French economist Thomas Piketty’s best-selling book showed how ownership of capital has, over time, become more and more concentrated in the hands of fewer people.
To bring greater equity, he suggests that we need to introduce a progressive tax on wealth. The ownership of property assets forms a very important part of this concentration of wealth, whether in France, the US or Ireland.
Data from the Central Statistics Office shows that in Ireland housing constituted 60 per cent of net household wealth in 2017.
A recent ESRI study found that, in common with many other countries, Ireland’s ownership of wealth is more heavily concentrated than income. The wealthiest 10 per cent of households hold close to 54 per cent of total household wealth, while the top 30 per cent own close to 85 per cent of wealth.
The study also found that one-third of household net wealth is held by over 65s, reflecting the fact that most pensioners own their own homes outright, having paid off their mortgages.
By contrast, those aged under 45 hold only 15 per cent of net household wealth, reflecting the fact that those who are lucky enough to own their own homes generally also have big mortgages and little equity in the property. Thus the distribution of wealth is skewed across the generations. In that context, it would be perverse redistribution to exempt over 65s from property tax.
Our tax and benefit system does a fairly progressive job on the income side – Ireland’s after-tax disposable incomes are a lot more evenly distributed than market incomes.
Generous treatment
However, wealth as against income, gets off a lot more lightly under our system. Abolition of domestic rates was a vote-winner in 1977. Income in the form of capital gains is subject to a lot more generous treatment than normal earnings and gain on a principal private residence is exempt from capital gains tax.
As a result, people with significant capital may be able pay a lower effective tax rate on their income than those whose income comes in the form of wages and salaries. More effective taxes on capital could achieve a more balanced redistribution of resources.
The 1973 Fine Gael-Labour coalition government introduced a wealth tax, which was largely counterbalanced by a major easing of the death duties regime.
Because of the way the wealth tax was framed, it only affected a few hundred individuals and brought in limited revenue. However, effective lobbying by the small number of wealthy taxpayers saw the tax dropped at the subsequent election, while the softer treatment of inheritances remained in place.
Property tax is less easy to evade than either income or wealth taxes – you can't hide your house
Likewise, the income-related property tax introduced by the 1980s Fine Gael-Labour government was shortlived in the face of vocal opposition.
An examination by the ESRI of options for a wealth tax in Ireland, modelled on systems elsewhere, found that while some options would bring in significant revenue, most systems would result in significant wealth tax liabilities for some people on low incomes. That would make such proposals politically vulnerable.
The ESRI found that, because of the many exemptions, introducing a wealth tax here on the lines of the recently-abolished French system would raise less than €100 million a year. This would be a poor return for a complex and potentially unpopular political innovation.
Effective redistribution
Taxing property is more straightforward than a complex wealth tax. It is also less easy to evade than either income or wealth taxes – you can’t hide your house. It is an effective way of redistributing resources from the housing “rich” to the housing “poor”, promoting greater intergenerational equity.
It captures some of the benefits accruing to landlords from high rents resulting from the housing shortage. It also seems fair that those who are well housed should contribute financially towards the solution of the housing crisis.
The current property tax is not perfect. The decision to postpone, beyond the current electoral cycle, the adjustment of the value of houses for tax purposes to current market values is weakening the link between the presumed basis for the tax, which is property values, and the reality.
It would also be fairer if taxes were levied on the equity in a house rather than on total value. Neither is it fair that homes built since 2013 should be exempt while those who own homes built earlier pay in full.
However, corresponding adjustments to the rates or the thresholds would be required to ensure that revenue from the tax would be maintained. If anything, while our housing crisis continues, we need more not less revenue from property owners to help solve that crisis.
