Wednesday 16 December 2009

Budget 2010: landlords 1, SW recipients nil

in 2010, the savings made by cutting Social Welfare will be almost exactly the same as the spend on tax breaks for landlords (SW saving = €809 million in a full year, landlords tax breaks = €782 million in a full year). You can read the full details in TASC's post-Budget analysis, available here.

9 comments:

Anonymous said...

By tax breaks for landlords, do you mean offsetting interest payments against rental income? Is it not a standard feature of tax policy to allow costs of capital against taxable income? Why would it be fair to single out landlords as not deserving of tax allowances related to their cost of capital?

Perhaps the solution is to move to a system of 30- or 50-year capital allowances for landlords, as businesses get for their properties. But I suspect moving to this type of system would not yield anything like the savings you suggest.

Nat O`Connor said...

—Anonymous

Yes, offsetting interest payments against rental income is exactly what we mean.

The problem with this tax break (and many others) is that they become taken for granted, and not seen as a form of annual Government expenditure. During a major recession, it is necessary to review the tax system, including tax expenditure, to ensure it is not wasteful.

Tax allowances for capital investment may be a ‘standard’ feature of tax policy, but that does not mean it should not be reviewed, to see if it provides an economic and social benefit.

In all cases, tax breaks on capital investment are allowing those with wealth to pay less tax if they invest in things that benefit the economy and society. For most businesses, capital investment is in factories, machinery, etc that generally boosts productive economic activity and creates jobs (and in turn raises revenue).

A difference between landlords and other businesses is that tax allowances to invest in rental property simply assists those with wealth to acquire assets that generate passive income. Few jobs are created and little extra revenue is generated for the Exchequer. Such tax breaks may be acceptable if there is no other way to persuade investors to build residential and commercial property, but for some time Ireland has had a surplus of commercial and residential property. Hence, there is no need for the Exchequer to provide an incentive for this kind of investment.

The high prices and rents during the boom could be seen as tax breaks adding to an already over-heated market. It would have been in everyone’s interest, including landlords who are long-term investors, for those tax breaks to be removed to help cool the market and avoid the price crash we have experienced (and that NAMA - and the taxpayer - is likely to absorb).

Anonymous said...

Nat

Thanks for the clarification. But I'm still concerned at the definition of any form of capital allowance as a "tax break". Not allowing the cost of capital against taxable income in any industry would be unfair. Capital is a real cost. It would be like deciding that landlords or any other business should no longer be allowed to offset repairs, utilities or any other cost against taxable income.

I completely agree with the need to broaden the tax base and to remove unnecessary tax shelters for the wealthy. But not allowing the cost of capital against tax on rental income seems to me to be a violation of basic principles of fairness and efficiency in gax policy.

Nat O`Connor said...

—Anonymous

Not allowing the cost of capital against taxable income in any industry would be unfair. Capital is a real cost.

It's not clear to me why you think this is unfair.

I think we both agree that some capital allowances are likely to pass an economic efficiency audit. However, why is it 'fair' that everyone else subsidises people or organisations who invest capital?

Yes, capital is a cost. Yes, investing capital can be risky. Yet, investors can make substantial profits, and that's the reward of taking those risks.

Now, if it generates jobs or otherwise benefits the economy/society, we might agree to allow a person or firm to reduce their income tax based on their capital investment. But why should this be automatic?

A basic tax system, stripped to its bones, is one where everyone pays a certain proportion of their income in tax. A progressive tax system is generally seen as the most 'fair' system, with those who earn over a certain threshold paying a higher rate of rate. If capital allowances reduce the tax paid by high earners to a lower proportion than that paid by low earners, then the system is regressive. The only moral justification of this can be if the benefit to the economy/society of the capital investment outweighs the loss of tax revenue - and that brings us back to the economic efficiency argument again.

But it doesn't justify tax relief on capital investment without some reference to the tangible economic/social benefit of the relief.

Anonymous said...

