Irish Mail on Sunday, July 17, 2010
A residential property tax, which seemed to be ruled out as a budgetary option this year, is very much back on the agenda at the Department of Finance. And so it should be. Finance minister Brian Lenihan continues to stress that there is a lot of preparatory work to be done before such a tax could be introduced. But the government needs extra revenue and a well devised property tax could supply that need in a fair and economically efficient way.
The opposition to the last property tax was led by those who were most able to pay it and it was easy to built up popular support for their views. No one likes paying tax and we seem to have a particular aversion in Ireland to taxes on property. But what are the alternatives?
Those opposed to such a tax need to have an answer to that question. Letâ€™s have a look at some of the alternatives.
Spending cuts are not an alternative. We are going to get them in any case. Ideally the cuts will be targeted solely at eliminating waste but that is unlikely. Some waste will undoubtedly be eradicated but suppliers of State services are very adept at protecting their own positions and inevitably front line services will be curtailed.
A case can be made for borrowing more in order to lessen the need for extra taxes but there is a limit imposed by the almost certain reaction that it would provoke from the international lenders and decision makers on whom we increasingly rely.
Extra taxes are inevitable. So who should bear the burden?
There are many people who have come through the recession relatively unscathed. High earners in secure jobs may have suffered a small drop in income and a drop in the value of their assets. But they are still well off.Â There was plenty of profit made on property deals during the boom years and not all of it was lost on subsequent investments.
The money borrowed from mortgage lenders didnâ€™t just disappear. For every home bought at an inflated price there was a home sold at an inflated price. The loans, that many home-buyers are now struggling to repay, were pocketed by builders and land owners.
Some of it has been lost in a spiralling round of speculation but much of it must have been salted away and is reflected in the current high level of savings.
Unfortunately this wealth is hard to pinpoint and is too easily moved. So itâ€™s hard to tax. High income could be subject to some type of sur-tax but the Government is set against it. The argument is that it would yield too little revenue to justify the impact it might have on the willingness of high earners to stay and work in Ireland.
So where is the Government to get extra money?Â The target is to reduce the budget deficit by â‚¬3 billion next year with the measures equally divided between cuts in day-to-day spending, cuts in capital spending, and higher taxes. That figure could change for the worse but not for the better.
If we rule out a wealth tax or extra tax on high earners, then the only other alternatives are taxes on the low and middle-income group or a property tax. Extra spending taxes are a possibility but unlikely. The gap between the standard Irish and UK VAT rate will be greatly narrowed when the UK rate goes up from 17.5 to 20% next January. But that hardly justifies an increase in our 21% rate.
Any increase in spending taxes, and ours are already very high, hits the poorest hardest.
Thereâ€™s no doubt that the income tax burden is to be increased with the rationalisation of the current levies and curtailment of some tax credits. Such changes would bring more people into the tax net and are likely to be regressive, bearing more on those on lower incomes.
Pensioners may also be targeted with their tax exemption limits of â‚¬20,000 single and â‚¬40,000 married abolished.
All of these possibilities are unpalatable and inequitable. A property tax must be seen as a fairer alternative. It needs to be related to the value of the property, or more properly to the equity that the owner has in the property. The ideal is an income tax on the notional rental income that a property would yield with account taken of mortgage costs. As an income tax, income would automatically be taken into account. Those not liable for income tax wouldnâ€™t have to pay it. Those paying top-rate tax would pay proportionately more.
There are good data bases on rental values that could be used for valuation purposes.
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.
A property tax may not be nice but itâ€™s the fairest option.