Nat O'Connor: The BBC reports that "A group of rich Germans has launched a petition calling for the government to make wealthy people pay higher taxes." German speakers can access the petition website here.
The idea is that if each of the 2.2 million Germans with €500,000 or more paid a 5 percent wealth tax for 2 years, the state would raise €100 billion "to fund ecological programmes, education and social projects".
The National Irish Bank wealth report claims that Irish households had an average wealth (net of debt) of €547,000 in early 2008 (including primary residences). The report is summarised here, and available as a PDF here.
Over 18 months later, in depressed Ireland, a lot of the NIB report's gloss is less an accurate estimate of remaining wealth and more like a monument to hubris (e.g. "There are now more Mercedes per capita in Ireland than in Germany where they are made").
Page 15 of the NIB wealth report suggests that 10 percent of Ireland's near €1 trillion in wealth was held in savings/deposits. The text says this is "€100 million", but unless I have missed something, 10 percent should be €100 billion. This in line with the €80 billion reported for 2005 in Bank of Ireland's 2007 Wealth of the Nation report. Of course, much larger sums were invested in shares and other financial assets, as well as a disproportionate amount in property. Much of which is likely to have fallen (if not collapsed) in value.
In order for a wealth tax to work here, it would probably have to include property, shares and other financial assets as well as savings/deposits. If not, people may simply move their savings into investments to avoid the tax.
Also, any wealth tax will not just include the helicopter-owning wine investors that the NIB report describes, but it will also include a lot of middle class households whose deposits/investments/property equate to their retirement savings. Many people who simply downsized their primary residence during the boom may have gained €500,000 plus in that single transaction, which may also represent their one-off 'cashing in' of assets to prepare for retirement. And many of these households - who are not professional wealth managers - may have invested in the 'safe options', like bank shares and property. In other words, the pool of 'wealth' is not an infinite resource that already makes enough profit that it will reproduce itself endlessly regardless of how much it is taxed.
Yet, the whole premise of progressive taxation is that 'money makes money'; that is, all things being equal, a careful investor with a pool of money can make a tidy profit on an ongoing basis. Our commercial legislation, regulation, taxation, tax expenditure, etc. is designed to encourage investment and to permit such wealth to grow. The basis for wealth tax then is that in exchange for the ways in which we encourage investment, the state's guarantee of bank deposits, etc. we can legitimately seek a fair share in the profits made by wealth. Not too big, to avoid discouraging investment here, but not too small, to avoid growing the gap between the 'haves' and 'have nots'.
(Note, I am now shifting away from the German idea of a one-off two-year tax. Here I'm examining the idea of more wealth tax on an ongoing basis).
If the state wanted to tax the remainder of Ireland's wealth - and let's say that €500 billion remains - it would need a range of property taxes, deposit taxes, share/financial asset taxes, etc. These would affect many ordinary households. However, a 0.1 percent wealth tax on €500 billion would result in €5 billion for the Exchequer every year.
€5 billion might be as much as we can expect from wealth tax. It won't close the structural deficit in the current budget, but it would make a major contribution - not only to repairing the state's finances, but also to reducing our unequal distribution of wealth.
In practice, the result of the various wealth taxes would look something like this:
- A household living in a house worth €500,000 would pay €500 a year in property tax.
- Someone with €200,000 deposited in the bank would pay €200 a year in deposit tax.
- A shareholder with €10,000,000 in assets would pay €10,000 a year in financial asset tax.
etc.
The fact that a general rule of 0.1 percent applies regardless of the form of wealth would negate incentives to shift the form of wealth - except of course, to move it out of the country; but those who can already do. The 0.1 percent could also be modified to make the tax progressive, rather than a single rate.
Of course, the tax would have administrative costs, and there'd have to be exempt categories, such as asset-rich, cash-poor older people living in houses they own. Hence, in this example, only €4 billion might actually be gained for current expenditure rather than €5 billion.
I may be making various simplifications or unreasonable assumptions. Is there a category of Ireland's wealth that will be impossible to tax? Is any of this wealth already taxed? Is there a constitutional barrier to taxing wealth (as opposed to gains)? Does 0.1 percent as a general rule for wealth/property tax seem reasonable (on the basis that assets will in general grow by more than this per annum, above inflation)?
36 comments:
Nat -
Once you come down from the super-rich, doesn't taxing deposits and the like amount to penalising those who save and live within their means? Hasn't the income used to accumulate those savings _already_ been taxed?
Isn't there a tax on interest and on dividends, on life policies (every 8 years regardless of whether a gain has been realised)?
Wouldn't that kind of tax force citizens into more risky assets (e.g. shares over savings) in order to protect the value of their savings? (There may be an additional advantage in encouraging savers to seek the best interest rates though).
A tax on based on land values may be fair game, as the state provides services to properties that boost their value - but what benefit will tax payers receive for these rises? The knowledge that their pension fund may be reduced, while the superior pensions and salaries of public servants are protected while services are cut?
I wonder what asset tax models there are available from other countries? I know France has a wealth tax (the ISF) but I think the revenues it generates are fairly marginal. You hope to raise something like 2% of GDP - I wonder has any existing asset tax achieved this?
Hi Both,
Thanks for your comments. You raise a lot of good points.
I'm trying to tease out some general principles of taxing assets/wealth, to see whether it could work in Ireland.
Hasn't the income used to accumulate those savings _already_ been taxed?
Yes, but that’s not unusual. I pay income tax, then when I consume good and services I pay VAT.
Once you come down from the super-rich, doesn't taxing deposits and the like amount to penalising those who save and live within their means?
Not really. We tax consumption much more than we tax savings/investment, even though the ones who consume with all of their income are usually those with least income in the first place. We are much easier on savers.
There is some logic in the idea that savers will be less of a burden on the state in old age, etc. But we are only seeking to take a tiny portion of their wealth, to provide the public services (like health services) that they will benefit from.
Likewise, we currently guarantee bank deposits, but don’t tax them. There is an argument there alone that the state should have an income stream from deposits.
Isn't there a tax on interest and on dividends, on life policies (every 8 years regardless of whether a gain has been realised)?
I’m not sure about the detail of all taxation here, but DIRT at 25 percent is payable on the interest gained by a deposit. If we decided to tax the asset itself, we might have to stop taxing the income from the asset, which would lower the estimated gain from introducing wealth tax. But at any rate, DIRT doesn’t rank as one of the main taxes and there are is no revenue stream from wealth per se (see here for recent details of state revenue).
Wouldn't that kind of tax force citizens into more risky assets (e.g. shares over savings) in order to protect the value of their savings? (There may be an additional advantage in encouraging savers to seek the best interest rates though).
Hopefully not. Having wealth would still generate more wealth, just a little bit less than before. Would many people become less risk averse and start investing in share portfolios when previously they saved? I don’t think a 0.1 percent tax would cause too much of that that.
A tax on based on land values may be fair game, as the state provides services to properties that boost their value – but what benefit will tax payers receive for these rises? The knowledge that their pension fund may be reduced, while the superior pensions and salaries of public servants are protected while services are cut?
The state provides lots of services (public transport, etc.) but the benefits are not evenly distributed. I would be advocating specific charges for services (like water charges, and the development levies cover elements of this too). So I wouldn't try to align property tax with services in this way. The wealth tax would be a tax on the accumulated asset value of the property.
You are quite right to bring in public pensions. They would have to be reduced by 0.01 percent on average to be fair to savers in the private sector. At any rate, public pensions will need to be reformed in other ways too, but that’s another story.
The bigger point you raise is of course, confidence in how tax is used. We raise less tax as a proportion of GNP than most other EU countries. Some of them provide well-run public services, other provide horror stories of wasted public resources. The answer is political; and my personal preference would be for much more transparency about taxation and expenditure, including tax expenditure. That would go some way to allaying fears.
I wonder what asset tax models there are available from other countries? I know France has a wealth tax (the ISF) but I think the revenues it generates are fairly marginal. You hope to raise something like 2% of GDP - I wonder has any existing asset tax achieved this?
Property tax (in particular of principle private residences) is the major asset tax I can think of, although it is often a local government tax and not necessarily seen as part of the systematic taxation of wealth.
I’d be interested to hear about other wealth taxes.
Nat -
Yes, but that’s not unusual. I pay income tax, then when I consume good and services I pay VAT.
True, but citizens will also pay VAT when they spend their savings - I take your point - it's a treble tax not a double tax!
I presume that many expensive items will not subject to the wealth tax - physical goods such as jewellery, plasma tvs, cars, maybe even antiques, wine, art etc. and certainly not expensive holidays and other services. So spendthrift citizens will avoid this tax while those saving for their children's education etc. will be hit.
We tax consumption much more than we tax savings/investment
Surely not? DIRT is 25-28%, life policies are taxed at 28%, dividends are taxed as income (up to 53%) while VAT is 'only' 21%.
There is some logic in the idea that savers will be less of a burden on the state in old age, etc. But we are only seeking to take a tiny portion of their wealth, to provide the public services (like health services) that they will benefit from.
