From top: Minister for Finance Paschal Donohoe; Michael Taft
The Minister for Finance believes in the property tax and the ‘latent potential for the tax to play a more significant and positive role in our overall taxation system’.
Any increase in the tax should be ‘affordable’ says the Minister, while the ‘progressivity’ of the tax should be upheld. Potential, affordable and progressive: yes, the Minister is a believer.
But a true believer would promote a full property tax – one that attaches itself to all assets, in particular those assets (such as financial property) that are held mostly by higher income groups.
The residential property tax is levied only on some property. It is confined to houses and apartments which are the main capital asset for low-average earners.
It is not applied to financial property (shares, bonds, pension funds, cash) or land beyond the one acre associated with the residential dwelling. This is a major omission.
If we put together real (land and buildings) and financial property, and exclude liabilities (e.g. mortgages), we find that total net assets come to approximately €750 billion following the red line in the following graph comes from the Central Bank.
This equals €156,600 average net wealth per capita or roughly €440,000 per household. This would be concentrated among higher income groups.
So what would happen if we started to refocus our tax system away from income and the productive economy and on to wealth, assets and property?
As the Nevin Economic Research Institute states:
‘The weight of evidence suggests that taxes on property, wealth and passive income have minimal negative consequences for economic growth compared to other taxes and are highly redistributive. Recurrent taxes on land and immovable property appear to be particularly pro-growth, and very likely pro-equality, and we can design these taxes in such a way as to make them progressive.’
We could start by extending the tax to all property with appropriate reliefs where necessary.
This is traditionally called a wealth tax but, in truth, it is merely ensuring a property tax is applied to all property; in particular financial assets.
The CSO’s Household Finance and Consumption Survey can help.
When we look at the ratio of asset values between the top and bottom 20 percent income groups, we find that for the main residence (home), the ratio is rather narrow due to widespread home ownership.
However, when we include all real assets (land, other real estate property, self-employment business wealth, vehicles and valuables), the inequality gap starts to widen with the top 20 percent owning three times the median value of the bottom 20 percent.
When it comes to financial assets, the top 20 percent own 10 times the value of the bottom 20 percent. Financial property is highly concentrated at the top.
Martina Lawless and Donal Lynch of the ESRI have produced a useful paper outlining the impact of an asset or wealth tax. They looked at nine different tax models applying a 1 percent tax on wealth.
We can see the range of models from those with high thresholds (income) and high exemptions (particular assets) to those with much lower thresholds and exemptions.
These models have the capacity to raise between €53 million and €3.8 billion. The variations are due to exemptions and thresholds. We should start a national conversation over the optimal model.
From NERI, Dr. Tom McDonnell’s seminal work on a net assets tax shows similar yields – ranging from €250 and €750 million in revenue (and this was published in 2013).
Of course, there will be the usual criticisms of a comprehensive net assets tax; namely, that it would disrupt our collective entrepreneurial chi. However, as Martin Sandbu from The Financial Times points out:
‘Compared with taxes on profits, dividends and capital gains, the wealth tax favours those who deploy their assets more productively. That is because it is a levy on the same slice of a fortune regardless of the returns the assets produce. Owners of a high-return asset . . . keep a larger share of the income generated by their wealth than owners of low-return assets . . . a net wealth tax effectively redistributes from those who invest their capital badly to those who find high-return uses for it. That should reward talented entrepreneurs and boost productivity growth in the economy overall — a combination that could just begin to look politically attractive.’
Extending the property tax to all property – making it a comprehensive tax on all assets – has the potential to make a positive impact on public finances, reduce inequality and extend the tax base.
This would vindicate the Minister’s belief in a property tax with potential, affordability and progressivity.
Indeed, it would make him a true believer.
Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday.