With the
property tax deadline now passed I felt it was time to put pen to paper
regarding the tax.
Anyone
who has read or listened to the national media in recent months will be aware
that the tax is deeply unpopular, with people feeling that they are at a wits
end financially. This tax it is claimed will push many over the edge… The
strange thing is, most people have also said that they would be far less
hostile to a similar increase in income tax. Why is that? Well let’s say the
average property tax bill for the year will be €250 – the amount can be paid in many ways, it
can be taken directly from pay, a direct debit can be set up or it can be paid
off in one go. Furthermore, reports have suggested, that the government may be
ready to, decrease the level of austerity, given the recent wins with the
promissory notes and the extension of the bailout loans. So what if the
government were to decrease the average earner’s income tax by €250, effectively
rendering the net tax effect as 0, would this reduce the hostility?
I don’t believe
so; the reason for the hostility is that this is a new tax, which can and
undoubtedly will rise in the future. The government’s plan is primarily to get
people registered and used to paying the tax. Once people have given into
paying the first time, it will become part of the norm and another source of
much needed funds for the country. So while the net effect this year may be 0
(at least for those with a job) the fact will remain that the government has a
new instrument, which they can use to extract money from individuals.
So let’s look at
a world with no property tax. The government undoubtedly needs to raise more money,
which they can do in one of two ways. They can cut spending or they can decide
to raise the tax take. One of the most lucrative ways of increasing tax intake is
by increasing income tax. There are three lose brackets of society that they
may tax, those on the lowest incomes who pay little or no tax (although it is
increasing), due to the tax free allowance, those on middle incomes who pay tax
at the lower level and some at the higher level and the wealthy, who pay most
of their tax at the highest level. Most governments, and especially a coalition
including the Labour party, will want to avoid taxing the lowest paid. The
middle class are less vulnerable but, with the majority of people at this level
already suffering from severe austerity fatigue, a move such as this may drive
voters - in a key demographic - towards other political parties. That leaves
the wealthiest, there are few in society who would feel that the rich should
not contribute more and most governments will agree. Rich people though are
unlikely to agree, and in an increasingly globalized world they can easily move
themselves and their money out of the government’s reach. For an illustration
of this, look at the amount of wealthy French people fleeing to London. Closer
to home, U2 are tax resident in the Netherlands. Undoubtedly both the middle
class and the wealthy will bare the brunt but raising taxes will only work up
to a point.
What about other
taxes such as corporation tax? Well, as has become clear in recent weeks the
low level of corporation tax in Ireland is a huge part of the government’s
strategy on jobs. Given the unwillingness of banks to lend and the lack of
confidence amongst SMEs, it would seem that in the immediate future foreign
direct investment will be the biggest source of employment growth. So it is
highly unlikely that the government gave any thought to raising the rate of
this tax. The government could also raise the level of VAT but as this would
directly effect consumer spending in a negative way this is also unlikely to
have been discussed. As well as this Ireland is trying very hard to attract
tourists, on the basis that it is a lot more affordable to come here now,
raising VAT would not help this strategy which is another focus of the job
creation plan.
The
Benefits of the Property Tax
The problem with
raising income taxes is it also raises the cost of employment, in an
increasingly competitive world and, with Ireland’s unemployment rate standing
at over 13%, is increasing tax on labour really a sensible strategy? The answer
to this is no, nonetheless, without a raise in income tax the government still
has the problem of needing to raise more cash. VAT and capital gains taxes also
have their limitations as discussed, as they penalize businesses and startups
disproportionally. So, where does the government turn? The obvious answer is to
a new form of tax that is not easy to avoid – the property tax. It also has a
benefit in that it has no impact on the cost of employment. Therefore, as per
the prospect raised earlier, if the government lowers the income tax by €250
labour will become cheaper and in theory employment should rise.
The
Drawbacks
At a
time when the property market is showing tentative signs of stabilization this
tax may cause another wobble in property prices. The buy to let market is
already in dire straights, with a huge number of these properties in arrears.