We need a pool of savings from which to fund investments - unless we want our banks to return to the old "Northern Rock" business model of borrowing massively on the wholesale markets - with the concomitant credit driven boom and busts that entails. I'm sceptical that such a tax, it were introduced, would remain at 0.01%. What we're really discussing is misappropriating their savings to fund runaway government spending (including high public sector salaries & pensions).
Likewise, we currently guarantee bank deposits, but don’t tax them. There is an argument there alone that the state should have an income stream from deposits.
No there is not. If the state did not guarantee deposits, deposit holders would put their money on deposit on banks with guarantees or perhaps would seek out investments. True today as it is at any stage over the last number of years (When other guarantees we're in place).
If we decided to tax the asset itself, we might have to stop taxing the income from the asset, which would lower the estimated gain from introducing wealth tax
Presumably could also turn it negative? If the goal is to smooth out taxes from gains - then why not use a simple bank fund or an investment vehicle (similar to pension fund) to achieve this?
We raise less tax as a proportion of GNP than most other EU countries
True, but
1/ We spend far more than any other EU state as a portion of GNP
Link -
http://www.ronanlyons.com/2009/10/21/tax-increases-or-spending-cuts-is-irelands-government-too-big/
2/ We tax below average earners far more lightly than other EU states - while often taxing above average earners much more heavily.
Links -
http://www.ronanlyons.com/2009/04/27/are-irish-workers-undertaxed
http://www.ronanlyons.com/2009/07/28/a-little-quiz-on-irelands-income-tax/
http://geckkosworld.blogspot.com/2009/10/talking-taxes.html
3/ Unlike many of our EU partners we have a tiny military and a much younger population (less need for health services) -> and yet we spend more! Most agree the provision of services in Ireland is poor, but yet we pay public servants substantially more than equivalent private sector workers.
The debate emanating from both right and left is pretty poor so far - perhaps understandable when backs are to the wall. Is it time to despair of this country? We certainly don't have the economy we want, we do seem to have the economy we deserve...
@Nat
"They would have to be reduced by 0.01 percent on average to be fair to savers in the private sector."
Was it a slip of the keyboard that you mention 0.01% here and 0.1% elsewhere in the post?
Assuming it was, that would actually be quite problematic as the 0.1% would have to apply to the notional accumulated capital, not the actual pension payment. It wouldn't be unusual for this notional capital value to be in excess of 1 million euros (for example that would the actuarial estimate for a retired Garda). So you'd be talking about an annual tax of a thousand euros on a pensioner. Can you imagine the weeping and gnashing of teeth that would ensue?
Mack, to present Irish spending now (and next year and the year after that) in the absence of any context, is not tenable. Between 2001 and 2007, Irish Government expenditure increased from 39.5 percent to 41.7 percent. This compares to the EU spend in 2007 of 46 percent. When you net out capital expenditure (and recently our capital spend has been much higher than the EU average - and it had been better be since the Global Competitiveness Index ranks our infrastructural quality at 64th in the world - one of the worst in the industrialised world) our current expenditure falls even further compared to the EU-15 average.
The Government projects voted expenditure to increase by 0.8 percent between 2008 and 2010. And that’s with unemployment having more than doubled. When interest payments are included (a non-voted item), Government expenditure would increase by 3% in each of the two years.
Ireland has had, up to the, recession one of the lowest level of both general and current government expenditure in the EU-15. Any increase in the expenditure/GNP ratio has little to do with additional expenditure – it’s all down to collapsing output. Whatever about disagreements to address this situation, let's at least ensure that the 'facts' we present are put into context.
As to ‘heavily’ taxing above average income earners – you might want to check out the OECD Benefits and Wages database. Here are some percentage tax takes for those on twice the average industrial wage: Austria (38.2%), Belgium (50.9%), Netherlands (42.6%), France (34.8%). Even in that other low-taxed economy – the UK – it’s 32.3%. In Ireland, it’s 29.4%. And this doesn’t factor in local property taxes.
As to really high earners you might want to have a look at this: http://www.finance.gov.ie/documents/publications/reports/2009/analytaxrestrict09.pdf . This survey shows that 89% of the highest tax earners paid out less than 20% of their income on income tax, while nearly a third paid out less than 15%, of their income on income tax. There are many words for this, but ‘heavily’ is not one of them.
James – I have read estimates of the French Wealth Tax as bringing in approximately 0.75% of GDP. On that basis, all things being equal (proportion of wealthy to total asset holdings), this tax would bring in here between €1 billion (GNP) and €1.2 billion (GDP).
