Colm’s columns

Colm Rapple
Irish Mail on Sunday, February 8, 2009

It may shave €1.4 million off the public sector pay bill, but the “pensions levy” proposed by Taoiseach Brian Cowen during the week, is patently unfair. It takes no account of widely differing pension entitlements among public servants or of the way those entitlements have influenced benchmarking pay awards. And although the levy appears to bear heaviest on those with higher incomes, the opposite is actually the case when tax relief is taken into account.

A more honest approach would be to simply cut pay on the basis of a sliding scale that would exempt those on low incomes while taking significantly more from those on higher incomes.

In the longer term a fair pension levy related to actual pension entitlements might be devised although the ideal would be to take differing pension entitlements into account in pay rates. The actual value of pension entitlements should have been built into last year’s benchmarking pay awards but, at the behest of the Irish Congress of Trade Unions, they weren’t.

The cost of pensions, according to a report commissioned by the body, varied from a low of 12.4% of pay in the case of some low paid public servants to a high of 32.9% in the case of gardaí. But instead of  taking account of the actual cost of pension entitlements for each group of workers, Congress got the benchmarking body to use an average which was calculated at 20%.

So for the pay determination exercise, the low paid were taken to enjoy pension entitlements worth 20% of pay although they are only really worth 12.4%.

Gardaí are a special case but that 20% average used by the benchmarking body is also certain to greatly understate the true cost of the pension entitlements of top public servants who will normally have spent many years at the lower rungs of the ladder but whose pensions are based on final pay. The opposite is true of staff nurses whose pension entitlements were estimated to be worth only 13.8% of pay mainly because most of them tend to remain at that grade for most of their working lives.

So the recommendations in the latest benchmarking report, while taking some account of pension entitlements, were greatly skewed in favour of the better paid.

That fact highlights the inequity of imposing a supposedly pension related levy simply on the basis of pay while taking no account of all the other factors that go into deciding the value of pension entitlements.  Although public servants will automatically be given tax relief on their levy payments, they are clearly not pension contributions and are in no way related to pension entitlements.

The proposal envisages three rates of levy: 3% on the first €15,000, 6% on the next €5,000 and 10% on the balance. That implies that there will be no exemption for those on very low incomes.

According to Department of Finance figures there are 55,000 public servants on less than €30,000 a year and another 74,000 on between €30,000 and €40,000. So let’s for example take the case of a married man on €35,000 whose wife is not earning. He would be liable for a levy of €2,250 a year or 6.4% of his gross income of €35,000. He’s unlikely to be liable for income tax so won’t qualify for tax relief but will get some relief from PRSI and health contributions. That should reduce the impact of the levy from 6.4% to just over 6%. That’s assuming he’s paying full rate PRSI, as he would if he joined the civil service after 1995.

His boss on €150,000 a year will be subject to a gross levy of 9.2% but will be eligible for tax relief at the top rate of 41% together with relief from a 2.5% health contribution. That brings the effective rate of levy down to 5.2%.

The effective rate for someone on €300,000 will be 5.4%.

So a public servant on €35,000 will be paying an effective levy of 6% while someone on €150,000 will be paying 5.2% and a top earner on €300,000, 5.4%.

That’s hardly fair or progressive without even taking into account the fact that the pensions of higher paid public servants are likely to be costing the taxpayer much more than the pensions of the lower paid not only in absolute amounts, as is obvious, but also in percentage terms.

It’s unlikely that Messrs Cowen and Lenihan are going to back down on their proposals although there may be some room for adjustment at the edges particularly in exempting low earners from the imposition. Even if that is done, however, the package as a whole will remain grossly unfair.

It was possibly right and fair that public sector pay should be cut as a first step towards getting the State finances back into order. Most private sector workers have already suffered, if not job losses or pay cuts, then a sharp erosion in the value of their pension funds. On average Irish managed pension funds values have declined by a third over the past year and are now worth less than they were ten years ago.

But the measure should have been better targeted to ensure that those who have most bear proportionately more of the burden, not the other way around.