This tax may push buy to let owners over the precipice, which could lead to a
large increase in the supply of housing. If this supply outstrips demand the
price of property will take another fall. As demand is a function of mortgage
lending and, as mortgage lending is weak, this possibility is very real.
Another factor to consider is that building inspectors are now beginning to do
inspections on houses - that were converted to apartments - during and preceding
the boom years. There are many that will not be up to scratch e.g. having no
windows in a bedroom, and these properties will either need to be invested in
or more likely sold which will add to the glut in the market. Clearly it is in
everyone’s interests for the price of property to start rising again so the
timing of this tax may be questioned in years to come. However, as I outline
below, Ireland is behind the curve in introducing a tax of this type and, so is
merely catching up with other nations, albeit at a difficult time economically.
The
Alternatives To Tax
So what are the
alternatives? Well as discussed the tax alternatives are highly unpopular and
likely to do more damage to the fragile economy. The other option therefore is
spending cuts. This is a viable option and many economists would claim that
this is the way out of recession, lower taxes to stimulate employment and
activity, and a cut spending to reduce the government’s role in the economy and
allow private enterprise to kick start growth. There is no doubt that there are
savings to be made in areas such as healthcare and social welfare, but as has
been seen in the Croke Park/Haddington Road negotiations cutting people’s wages
is not easy. Cutting benefits would also lead to an outcry from the less well
off. Our neighbors Britain have championed the idea of cutting spending and
although a lot of pain was felt initially there, it seems that there are green
shoots of growth now appearing. The British have the benefit of their own
currency, but nonetheless they have wielded the knife on the bloated public
services sector and, have clamped down on benefits. Britain is increasing the tax-free
allowance, is increasing the tax bands on income, has lowered the top rate of income
tax and is lowering the rate of corporation tax.
The other aspect
of this is the fact that it is important to cut the right type of spending.
Cutting current spending e.g. wages and benefits is a priority however cutting
capital spending e.g. roads, broadband infrastructure etc. can be more harm
than good as this type of spending boosts the economy and creates employment.
The final option
left to the government would be to declare bankruptcy or restructure it’s debt.
This, may be viewed by many, as being the ideal scenario, after all the average
guy on the street did not decide to bail out the banks. He has however had to
pay for it, face savage spending cuts, massive tax hikes and has seen his
family and friends emigrate in their droves. Would bankruptcy change this? Had
the government decided to allow the banks to fail in 08/09 there would have
been chaos, savings would have been wiped out and there would be no Irish banks
left to make loans. Without credit the economy would rapidly have
declined. However, it would in time have
bounced back and may even be in a better state than it is today. Our
international credibility would have taken a big blow however. I have no doubt
that at this stage of the game Ireland is better off sticking to it’s current
plan as the economy and housing market seem to be slowly turning around.
If you would
like an illustration, of an example of a country that underwent bankruptcy look
no further than Iceland, the country is doing quite well, and with it’s low
levels of debt, will be well positioned when the global economy starts to grow
again. On the other hand, Argentina which defaulted in the early noughties is
still feeling the affects with no sign of it recovering any time soon.
In
Conclusion
To give the
government it’s due they are only catching up with most other European
countries. Take a look at the UK, in London someone who lives in the borough of
Islington in a modestly sized one bedroom apartment would be expected to fork
out about £1,200 a year in council tax (a property tax by any other name). The
council tax is decided individually by each of the 32 borough councils so your
neighbor could be paying significantly more or less than you if you happen to
live on a boundary. This tax has been around since 1990! This tax does cover services
like bin charges and other council amenities, but it is still a lot higher than
the Irish property tax.
If as is
expected the government cuts income taxes for the average earner, then I
believe this will tax will become more palatable, the ultimate aim is to
restore the faith in the country, and reducing out deficit is a key aspect of
this. With water charges to come there is no doubt that there is more pain to
come for the people of Ireland, but in time I am confident that this pain will
pay off.