@Michael
"Between 2001 and 2007, Irish Government expenditure increased from 39.5 percent to 41.7 percent."
Would that be 41.7% of GDP, or GNP?
Even if the latter, it would have been distorted by a vast amount of "borrowing from the future" in the form of building for stock (above and beyond the true level of housing demand).
If former, it would continue to be distorted by a large wedge of vapour emanating from MNC transfer-pricing, which is effectively impossible to tax at European levels (as it only exists as by virtue of the 12.5% corpo tax being significantly lower than the European norm).
Proposition Joe - that's GNP. How would you calculate the effect of building for stock on Government expenditure?
@Michael
(number of houses built) * (proportion above true demand) * (average price of a house) * (some factor describing the total economic activity accruing from the house construction)
Back of an envelope: 90k * 0.3 * 300k * 1.2 gives about 10 billion
Minus that off total GNP for 2007, and the proportion of the "real economy" accounted for by government spending would jump from 41.7% to nearer 45%.
Michael I'm not opposed to tax rises (certainly not on high earners avoiding paying tax) - I am opposed to raiding the savings of ordinary citizens (without having the decency to even wear a balaclava ;) ) in order to pay for excessive spending. If the tax burden is to be higher - I'd expect better services and more services delivered free (i.e. covered in by the tax take). I think this position is reasonable.
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On the spending figures - I'm not sure that the detail makes any difference, unless you are proposing cutting some of it?
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On tax - the average wage in the UK is £26,020 (source - http://news.bbc.co.uk/2/hi/8151355.stm), or £31,323 when only calculated for full-time employees.
In Ireland the average wage is €32,000 ( source - http://www.finfacts.ie/irishfinancenews/article_1015830.shtml. You gave me the figure of €36,660 for all workers including managerial here - http://notesonthefront.typepad.com/politicaleconomy/2009/05/here-is-my-challenge-to-the-real-devaluationists-will-any-of-them-take-it-up-real-devaluationists-claim-that-since-we-c.html)
When I calculate take home pay on http://listentotaxman.com for a UK worker on £52,040 and an Irish worker on €64,000 on http://taxcalc.eu/ I find that the Irish worker takes home only 67% of their pay while the British equivalent takes home 71% of their pay.
If we were to take your larger figures of €36,600, the Irish worker on twice that only takes home 64% of pay the British worker 69%. The Irish worker does appear to be hit harder - and of course, even in low tax Britian workers don't need to purchase VHI or pay for medical treatment - like we do here which ultimately makes the differential larger (and their tax pays for a large military etc).
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To clarify though, my point is that some groups are easy targets while others are taboo. I'm disappointed with the debate on both sides, as it seems focused on whacking the easy targets and not on formulating a holistic and fair path out of this mess.
Lest there be confusion - I'm not equating the British full-time figure with the Irish-all-in figure. I came back and edited the text to add in the calculations for the British figure at the point and as a result it's not worded the best.
I imagine that if you were to calculate the figure for Irish full-time only employees (the CSO includes both - http://www.cso.ie/surveysandmethodologies/surveyforms/documents/earnings/pdf_docs/q2_2009_ehecs_form.pdf) the gap would be larger still (as the full-time average will be higher again).
Mack - the detail (or context) is extremely important. If we don't get that right we're in danger of confusing cause with effect. If we believe that spending is too high, then we might be tempted to cut spending. If that were to be done - as the Government has done for the last year - then all that will happen is that the economy will further deflate, depressing consumer spending and employment, causing government expenditure to rise (unemployment payments) while growth is cut. Perversely, then, the expenditure/GDP ratio increases. Isolating cause and effect, therefore, is extremely important.
I'm not sure what you're getting at with calculations on average pay. Nat's piece here is about how revenue sources can be tapped by targeting wealth. I referred to above average pay (twice average industrial wage) to show that Ireland is not a high tax country. And the link I provided for the DoF publication showed how many sections of high income earners pay so little income tax.
Michael - I just looked up the figure for the French wealth tax (Impot sur la Fortune) and according to this official site the revenue amounted to just over €4bn:
http://www.performance-publique.gouv.fr/le-budget-et-les-comptes-de-letat/approfondir/les-recettes/les-recettes-fiscales.html
This amounts to less than half a percent of government revenues, let alone GDP.
Michael - averages can hide a lot interesting data, and while Ireland may be a low tax economy on average - for many other taxpayers it simply isn't (especially when you consider how much we actually have to pay out on services). Not only has income tax increased but we still have a range of penal indirect taxes and stealth taxes including but not limited to Stamp Duty, VRT, developer levies that pushed house prices into the stratosphere, motor tax many multiples of that charged in the UK etc.
