We shouldn’t introduce a wealth tax in Ireland – we should makes changes to the ill-conceived property tax to turn it into a real wealth tax that’s stable, smart and reasonable. Here are four quick reasons why.
One, the property tax is neither the wealth tax, nor the local service fund, we’re told it is. Local services cost less to provide per person in urban areas than in rural areas. So a tax to fund those services should charge urban dwellers less. The property tax charges them more, because their houses are, on average, more expensive than rural houses. The claim that it’s a wealth tax is even more preposterous. A family in negative equity has no wealth, but is charged the same amount as the person next door with no mortgage, who has wealth. The tax does not consider wealth, it considers assets. One result is that the negative equity generation are being taxed on their debts, which is outrageous.
Two, a wealth tax is less damaging than the alternatives. Increasing the corporate tax rate would cost jobs in the multinational and domestic business sectors. Raising employers PRSI would make it more expensive to hire people, risking jobs. Hiking income tax rates would reduce the incentive to work and narrow the replacement rate between social welfare and employment. And hiking up VAT, again, would reduce consumption, costing more jobs. A wealth tax doesn’t cost employers or workers. It doesn’t scare investors or reduce consumption – in fact, it tends to increase both. In short, a wealth tax not only doesn’t cost jobs, it can help create them.
Three, a wealth tax is stable. Ireland’s tax take over the past ten years has gone up and down far more than for other Western countries. This is in part because we don’t have a wealth tax. Post 2008, labour, profits, consumption and construction all fell. So too, therefore, did the taxes on those things. The result – €85bn had to be borrowed to fund the budget deficit, not including the €64bn for the banks. That €85bn’s now costing us about €3bn a year in interest. Wealth doesn’t tend to vary as much as other taxable activities, so taxing it makes such huge budget deficits less likely in the future.
Four, wealth tax is progressive. So people who can afford more expensive houses pay more. In Ireland, this would go some way to counter-acting the on-going consolidation of wealth in the hands of fewer and fewer people – something very topical right now due to Piketty’s new book, and something both those on the Left, and the billionaires at Davos, believe to be a very bad global phenomenon. There’s an extra benefit too – a real wealth tax would consider both the value of the home and the mortgage on that home. So people would be taxed less early on, and more as they pay down their mortgage over the years – in line with them having more disposable income due to rising wages, falling mortgage payments, and the children leaving home.
Wealth taxes can consider all sorts of things, from homes, paintings and cars to cash, funds, pensions and shares. In Ireland, it’s probably best to stick with property. For the vast majority of people, their main wealth is their home, so it’s a good and accessible proxy for total wealth. Going after things like cars feels a little intrusive and mealy-mouthed. Because we’re such a small country, it’s easy to move the more liquid assets, like cash, funds and shares, out of the country – so they’re hard to tax and you’d end up seeing a lot of wealth heading to London. Including very high pension funds is probably fine, but including ‘normal’ pensions in a wealth tax would be risky right now. Considering Ireland’s pensions timebomb, making it less attractive to invest in pensions would be unhelpful.
Some simple changes could make a world of difference. Change the property tax to consider the net value of people’s homes, add more bands to make it more progressive, maybe adjust it regionally to account for the cost of local services (to make that a credible link), maybe add in the multi-million euro pensions, and we replace one grossly unfair and disingenuous tax with a progressive, stable, fair and sensible alternative.
This article originally appeared in the Sunday Independent on June 29, 2014.