Property taxes and economic growth

Tom McDonnell01/06/2010

Tom McDonnell: Nat O’Connor’ post on this blog on May 18th provided an excellent overview of the debate on property tax. Another important aspect of the debate relates to the effect of a property tax on economic growth.

It is important to stress at this point that I’m restricting my comments here to ‘bricks and mortar’ property. Bricks and mortar property is no more or no less a form of property than a financial asset or a car, but as it is likely that any property tax introduced later this year will effectively be a bricks and mortar tax, I won’t include those other categories of property in this post. Of course, from an equity perspective an all-encompassing property tax is preferable to just a bricks and mortar tax, because most low and middle income earners do not have substantial assets besides the family home.

The parlous state of the public finances seems to be making the prospect of some form of bricks and mortar property tax ever more likely. But fixing the hole in the public finances is not the only reason to introduce such a property tax. From an economic growth perspective, recurrent (e.g., once a year) taxes on immovable property are generally considered to be desirable because they do not penalise productive activity. One rationale is that, in the long term, recurrent taxes on immovable property will shift some investment out of housing into higher return investments and so increase the rate of growth. Taxes on property transactions are considered less desirable than recurrent taxes for a number of reasons, for example because they reduce labour mobility. Recurrent property taxes are also preferable to taxes on property transactions because they are stable over the economic cycle

Recent evidence indicates that the tax structure does appear to impact growth performance. The OECD looked at various taxes from an economic efficiency perspective and found that property taxes may be the least damaging to growth prospects. Heady et al (2009)also find that recurrent taxes on immovable property are the least harmful (or most beneficial) tax instrument in terms of its effect on long-run GDP per capita.

The full tax-and-growth rankings are (from best to worst):

1. recurrent taxes on immovable property
2. consumption taxes (and other property taxes)
3. personal income taxes
4. corporate income taxes

Finally, it should be noted that the better-off are disproportionately likely to hold property, and that it should therefore be possible to construct a progressive property tax. An inequality-proofed and poverty-proofed property tax is long overdue in Ireland.

Posted in: Fiscal policyTaxation

Tagged with: property taxgrowth

Dr Tom McDonnell

McDonnell, Tom

Tom McDonnell is senior economist at the NERI and is responsible for among other things, NERI's analysis of the Republic of Ireland economy including risks, trends and forecasts. He specialises in economic growth theory, the economics of innovation, the Irish and European economies, and fiscal policy. He previously worked as an economist at TASC and before that was a lecturer in economics at NUI Galway and at DCU. He has also taught at Maynooth University.

Tom obtained his PhD in economics from NUI Galway.



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