Demonstrating that some groups in society pay very little tax doesn't show that there aren't other groups getting whacked with high tax rates. And politically, everytime someone argues that Ireland can cope with higher taxes because we tax less tax as a proportion of our GNP than our European neighbours it's those same guys who get whacked again. (As asking lower income groups to contribute is taboo, and it seems the rich fundraisers ensure they get their tax breaks, retrospective tax laws etc). Plus ca change, eh? I was a bit young back then, but wasn't there a PAYE strike back in the '80's. We're not visiting those climes yet, but it sure is a slippery slope..
I would have a slightly different view on spending, and while I certainly accept your argument that 'spending cuts' are deflationary (what we're really talking about is borrowing less, i.e. introducing less cash into the economy, rather than cutting out money that already exists) - spending at 55% of GNP is unsustainable. As voter I'm open to being persuaded that we should delay dealing with that somewhat more than FF will countence, but it will have to be dealt with eventually. What Nat is suggesting is whacking once again, those above average earners (but not rich, super-rich or even German style wealthy) so that those who benefit from boom-time public largese can continue in the manner to which they become accustomed. This is not a tax from which society will see a return, it is a tax to protect special interest groups...
The worst thing is, once you abrogate the property rights of citizens, in a deep crises, what's to stop a corrupt government following in the footsteps of the Argentines who last year siezed private pensions to help pay their debt? Will your members thank you then?
By the way - the UK system of taxing interest at the marginal rate, but allowing a certain amount to be squirreled away each year in tax free accounts might be a fairer (not to mention less totalitarian) way of dealing with this...
Mack,
Thanks for your many comments.
What Nat is suggesting is whacking once again, those above average earners (but not rich, super-rich or even German style wealthy) so that those who benefit from boom-time public largesse can continue in the manner to which they become accustomed. This is not a tax from which society will see a return, it is a tax to protect special interest groups...
In fairness, I am not suggesting anything definite for the minute, simply teasing out the pros and cons of taxing wealth as opposed to relying on income and consumption taxes. And I am happy to declare that I am against ‘whacking’ any group who already pays a disproportionate share of tax/service charges.
I’ll address wealth tax first, then come back to your other points:
The ESRI, Commission on Taxation, and others have called for property tax. Many countries have property tax, often to fund local government. As a form of taxation, it can be less prone to cyclical fluctuations, providing some insulation when cyclical income falls; such as building levies, VAT from construction, etc. I think it is likely that we will introduce property tax, although maybe not for a couple of years. When we do, we will have introduced a ‘wealth tax’, if the tax is in any way linked to the notional market value of the property.
And if we only introduce property tax, in isolation from discussing the wider question of asset tax/wealth tax, then it will fall disproportionately on ordinary households, for whom their home is their primary asset. The only way to tax the ‘super-rich’ you mention is to examine options for wealth tax, as most very wealthy people may not have high incomes, but massive financial assets, land, etc.
As for “special interest groups” and misappropriating savings “to fund runaway government spending (including high public sector salaries & pensions)”:
I agree that the country could be better run. And I’d certainly prefer the country to be better run before new taxes were introduced. However, if we were to have real political reform and real public service reform, and we desire to have quality public services, then we will are likely to have to pay more tax to fund them (but that could in turn reduce or eliminate charges for some services).
But I agree unreservedly that we need major change in how the country is run, and this must precede major new taxes!
So spendthrift citizens will avoid this tax while those saving for their children's education etc. will be hit.
I agree entirely with the point you are implying. Any tax – current ones or proposed ones – must be fair. And should reward socially beneficially activities, like saving for education, and deter negative ones, like carbon consumption.
As I suggested above, wealth tax could be progressive; e.g. you pay nothing on the first €100,000, then progressively pay more. That would take ordinary households with modest savings out of the tax.
Other options include the introduction of saving accounts that make saving for the purpose of education tax-exempt. Raising VAT on luxury, ‘spendthrift’ items is difficult in the EU context, but possibly some options for a luxury goods tax could be examined.
it's a treble tax not a double tax!
It is! It’s also something of a treble, quadruple, etc tax when you buy and sell property (paying stamp duty every time). It would be interesting to map out different people’s ‘tax journey’; that is, how many times they pay tax on the same dwindling pool of income. Currently, most people pay twice (income tax and consumption tax). But those on high incomes pay proportionately less consumption tax, as they save money or put it into financial assets. Once they have accumulated large sums of money, they can often avail of various tax avoidance measures to lessen the amount of consumption tax they pay. For example, Section 23 housing acted as a ‘tax shield’ in this way. My aim would be to close as many tax avoidance paths as possible, and make sure that tax is paid fairly (and progressively) across all of society.
