Property Tax (Capital v Income)

Nat O'Connor19/07/2010

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.

Posted in: TaxationInequality

Tagged with: wealthproperty tax

Dr Nat O'Connor     @natpolicy

Nat O'Connor

Nat O’Connor is a member of the Institute for Research in Social Sciences (IRiSS) and a Lecturer of Public Policy and Public Management in the School of Criminology, Politics and Social Policy at Ulster University.

Previously Director of TASC, Nat also led the research team in Dublin’s Homeless Agency.

Nat holds a PhD in Political Science from Trinity College Dublin (2008) and an MA in Political Science and Social Policy form the University of Dundee (1998). Nat’s primary research interest is in how research-informed public policy can achieve social justice and human wellbeing. Nat’s work has focused on economic inequality, housing and homelessness, democratic accountability and public policy analysis. His PhD focused on public access to information as part of democratic policy making.


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