A Progressive Development (growth) Policy for Europe

Paul Sweeney: Did you know that last year 22.9 million people in the EU were unemployed, of which, a staggering 10.9 million people were long-term unemployed. At the current pace of reduction, the unemployment rate would take 7 years to return to its pre-crisis level in Europe. This is one of the many interesting points in a new economic study from European progressive economists.

The authors of the Independent Annual Growth Study “The Elusive Recovery”, expect that economic growth is going to slow down in the EU in 2017 to 1.6% after 1.9 % in 2016 and to 1.5% in 2018 because “tail-winds are turning into headwinds.” Brexit, higher oil prices and especially the slowdown in trade will impact negatively, along with uncertain politics.

Revolt of the Rich

Nat O'Connor: A concern with the "predatory super-rich" as the new secessionists in the USA is very clearly articulated in this article ('Revolt of the Rich') in the The American Conservative.

It begins: It was 1993, during congressional debate over the North American Free Trade Agreement. I was having lunch with a staffer for one of the rare Republican congressmen who opposed the policy of so-called free trade. To this day, I remember something my colleague said: “The rich elites of this country have far more in common with their counterparts in London, Paris, and Tokyo than with their fellow American citizens.”

Property Tax (Capital v Income)

Nat O'Connor: The Minister for Finance has rightly pointed out that any property tax - a tax on capital - must still be paid out of income (Irish Times). However, this is not a good reason to stall proceeding with its introduction. It has been rightly pointed out that successful opposition to property tax from wealthier constituencies would mean cuts to services and/or other taxes increasing. It seems likely that the absence of a progressive property tax will mean that people on low and middle incomes will suffer more - through other tax increases and/or service cuts.

But any new property tax must be designed to be progressive. A progressive tax is one where those who can afford to pay more, do so. In that way, money is redistributed from those with more to those with less. In the case of housing, progressivity would require property tax on valuable houses to be multiples of that charged on more modest housing. This will require a system of rates and bands, similar to income tax, and some kind of professional property valuation will be essential.

The Minister is also quoted as saying "One of the problems with capital taxation at present . . . is that we’ve seen this huge reduction in the value of property so that the capacity of the capital taxes to raise money has reduced accordingly," (Irish Times) On one level this doesn't matter. In theory, yes, if property worth €3 million is now worth €2 million, then a 0.1 per cent property tax would bring in less money. But there's nothing to stop the Government raising the amount of tax to 0.15 per cent, in order to restore the amount of money coming in. Should property prices go up, the Government has the option in the annual budget of changing the rates and bands for property tax. On another level, there is certainly a maximum amount of tax that can be taken from capital, which falls as the total value of capital falls. But Ireland is starting from a low base in this regard, so there remains considerable scope to expand taxes on various forms of capital.

The more pressing problem for the tax would be where people are 'asset rich-cash poor'. In other words, someone might have a valuable house but a relatively low income. It is certainly not desirable for the state to be forcing people to sell up and downsize because they cannot pay their property tax. No one is going to tolerate that. Moreover, it would lead to a homogenisation of social classes within different areas; so that only high earners could afford to live in expensive areas, driving out those who inherited property, who retired on a low income pension, etc. Repeated evidence from housing studies shows that tenure mix and social mix is the best way to create vibrant residential areas.

On the positive side, the introduction of property tax could be a long-term stabiliser for tax revenue, which is least damaging to economic growth. In particular, it could stablise local government revenue. That is, it could provide a steady flow of cash coming in every year, without the 'boom and bust' that affected stamp duty and VAT in particular. From that point of view, one solution to the 'asset rich-cash poor' dilemma is for the state to simply take a longer-term view, rather than seek all tax annually. Let people build up a tax bill that will take effect when they eventually sell their property or pass it on as inheritance. Provide a waiver on paying much interest on the tax bill where people genuinely cannot pay, but charge interest in other circumstances to encourage most people to pay annually. But don't pursue arrears aggressively.

This would also solve the dilemma of what to do if a significant number of people refuse to pay. Once a legally robust mechanism is put in place for the state to intercede in any sale or inheritance of property, people will see that non-payment is just putting off the inevitable.

Of course, the value of tax owed will decrease annually, which is why those entitled to a waiver should be charged a small amount of interest, depending on inflation, whereas a mildly punative level of interest could be levied on those not entitled to a waiver.

Such a longer-term approach to collection would also allow the tax to extend to pensioners and others living in valuable housing, without burdening their income. A maximum effective rate of taxation could also be put in place for people entitled to a waiver so that the entire value of a house is not taken in tax. For example, this would facilitate older people 'downsizing' and purchasing a small home.

One major concern, from an equality perspective, is that the debate about 'property tax' is still narrowly focused as a tax on people's homes rather than a discussion about whether we comprehensively tax all forms of property (this argument is expanded here). This disproportionately puts the emphasis on people on middle incomes, rather than wealthier people who may have financial assets and other forms of property. Where other property is already taxed, we should look at making the effective level of tax paid more uniform across different forms of capital, and also seek the principle of progressivity to be extended so that those with larger amounts of assets pay increasingly higher rates of tax.

If a tax system as a whole (inclusive of tax breaks, etc) does not adequately redistribute wealth, then a relatively small number of people and companies in every generation will acquire more and more assets. This is not sustainable. If established in a progressive way, property tax could be a useful way of ensuring that a steady redistribution of wealth occurs in every generation.

Wealthy Germans Call for Wealth Tax

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)?

New TASC survey shows 85% believe wealth distribution is unfair

Survey results published by TASC today show that 85% of respondents believe wealth distribution in Ireland is unfair, and an equal number (85%) believe that the Government should take active steps to reduce the gap between high and low earners. TASC also published a background document highlighting some of the data relating to economic inequality and presenting an analysis of the survey results. Click here to download The Solidarity Factor: Public Responses to Economic Inequality in Ireland. All comments on the document welcome!

Wealth in a downturn

Paul Sweeney: Most of the banks and financial sector economists, especially those paid under the banks’ Marketing Budgets (as apposed to those bank economists who are paid to add value to the banks’ decisions-making) have gone to ground. So it is surprising that the NIB, a Dankse Bank subsidiary, has come out with a report on Wealth. It did one before, at the peak of the boom. It made really interesting reading, I thought, though it was excoriated recently in the book on the property boom, Ireland’s House Party, by Derek Brawn, himself of an auctioneers!

Here, the new report asserts that Ireland’s wealth is down by a large €150bn in the past year. The fact is that it was never as high as the earlier figure. The market said it was, but the market got it wrong! Most economists don’t believe that the market can get anything wrong (though they do talk of market corrections… which also implies that maybe they do think that the market is not always right).

The boom was an illusion and we are still falling to ground – to realistic wealth levels. But in the meantime, I look forward to a government report into wealth distribution in Ireland. The Norwegian Minster for Finance, the leader of the Left party, has commissioned such a report. Ireland has a Tax Commission which will report in mid-summer, but under its terms of reference it is instructed not to examine wealth distribution.

I suppose this NIB report is the nearest we will get to such a report until we elect a progressive government. I’m sure many will perturbed to hear that the sale of helicopters has fallen from 66 in 2006 to only 2 (6, but 4 were flogged abroad) and luxury car sales are only one tenth of last year's figure.