DIRT is 25-28%, life policies are taxed at 28%, dividends are taxed as income (up to 53%) while VAT is 'only' 21%
Strictly speaking they are all income taxes, not taxes on the asset/capital; e.g. money in a zero interest account wouldn’t incur any DIRT. We do tax the ‘passive income’ from assets, but the question is whether we should also/instead tax the asset itself.
If the state did not guarantee deposits, deposit holders would put their money on deposit on banks with guarantees...
I agree that the state could decide to withdraw from guaranteeing deposits, but history shows that in crises like the present, the state is often called upon to be the ‘insurer of last resort’. Hence, state guarantees of deposits have become something of a norm. I’m sure private banks charge a premium for guaranteeing deposits. If the state is in this role, why not charge a small deposit tax to cover it?
If the goal is to smooth out taxes from gains - then why not use a simple bank fund or an investment vehicle (similar to pension fund) to achieve this?
How would this work?
The worst thing is, once you abrogate the property rights of citizens, in a deep crises, what's to stop a corrupt government following in the footsteps of the Argentines who last year seized private pensions to help pay their debt?
The courts are unlikely to allow the Argentine scenario to occur here. We don’t have that kind of endemic corruption and property rights are well protected in law.
We do need to strengthen our democratic institutions, make disclosure of a range of information mandatory, give real power to parliamentary committees to investigate and hold Government Ministers and senior officials to account. Above all, we need a reformed political culture where politicians put detailed information in the public domain and make rational arguments for policy, rather than half-truths and dogmatic ideology.
Joe,
“0.1%”
That is indeed the right figure!
“you'd be talking about an annual tax of a thousand euros on a pensioner. Can you imagine the weeping and gnashing of teeth that would ensue?”
Actually, in this example, I’d just reduce their weekly/monthly payments to make it equivalent to an annual reduction of €1000 (e.g. €19 less per week). And it would be a pension reduction, not a tax.
The point has already been made that taxing wealth itself simply reduces the other taxes that are imposed on incomes streams from it or on gains when it is disposed. In other words, you are just frintloading a tax that you were going to take anyway. This effect must be taken into account when estimating how much a wealth tax might yield.
Does anyone know why many of the countries which had wealth taxes recently abolished them: places like Finland, Sweden, Austria?
I firmly beleive our tax system needs a radical overhaul - it needs to close all loopholes and expenditures, be made more progressive, and be widened. But I cannot be convinced that the 'pot of gold' approach will enable us to avoid the obvious: admitting that our public spending is at unsustainable levels given the chronic fiscal picture.
Arguments about our level of spending relative to GNP are useful so that we can place ourselves in comparison with other countries. But it is equally important to understand how that money is spent. Two countries might spend equal percentages of income on public service, but have vastly different output levels from those services. For example, one of the countries might be using far more resources to remunerate the senior staff in its public sector (sound familiar?) while the other uses those resources to have higher headcounts or fund better services in other ways.
James - I note your source. The source I used also claimed that the ISF took in €4.4 billion but stated that this was 1.5% (http://www.humaniteinenglish.com/spip.php?article843). If your source is closer to the reality, then applying it here would realise revenue of €400 million plus. I'll try to pursue this issue further.
But on the larger point that Nat has raised in this post, I'd like to cut through some confusion. There is no difference between wealth and property. In the current debate, a property tax is shorthand for residential property; similarly, a wealth tax is shorthand for property - housing and financial assets - of the 'rich'. We can save ourselves a lot of heartache by just calling a tax on property (all property) a property tax. Or a comprehensive property tax.
The recent Goodbody report showed that gross financial assets are now nearly equal to gross housing assets, as housing values have fallen so rapidly. It should also be noted that financial values are already rising again after only a small dip. In 'property' terms this is important, as according to the Bank of Ireland, the top 1% own a third of all financial assets. Therefore, in equity terms, a comprehensive property tax is fairer. To exclude financial property from a property tax would be to exclude nearly half of the nation's asset base and a considerable proportion of the asset base of high income groups
If people believe, in principle, that a property tax is desirable, then it seems reasonable that you would start 'at the top' and slowly phase it downwards. For two reasons: one, taxes on high income/wealth are less deflationary; secondly, the administration of such taxes is labour intensive so if we start with, say, anyone earning over €100,000, it is easier to establish a proper auditing and compliance regime. Revenue Commissioner estimate that there are 54,000 earning over €100,000 (and that's just for income tax purposes - there would be others whose capital income may bring them above this threshold).
