Tom McDonnell: When Minister Noonan stands up in the Dáil next Tuesday it would be helpful if the tax measures he is introducing were accompanied by a set of documents explaining the rationale for each choice being made.
What will be the impact on growth and employment? What about the impact on the most vulnerable in society? What other measures were considered? Why were they rejected and what were the expected impacts of the rejected measures?
The empirical literature strongly argues that taxing property is the least damaging form of taxation when it comes to economic growth and employment. By comparison taxes on labour are more damaging because they directly interfere with economically productive activity. Taxes on low-income workers are particularly damaging because of these worker's high propensity to consume.
Broadly speaking property taxes are composed of:
• Recurrent taxes on immovable property (residential property taxes/site valuation taxes)
• Recurrent taxes on net wealth
• Estate, inheritance and gift taxes (this is CAT in Ireland)
• Taxes on financial and capital transactions (e.g. Tobin Taxes and CGT)
The literature is consistent in its findings. OECD estimates are here.
A shorter document is here.
Table 1 on page 6 has the main results
Each year the European Commission compares the tax burden for all 27 EU countries. The Commission identifies property, environment and consumption taxes as the least damaging to growth (see Box 1 on pages 38-40 of the document)
As an aside you can compare tax burdens for all EU countries on page 282 of the European Commission document (Table 1) – it shows Ireland had the third lowest tax burden in the whole European Union in 2009 - we are a low tax regime (we rank 25th – only Romania and Latvia are lower).
This IMF paper highlights the causal role of growing inequality in generating both the current and the 1929 crises. The authors suggest moving away from taxing the labour of low-income workers, and instead increasing taxes on economic rents, including land, natural resources and financial sector rents.
Not only are property taxes the least damaging to growth and employment but if properly designed (i.e. not a flat rate charge) they are also some of the least regressive forms of taxation. In general, consumption taxes are by far the most regressive taxes and tend to disproportionately impact on lower income groups. On the other hand property taxes tend to impact on the wealthier cohorts.
The TASC Pre Budget Submission has strongly emphasised property taxes as being the most consistent with economic recovery and consistent with social solidarity.
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.