Nat

Thanks. I'm not being clear. We agree that tax systems should be progressive and fair. My point is simply about the definition of "income" and "gain" when it comes to income tax. As much as labour or property, capital has a cost which is considered by nearly all tax systems in OECD countries when assessing how much "income" or "gain" is assessable for taxation. This is not some "incentive" system introduced by Ireland.

You might as well argue that we should not allow an offset of labour costs, utility costs or property costs when considering how much gain should be taxed on any business. In this sense, capital allowances are not some "incentive" that allow the rich to escape their obligations; they are a basic tenet of fair taxation in that they allow a proper definition of income, gain and loss. It is why we tax people not on their gross income, but on their net income after allowable costs.

If we arbitrarily start to remove real economic costs from the definition of gain for tax purposes, we'll end up taxing people who make losses and completely undermine economic activity.

As I said at the beginning, it may well be that allowing mortgage interest payments against rental income for tax purpsoes is not a good way to assess the cost of capital for landlords and I believe that moving to a standard system of capital allowances is probably superior, but this will yield nothing like the savings that you have estimated.

Pavement Trauma said...

@Anonymous

Don't you realise that the people in question are *landlords*? It doesn't matter whether the proposal is reasonable, fair or even practical. They're the boogeymen. They buy things and then rent them out to other people - disgusting.

Whipping is too good for 'em.

Nat O`Connor said...

—Anonymous

"...a basic tenet of fair taxation in that they allow a proper definition of income, gain and loss. It is why we tax people not on their gross income, but on their net income after allowable costs."

I think the central point of our disagreement is the definition of "allowable costs". I don't think this is clear cut. For example, the Commission on Taxation lists 24 "deductions for expenses occurred in earning income" (2009, pp. 320-321). You mention a "standard system of capital allowances" so I imagine that a review of the 24 could yield a more efficient system that we could both be happier with, but nevertheless decisions have to be made about what to allow. There is no basis to simply allow all costs of capital against taxable income, as we have to legislate on what can and cannot be included. For example, we don’t want to allow hugely risk investments as capital costs as that will transfer the risk from the investor to the Exchequer. So we end up with allowable costs and non-allowable costs.

If we drop exemptions for landlords, but leave incentives in place for job-creating industries, won't society gain more? Investors will simply operate on a different set of incentives.

As for the estimate of savings, the Minister for Finance claimed that €95 million would be saved by the April 2009 decision to reduce the level of relief from 100 to 75 per cent for interest on mortgages and loans on residential rental properties. That implies that the remaining 75 per cent is worth €285 million (€95m x 3). And that's only residential property. Add commercial property to that (where relief remains at 100 per cent) and we have little reason to believe that the end cost is much less than the €782 estimate (especially as most commercial rents have not come down, at least in Dublin, due to upward-only rent review clauses, which remain in place except for new leases).

Anonymous said...

Nat

Agreed - we need a simple and fair system of allowable costs against income and gains asessable for taxation - one that I would argue should include a fair system of capital allowances that supports additional investment.

I'm sceptical of too much tinkering by policy makers and politicians who believe they know which types of investment are better than others. This is how we ended up with vastly superior incentives for property investment than for investing in knowledge and education. I'd be equally concerned if the pendulum swung back too far in the other direction. Best to have a neutral system of capital allowances that reflect the lifespan of the assets in question and that encourages saving, capital accumuluation and investment. This should be the lesson of Asia's economic miracle to over-indebted countries like Ireland and the USA.

Antoin O Lachtnain said...

Tax breaks to encourage people to invest in building homes are a fiscal stimulus. Whatever about the wisdom of fiscal stimulus during a boom, is it really wise to remove a fiscal stimulus during a recession?

If we drop exemptions for landlords as Nat suggests as Nat suggests, we will end up with crappy, delapidated accommodation.

What are these other 'job-creating industries' that Nat speaks of? Care of the elderly? Fast food? I don't think for a minute that that is what he means, but that is what it sounds like.

In fact, developing accommmodation is highly labour-intensive. The problem is that it doesn't generate any external revenue, and that's why we're in the mess we're in.