As to how much tax revenue this would generate, it’s hard to speculate without further work. And the problem here is that we have so little data on property holdings and how they are distributed among income groups. I’m not sure it would be a pot of gold. But it wouldn’t be a pot of nothing.
Nat -
A few thoughts
#1 Surely the moral basis of a property tax is not as a tax on wealth created, but as a tax to pay for services rendered to the property, by the state, that give it it's value?
#2 Increasing inheritance taxes, would be an alternative to taxing the asset rich but cash poor while they are living. What would forced sales do to asset values and Irish wealth generally? Could it force us to transfer ownership of Irish assets to foreigners allowed to keep their wealth?
#3 I agree tax avoidance loop-holes should be closed, although there are surely benefits in encouraging private investment in areas where that will get a better return than government (e.g. business expansion & job creation)?
#4 While I'm not happy at the scale of tax avoidance that seems to have occured in this state, at the same time, I think it's wrong to begrudge those who have worked hard. It's easy to take this line of thinking too far, and many wealthy people accumulated their wealth through activities that were very beneficial for society.
If the goal is to smooth out taxes from gains - then why not use a simple bank fund or an investment vehicle (similar to pension fund) to achieve this?
How would this work?
Much like the solution to the biblical solution to 7 years of feast and 7 years of famine - or what my impression of real Keynesian economics is. You force net contributions to the fund in good times and allow the state to draw down those contributions in times of trouble.
On the legality of Argentine-like behaviour in Ireland, this is very similar in microcosm ( albeit probably using different mechanisms - state helping itself to savings, reducing pensions etc) - once the structures are in place and proven legally and politically - surely it would merely be a matter of scaling it up?
If the state is in this role, why not charge a small deposit tax to cover it?
Ok, that is fine, in fact I agree that it should probably be implemented straight away. Of course, morally, this tax shouldn't be retrospective and citizens should be free to move their cash to non-state-guaranteed banks if they wish.
Michael -
A couple of points / questions -
#1 What services does the Irish government provide that give Irish wealth held in equities their value? If we are to tax wealth held in shares, surely we must provide some services that help create that wealth? We can't attempt to make that argument for foreign shares, only local shares - so surely we should be looking at taxing holders of Irish shares wherever they may reside. What would that do for investment in Ireland?
#2 On spending. I think you are right about the deflationary impact of cuts - however surely cutting salaries only above a certain level would not only not be deflationary - but would lead to a significant drop in spending as a proportion of GNP?
Wouldn't this money be spent on foreign holidays / luxury goods or saved anyway?
Mack - I find the principle you propose ("the moral basis of a property tax is not as a tax on wealth created, but as a tax to pay for services rendered to the property, by the state, that give it it's value") somewhat arbitrary. Only a Jesuit could design a tax system based on such a principle - it's a formidable task to assess which forms of wealth and income owe more to the state.
Instead I propose a simpler principle: the state needs revenues to perform tasks necessary to secure prosperity, freedom, security and justice for all (how much revenue is a matter of debate of course). These revenues should be raised in a manner consistent with both fairness and economic efficiency.
I don't think there's any need to tie ourselves in knots wondering how much specific forms of wealth owe to the state. Society and economy are thick web of interrelations and as Hobbes showed, no wealth would be sustainable without the public order guarenteed by the state.
James -
I disagree.
Given, there is a clear difference between taxing Irish assets and foreign assets.
A property tax will apply to Irish proeprty and not foreign property owned by Irish citizens. The Irish state clearly does provide services that add value to Irish property.
Even a total collapse of the Irish state would not wipe out the value of precious metals and would not affect foreign investments.
While singling out property, over say shares, is somewhat arbitrary - it is also pragmatic. Foreign investors will look at the total return and invest elsewhere if it is poor. People with property here - want to live or spend time in this state - and we can cope with out foreign property investors.
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I think that recognition of a citizen's property rights is very important to the functioning of a modern Western-style democracy that will encourage enterprise and wealth creation.
That is - the citizen must have the right to claim ownership of certain resources in certain circumstances. Taxing the ownership itself, of resources, clearly reduces the extent to which an owner controls a resource. (It may, for example, force the owner to sell the property when they wish not to do so).
Given the above, I think you need a damn good reason to tax ownership of property at all.