Colm Rapple
Irish Mail on Sunday, February 1, 2009

None of the painful proposals for dealing with the Government’s current financial crisis has caused such an uproar as the prospect of a tax not only on second homes but on all residential property. The idea was well aired on chat shows and elicited an irate response from most callers. Maybe it’s because it was assumed that unspecified income tax increases and spending cuts would only affect others and that’s harder to believe of a house tax.

Alternatively it could have something to do with our peasant roots, our attachment to land or some distant memory of how unfair the system of rates on houses was prior to its abolition in the late 1970s.

But whatever the reason, we seem to have an ingrained, deep-seated and emotional aversion to property taxes.  It shouldn’t be so.

It is possible to devise a fair, sustainable and economically efficient tax on residential property. It’s as good a way as any, and better than most, of raising revenue for the State coffers. And, in their current depleted condition, those coffers badly need replenishing. A property tax would also greatly broaden the tax base and help prevent a future re-run of the current budgetary crisis.

Compared with the alternatives, a residential property tax has a lot going for it. It could be nasty but it needn’t be. It’s a tax that can be justified on economic grounds. It can be equitable. It can be related to ability to pay. And, if used to replace the current direct State subvention to local authorities, it can also help to promote a greater degree of local democracy.

The trick is to get it right.

The economic justification is the easiest part. If you invest in buying a house for yourself, the benefit you get is your right to live in it. That’s the return you get on your investment and there is no good reason why that return should not be taxed in the same way as the return got from any other investment. If you have €400,000 and invest it in shares or put it on deposit, you’re taxed on the dividends or interest you earn. So why shouldn’t there be a tax on the benefit accruing to an owner-occupier if that same €400,000 is invested in a house?

By broadening the tax base a property tax would take pressure off labour taxes which are deemed to have an adverse impact on economic activity and employment levels. And it would also achieve a fairer distribution of the tax burden by taxing an income equivalent that currently gets off scot-free.

The benefit enjoyed by owner occupiers is equal to the rent that they would have to pay if it was owned by someone else. Known by economists as “imputed” rent, it is actually included as part of our national income by the Central Statistics Office and by the EU. The CSO estimated that the total benefit was €5,435 million in 2007.

It’s a large amount of money. But that’s not surprising since three-in-four homes are owner occupied and there was no outstanding mortgage on almost two-thirds of those in 2003 when the last statistics were gathered. Doubtless there are mortgages secured on a larger proportion of homes now but it’s likely that at least half the owner-occupiers in the State have no mortgage liabilities.

The €5,435m notional value put on the benefit all owner occupiers enjoy is a very real benefit-in-kind.  If it were all taxed at even the standard rate – 20% – it would yield over a billion euro a year for the Exchequer. It’s basically fair in that the larger and more desirable the house, the greater the tax, but, of course, there are anomalies and exceptions that would have to be allowed for.

Account would have to be taken of ability to pay. There are people living in valuable houses whose incomes are so small that they are not liable for income tax. For instance a couple either of whom is over 65, with an income of less than €40,000 are exempt from income tax so they would also be exempt from this type of property tax. Some sort of sliding scale of tax related to income could make the tax even more equitable.

Consideration might also be given to providing special relief for those who paid stamp duty on a house in recent years, since ideally a new annual tax would be a replacement rather than an addition to the current stamp duty. That would result in a lower net additional tax take but the revenue from an annual tax on imputed rent wouldn’t fluctuate with the level of activity in the property market as stamp duty does.

Such a tax did exist prior to 1969 when it was abolished. Then, in the 1980s the last Commission on Taxation made the case for reintroducing it although it concluded that because of administrative difficulties it should only apply to holiday homes.

The perceived administrative problems related mainly to putting rental values on properties but current data bases have greatly eased that difficulty, particularly the information garnered by the Private Residential Tenancies Board. The tax could be levied through the PAYE system in the same way as the tax on benefits-in-kind.

No-one likes higher taxes. But taxes are going to rise and if we want to ensure sustainable levels of state services in the medium and longer term, we need reasonably predictable sources of revenue. Property taxes must be part of the mix.