Michael Taft: Believe In A True Property Tax

at | 25 Replies

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.

Sam Boal/ Rollingnews

25 thoughts on “Michael Taft: Believe In A True Property Tax

  1. Jake38

    “……to refocus our tax system away from income….”

    I didn’t see any subsequent elaboration Michael in your analysis of how my income taxes would be reduced when a wealth tax was to be introduced. Otherwise its just another tax for those who already pay the large majority of tax in this country.

    Reply
  2. Jonickal

    What sort of reduction in income taxes would we be looking at. If you could present even just an example scenario to get the discussion going. Otherwise I’m not so convinced and we’ll only be look ultimately at paying more taxes, property, income or other.

    Reply
    1. Qwerty123

      That’s the tax paid on the gain between purchase price and selling price if any. If I have 1,000 apples shares purchased at 50 euro, say, and now whey are worth 150 euro, I dont pay any tax until I sell. If I did, it would be approx (150-50)*1,000*33%=33,000 in CGT owed. (exemptions and reliefs excluded)

      What Michael is talking about is a wealth tax, so if I had 150,000 worth of shares, I would have to pay tax on the value every year based on a percentage, or whatever model is to be used.

      Looking at all assets is definitely fairer than solely looking at property values. imo

      Reply
      1. Cian

        If I had 1,000 apple shares valued at 150,000 and paid a tax on them last year, and then the share price dropped to 100/share. I’ve lost €50K… am I entitled to a rebate from the revenue? or do I continue to pay tax on the 100K value that remains?

        Reply
        1. Qwerty123

          No and yes.

          says it’s a flat 1%(for ease), then you would pay 1,500 year 1, 1000 this year say.

          Should be exempt if it is part of your pension imo.

          Why? well if you are rich enough to have 150,000 shares in apple, you are rich enough to pay 1,500 a year in tax on them.

          Same for high value houses, these asset rich income poor people. I have a 1,000,000 net asset value house but cant afford to pay tax. BS – its like winning the lotto and not cashing in the ticket as you dont want to pay DIRT.

          Reply
          1. Cian

            Shares are different to houses.

            While the value of a house may fluctuate it always retains an intrinsic value[1]
            This isn’t true of shares. They can change value massively (1000%s over 5-10years) AND can be reduced to zero overnight.

            [1] except in very rare cases like if a house is build on a sea cliff and there is massive erosion.

          2. Qwerty123

            If your shares are worth 0, then you pay 1% of 0 which is 0.

            What you pay changes every year, like it should based on your net asset value.

            I would say it easier to tax share value as that value is easy to obtain, whereas not so much for houses.

            I’m assuming you are not a fan of wealth taxes?

          3. Cian

            @Querty, I’m not against to the idea of taxing shares (or wealth). I just wonder can it be done fairly?

            My point is that you could end up paying a lot of tax on an asset that is eventually worthless (which is unlikely to happen to real assets, say property).

            How do you assess the value of a share? Do we check on a particular date (and how would this affect the stock market)? Average the value over the year? What if I buy and sell on the same day?

            Shares are currently taxed:
            – If the shares have a dividend, this is currently taxed.
            – If the shares increase in value, and I sell them, I would pay Capital Gains Tax.

          4. Qwerty123

            I see your point, but assets also include cash. So if you sell your shares for avoidance, you will still have the cash sitting in your account. Obviously it would need to have thresholds and allowances, like income tax. Your net asset value, so house, shares, pension and cash, minus mortgages etc. would be fairer way to look at tax, and as per the FT, people would be more inclined to invest in value adding enterprises as a result.

            Anyway, completely moot, as will never happen. There are some seriously wealthy people in this country not being taxed in a correct proportion, imo.

    2. Owen C

      Yes. And stamp duty (1%) when you buy and sell them (ie 2% total for buy and sell) regardless of any profit. And income tax on the dividends.

      Reply
  3. Chris

    You need to exude the family home for it to be a proper wealth tax. Many working can not afford a property tax and the wealthy have exemptions. And yes tax financial assets/property heavily!

    Reply
  4. SB

    Does the property tax apply to houses own by “trusts”? These seem to be a way rich people avoid “owning” property, instead creating a family trust in the Isle of Man or similar. This shouldn’t be allowed. The same thing would apply to a lot of the other assets, owned by a myriad of offshore companies.

    Reply
    1. Qwerty123

      Agreed, but these trust structure ain’t cheap, effective tax in several thousand of euros in fees every year paid to banks and lawyers offshore.

      Reply
  5. Cian

    We need to be careful with comparing ratios of Median values. I’m not sure if it is useful – especially if the underlying values are different.

    That CSO page says that
    95% of households have some Real Assets, and the median value is €163K
    90% of households have some Financial Assets, and the median value is only €6K

    Reply
  6. Qwerty123

    Good article Michael, however, the more wealthier asset owners will find legal ways to avoid. Either offshore, trusts etc.

    Reply
  7. Vanessa the Holy Face of Frilly Keane

    Good piece and it is about time a Wealth Tax came into our tax code

    But ultimately
    The taxable Wealth
    Will just have too many opportunities available to avoid and or limit their exposure

    If it does get introduced it will only be a populist measure for the squeezed middle
    Ahead of a general
    And by no means a tax generator

    And it’ll be down to the cash cows
    Value Added Taxes, employment taxes and stealth taxes and levies to keep the country going

    Reply
  8. Owen C

    Isn’t the big problem with taxing financial assets that they can be held offshore easily enough? And/or bought and sold to avoid tax etc. Whereas property remains illiquid and immovable with high transaction fees (so ownership tends to be medium to long term and difficult to time a transaction to avoid tax), and also, by tradition, tends to form a significant portion of most households net and gross wealth (ie wide tax base), as well as tending to be less volatile (recent Irish experience notwithstanding) than financial securities. Its only when you get to HNW individuals that property as a % of household wealth tends to fall off.

    Reply
  9. italia'90

    I’d like to see a tax on religious orders.
    They’re sitting on a lot of assets and unearned wealth.
    Not to mention their profitable enterprises granted by the state!
    Let the gullable followers pay for their nonsense.

    Reply
  10. Mary Brennan

    It’s my home the only house I have ,I borrowed for it in the 70s .why should I pay tax on it only nearly surviving

    Reply

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