% of households.

* Second, a threshold of €500,000 (double if married) with additional relief for children. With few exemptions and a tax rate of 1 percent, this would have generated €622 million in 2013 and affected 6% of households. In both cases

In both scenarios, a 0.5 percent tax rate would halve the projected revenue.

We would need to introduce a mechanism to protect cash-poor, asset-rich households. This is usually done by ensuring that the wealth tax does not exceed x amount of income. This can either be exempted or postponed until such time as payment can be made out of the sale or disposition of the asset (e.g. inheritance).

In short, we are looking at somewhere between €125 and €300 million in revenue for a net wealth tax of 0.5 percent.

However, it should be noted that this is based on 2013 data. Since then the Central Bank has estimated that net household wealth has increased by a massive two-thirds. So revenue would be higher today.

A net wealth tax is not the answer to all our problems. But it can make a small contribution to equality. The top 10 percent income group takes 26 percent of all income, including social transfers. However, the top 10 percent owns over 50 percent of all wealth. Wealth is far more unevenly distributed than income.

And there is one further advantage. A net wealth tax can create a new audit trail for the Revenue Commissioners who can use this to compare other tax receipts from high-net individuals.

This should not be seen as a stand-alone tax (though it is an extension of the current property tax). It should be part of a drive to increase taxation on assets and unearned income: increasing inheritance and gift tax, higher taxes on unproductive capital activity (currency speculation, property transactions) – leading to the ultimate goal of treating income from capital and labour equally for tax purposes.

Budget 2019 could be that start.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.

Leah Farrell/Rollingnews

39 thoughts on “Michael Taft: Taxing Wealth: A Common Sense Tax Proposal

    1. Cian

      Are farms taxed differently for inheritance?

      If a farm has been in a family for generations and is providing a reasonable income for one family – should it be taxed so heavily that the next generation can’t keep it?

      1. andy

        Should it be taxed as heavily as everyone else?

        Hell yes. Why should a farmer (who’s getting subsidies out their ears) get special treatment.

        Good luck trying to get a government to approve it.

  1. b

    By net wealth, do you mean you would only tax the equity someone would have in their house rather than the valuation?

    1. Michael Taft

      b – yes. There might be inequities and perverse consequences if you tax someone’s debt. Therefore, you tax debt-free asset. However, I’m not necessarily wedded to that proposition if there are good arguments to tax gross wealth (i.e. the valuation).

      1. keLLMA

        I think taxing gross wealth would be a much harder sell. As it is you are taxing an “unstable” asset. Unless it is realized, the wealth is notional. If part of the intention is also to encourage people not to sit on unproductive capital and into the realm of making it productive and therefore paying capital gains tax, maybe an idea would be to start the rate even lower but increase it in line with the no of years the asset has been unproductive?

        1. b

          i think net wealth is fairer though there is the issue that as your equity is largest when you near retirement, your ability to have to cash flow for wealth taxes diminishes

        2. Rob_G

          When you see how much of wealth is tied up in property, probably the easiest thing to do would be to just raise property taxes a bit – no need to reinvent the wheel.

          1. Cian

            This, but add in one item – it should be based on the net value – i.e. you can deduct your outstanding mortgage from the market value.

  2. Jeffrey

    Taxing the 1-5% top brass – are you nuts? Not gonna happen. And if it does, they’ll all emigrate abroad!

    1. Annon

      I’ve heard this before but where’s the evidence the top tax payers would really leave, or that they haven’t already taken advantage of every available legal loophole to move their money?

  3. Col

    Question, in relation to this bit:
    “We would need to introduce a mechanism to protect cash-poor, asset-rich households. This is usually done by ensuring that the wealth tax does not exceed x amount of income”
    Does this encourage people to spend beyond their means rather than buying a modest house and saving wisely?

  4. Culchie

    If a thug were to accost you in the street and demand your wallet or purse, you wouldn’t hesitate in knowing what to call it – theft!

    If a group of thugs were to demand at least one third of your income every month and threaten dire consequences if you didn’t accept their offer of “protection”, you wouldn’t hesitate in knowing what to call it – theft!

    Yet you are robbed every day. Every month at least one third of your income is taken from you forcibly, without your consent. It is taken by the government. And yes, even if only a few realise it, that too is theft!

    For just how does government differ from a mugger? Why is the state’s “protection” racket different from that of any other gangster? Both conform to my dictionary’s definition of theft – the seizure of individuals’ property without their consent. The only difference is that the government is less
    honest than its private competitors in crime. At least a thief doesn’t claim to be committing his crime for your own good, to be performing a desirable social service in “the public interest”.

    http://www.libertarian.co.uk/lapubs/polin/polin044.pdf

    1. Cian

      seriously? you are comparing paying taxes with a thug stealing your money?

      A thief takes your money and runs off with it. You get nothing in return.

      The State takes your money and provides lots of services in return: Education, Health Services, Pensions, Security, etc….

      1. Culchie

        How many “government services” are fit for purpose?

        How much private bank debt has been unfairly transferred to the citizen?

        What do property taxes actually pay for that isn’t also covered by other taxes or private fees?

        How many pay rises can the TD’s vote for themselves?

    2. kellMA

      Ah for god’s sake… the comparison is a bit of a stretch. A mugger f’s off and spends the money on himself. We live in a society where we have roads and lights and public services and also people who are unable to support themselves (some willfully, most due to difficult circumstances they find themselves in). These have to be paid for. I am not saying there is no mismanagement there etc. but the principle is fairly clear. What else do you propose?

    3. Rob_G

      Culchie – suggest you move to the libertarian paradise that is Somalia, where there is no nanny-state forcing things like hospitals on you, or dictating the manner in which you drink your G&T.

  5. Termagant

    Or we could find out where all our money’s going, since we’re already heavily taxed while at the same time spending is cut to the bone. We’re not getting value for money as it is, let’s solve that problem before throwing more money down the pit of mystery.

    1. Cian

      How would you propose to do this?
      How do you work out ‘value for money’? Who assesses this? Is spending money on working out ‘value for money’ a good use of that money?

      What about pensions? Are they ‘value for money’? We spent over €7,000,000,000 on those smelly old people – what a waste of money.

      1. Termagant

        You don’t need to work it out, you can judge it on a vague basis. Question 1: Are we collecting a lot of money from our tax base? Question 2. How are we spending that money? Question 3. Is that the most beneficial way we could spend our money?

        Would we be better off cutting pensions if it gave us more money to pump into care programs for the elderly? Possibly. Would our society benefit from cutting the dole if we could then start paying our teachers and nurses more? Probably. Are there moneymaking avenues other than tax that the state could be exploring to offset spending? Absolutely. These are the questions that we need to start asking, they’re not even that complicated.

        1. Cian

          You’re right – these questions aren’t complicated. (although I’m not sure if they are particular useful).
          However getting a correct answer to these questions is extraordinarily complicated. And getting a ‘vague’ answer isn’t good enough.

          “Would our society benefit from cutting the dole if we could then start paying our teachers and nurses more? Probably” how do you measure “societal benefit”? how do you measure the impact [positive or negative] of cutting dole or of paying teachers and nurses more?

          “Are there moneymaking avenues other than tax that the state could be exploring to offset spending?” Absolutely – really – like what? Ones that are long-term and repeatable. I mean, yes, we could sell off some state assets (ESB, Aer Lingus, IW, Bord no Mona), but we’ll run out of assets soon. We could sell Irish passports to Arabs (again). What else?

  6. Cian

    How do you measure these assets? Will it rely on self-assessment – or will the taxman come in and assess the value of your curtains and carpets and furniture?

    At the moment the Local Property Tax is based on your (self assessed) house-price – and this is 0.18% of the value (raising to 0.25% over €1m). Assessing house prices is fine in estates where there are lots of similar houses, and there is a turnover of selling houses. But it is a lot more difficult for one-off homes and/or when houses aren’t selling.

    1. Michael Taft

      Cian – the tax would be self-assessed. But it would create a new audit trail which would help Revenue monitor other tax compliance (e.g. inheritance, capital gains, off-shore activities etc.). There would probably be random audits as exists with self-employed. These are important design, monitor and compliance issues.

      1. Cian

        I may be a cynic, but I would assume that any high-wealth individual who is, ahem, ‘creative’ with their tax returns would be equally creative with this new proposed tax.

        The existing Local Property Tax, on the other hand, is better placed to assist Revenue monitor tax compliance. “excuse me Madam, how do you afford a €3.75 million house when you have only declared €300,000 income in total over the last 20 years”

  7. Owen C

    Michael

    you might expand on what you mean by this: “no exemptions except for pension rights”

    Would this include personal pension plans (ARFs or similar), or do you just mean accrued values of DB schemes (or DC too)? Obviously a lot of household wealth is tied up in pension schemes, so it’s important to understand how this would be dealt with?

    1. Michael Taft

      Owen C – I’m open to different treatment in this area. The point of the post is to establish the valuable principle of a tax on assets, both real and financial. People will have different perspectives on how particular assets are treated which can lead to a good debate and hopefully, economically efficient and socially equitable outcomes.

      1. Culchie

        The point of this post is to provide intellectual cover for increasing the scale of government theft from the citizens.

        FIFY

  8. Baffled

    If the tax is on the net worth of a house, then all this will do is encourage people to borrow more money against the value of their house and buy other assets such as shares to avoid the tax. And we all know how high leverage worked out in 2007/08.

  9. Cian

    Another area that I would change the tax rules is related to re-zoning land. If land is re-zoned then the capital gains should be something like 80%.

    The owner of the land shouldn’t get a huge payout just because of rezoning.

  10. GenerationScrewed

    But isn’t financial asset wealth – stocks/shares/equities and investment property all subject to the CGT and the income tax regime and deposit accounts subject to DIRT? Are these not effectively wealth taxes?

    If a person has a residence worth a million quid now they will pay property tax of 0.18% of the value per annum. If they have 1 million on deposit at a rate of 0.5% they’ll pay 37% DIRT so a tax of 0.18% on “wealth”. If this 1 million house is the principal private residence and it doubles in value in 20 years, the 1 million gain will be CGT free. If it was shares, the gain would be taxed at 33%.

    Merit in moving towards increasing the taxation on wealth with a corresponding decrease in income tax but needs to factor in all existing taxes and reliefs available. The property tax is a rough proxy for taxing wealth dressed up as a tax to fund “local services”

  11. Zaccone

    This is a great idea. At 0.5% its so marginal that it gets around all the dubious claims of “high earners will move abroad” too – nobody is going to move for that small a hit.

  12. nellyb

    Throwing more revenue into our fiscal governance delinquency? If your builder didn’t do agreed job at agreed cost – do you rush to pile more money on him/her, no questions asked? When would you stop giving money? At double the cost? At triple the cost?
    By ignoring oversight of expenditure problem, Michael, you’re grooming tea-party here at home. We can do without it, please.

    1. nellyb

      i.e. public money are to be spent in public interest. Rest assured, if a sound policy will have been implemented, there will be a thousand loopholes created to legally syphon money into healthy private margins. Trust is thing on the ground.

  13. andy

    Why would you try and protect asset rich but cash poor people?

    Seriously, why? they’ve valuable assets. They should be forced to sell them if they can’t afford the tax.

    The usual arguments for this protection is farmers or old people in big houses. Well tough, they shouldn’t get any exemptions.

Comments are closed.