Mack - I'm not sure I get your point. A comprehensive property tax would tax all property of Irish residents globally, just as the ISF. In France, foreign residents are taxed only on property held in France.
As to what the Government does to service that wealth - well, they service the holders of that wealth (health, education, Garda, traffic, roads, etc.). Indeed, you could call public services an input to wealth.
Michael -
That's pretty unusual I'd have though. A rich Frenchman with an apartment in London will pay the English council tax and also another tax on the value of the apartment in France? A pretty harsh double taxation, is it not?
Michael -
I think that makes the case for the opposition. There are two separate local property taxes in France (used to fund local services provided to the property) - one is based on the land value, the other is to be paid by the resident. These are separate from a tax on wealth (indeed the French will tax property again via the ISF).
http://www.properties-in-europe.com/info_france_tax.htm
Again, Mack, I'm not trying to be obtuse but what case and what opposition?
Sorry, if that was a little confusing. We may be debating about the number of angels that can dance on the head of a pin, but I read some of the comments above as implying that the valid paradigm for viewing wealth and residential property taxes was that there is a degree of equivalence between them. In fact I thought it was being argued that a residential property tax was inherently inferior because it missed out taxing other forms of wealth.
I tend to view differently - that it's valid to tax residential property because the state (or local government) provide services to the property to give it it's value (and I see no reason why such a tax couldn't be progressive with multiple tax rates), but questionable to tax property, in and of itself, in system that is centred on respecting property rights.
The French system would seem to concur with the first part of my statement above (valid to tax residential property in lieu of services rendered - which I did think before yesterday was something of a consensus view!), but not the second part (they also think it valid to tax wealth). I would imagine that a residential property tax would raise more money for the Irish state than a ISF-style system?
Just to clarify about the French system - they have separate compartmentalized taxes, each of which you could proffer arguments for justification.
1. A tax based on the value of the land (which depends on services rendered by the state) - which the owner must pay
2. A tax which the residents who actually use the services (roads, bins (?), schools etc)
3. A tax on all wealth held by individuals, net of debt, over a certain level
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I don't accept James' argument above about the needs of the state being justifying taxation - as needs are effectively boundless. I don't think we can lay limitless claim to the fruits of the endevours of others. I think it's better to have strong moral justification for the levying of taxes (such that we don't revisit their original purposes - to wage war - in this country), that should be focused on the services delivered to society as a result.
Mack,
I think the moral basis of tax deserves a post of its own, so I will try to oblige you with that soon.
I broadly agree with the last points you made to me (Nov 2). In particular, your 7 years of feast and 7 years of famine fund is a very good idea.
Nat -
Another alternative or perhaps complementary strategy could be one based on Nassem Taleb's 'Bleed' trading strategy, and his view that the modern financial world is exceptionally prone to these kinds of blow ups.
During the boom times a portion of volatile transaction revenues could be used to purchase derivative products that payout during a crash (black swan event). E.g. If a portion of transaction revenues were spent purchasing out-of-the-money put options on bell-weather stocks a severe market crash could generate a significant windfall for the exchequer - just as transaction revenues collapse. A quick back of an envelope calculation based on the current prices for the AIB ADR on the NYSE would suggest that $1bn invested in put options with a strike price of $2.50 and an expiration date of Feb 2010 at a cost 15c each, should AIB's share price collapse a further 90% (from $5 to 50c) that could generate a windfall of over $13bn.
Mack,
Interesting. It's something I'd have to go read up on...
Could it be characterised, in simple terms, as taking out insurance? Or is there some important different between this and insurance?
Nat -
I think so, but I'm no expert in this field.
It's seems conceptually similar, but with (hopefully) less concentrated counter-party risk - I'm not sure the state could just decide it was going to pursue one particular strategy - as their presence in the market may have an impact (esp. if it was predictable).
Taleb's thesis seems to be that human's aren't built to comprehend the asymmetric nature of the scale of the risks - the instruments that pay out are often (optimistically) mispriced (he's a big critic of the Black-Scholes equation, and Value-at-Risk methodologies employed in banks) so the upside for the trader betting on the downside is normally greater. In this case, the house / insurance company may lose out to the insuree.
In fairness, I think the recent past in Ireland validates his thesis, with property speculators, bankers and developers still continuing to pile in, when if they were able to force themselves to seriously evaluate the risks - they would have seen that even though property prices go up most years, they'd gotten so expense relative to incomes that if they were going to fall, they were going to fall a long way..
Here are a few links -
http://www.fooledbyrandomness.com/bleedblowup.pdf
http://www.fooledbyrandomness.com/tenprinciples.pdf
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